‘Fear factor’ running high with global rate-cut bets mounting

Traders bracing for another rough week sought refugee in haven assets, sending global bond yields down to new record lows.

As markets reopened, rate-cut expectations spurred by the Federal Reserve’s announcement on Friday that it was ready to act rippled through yield curves. The dollar and commodity currencies weakened in early trading.

The drumbeat of bad news surrounding the virus outbreak continued over the weekend. Italy reported a 50% surge in new coronavirus cases and the US and Japan issued “do-not-travel” warnings for affected regions of Italy and South Korea. The US, Australia and Thailand reported their first fatalities.

“The market is dominated by pessimism on the back of the coronavirus,” said Hidehiro Joke, a bond strategist at Mizuho Securities in Tokyo. “The market is urging the Fed to cut rates. Ten-year Treasury yields falling below 1% cannot be ruled out.”

Treasury two-year yields fell 17 basis points, while Australia and New Zealand’s bonds also saw record low yields amid mounting concerns about the health of the Chinese economy. The Chinese government reported on Saturday that February manufacturing activity plunged to its lowest level on record.

Deepening worries

Global equities suffered their sharpest declines since the 2008 financial crisis last week, while commodities plunged on concern the spread of the coronavirus will tip the global economy into a recession.

The New Zealand dollar dropped more than 1% to its lowest level since August 2015 and the Australian dollar traded as much as 0.8% lower before both pared the declines.

“Given the fear factor that’s in the market right now, the risk relative to our base case scenario of just a few months ago, is that safe haven currencies including yen, the swiss franc and the dollar continue to outperform,” said Steven Englander, Standard Chartered Bank’s head of North America macro strategy.

China PMI

China’s manufacturing purchasing managers’ index plunged to 35.7 in February from 50 the previous month, according to data released by the National Bureau of Statistics, much lower than the median estimate of economists. The non-manufacturing gauge also fell to 29.6, its lowest ever. Both were well below 50, which denotes contraction.

Investors are looking to not just the Fed and other major central banks — even with their limited ammunition — to contain the fallout from the outbreak. Fed chairman Jerome Powell in a statement on Friday said the US central bank is ready to cut interest rates if needed as the epidemic “poses evolving risks” to the American economy.

Australia’s central bank is all-but certain to cut interest rates Tuesday, money markets show. ANZ Bank New Zealand now sees the Reserve Bank of New Zealand slashing its benchmark rate to 0.25% by May.

“I can see rates continuing to fall in the near term as there is no sign of a cure or vaccine,” said Priya Misra, head of global rates strategy at TD Securities. “Even though the mortality is lower than SARS, the magnitude and geographical spread of affected people is massive. Add to that travel restrictions and fear.”

Here’s a round-up of comments from analysts and strategists::

Hasnain Malik, the Dubai-based head of equity strategy at Tellimer:

• “Manufacturing, commodities, trade and tourism are all affected”
• “Counter-intuitively, this implies one should ignore it if we are talking about a portfolio exposed only to emerging markets, as opposed to multi-asset global portfolios. The countries and stocks one liked before have simply become cheaper”

Jason Daw, head of emerging markets strategy at Societe Generale SA in Singapore, wrote in a note:

• “Markets might be partially soothed by Powell’s statement that the Fed will act, but unlike other growth or liquidity induced market sell-offs, monetary policy could be ill-equipped to deal with Covid-19”
• “Whether the market rout last week develops into a full-blown crisis is an open question (Covid-19 news flow will be critical). But the tail risk event everyone was worried about is possibly here in the form of large negative growth shock and it’s time to be prepared and dust off the crisis playbook”
• “If risk assets come under continued pressure, CNY might outperform others, but ultimately there is no safe-haven EM currency in a negative growth shock”

Mansoor Mohi-uddin, a Singapore-based senior strategist at NatWest Markets:

• “Risk assets will weaken Monday morning in Asia because China’s PMI data was worse than the consensus expected. If the US ISM survey later in the day also falls back below 50, signaling the coronavirus was already affecting US corporate sentiment in February, then financial market expectations for Fed easing before March’s FOMC meeting will increase further”
• “Central banks will wait to see what the Fed does first before using their own limited ammunition”

Stephen Innes, the Bangkok-based chief market strategist at Axicorp:

• “The fallout from the China PMI means we are starting the recovery process from a weaker level than thought. The shift from a more Asia-centric to global perspective means a more protracted economic downturn is also negative”
• “The PBOC response should help, given the dreadful PMI. I expect much more policy front-running, with RRR cut and guidance for a 15-basis-point cut in the OMO rate.”
• “The week will start horrible, but may improve on central-bank pivots, with a coordinated G-20 fiscal pump not out of the question”

Patricia Ribeiro, a New York-based senior portfolio manager at American Century Investments:

• “It’s a short-term impact or challenge for the portfolio. The second half of 2020 should get better” as countries respond quickly to contain the outbreak
• “The earnings-per-share numbers are still pretty high. You’re going to see a very significant slowdown in the first half of the year and then that will bounce in the second half”
• “Rates are already low and that’s positive for emerging markets. It’s beneficial for consumption in all of these countries. For me, it’s less about rates coming down more in the US; it’s more about not going up any time soon. If rates were to stay or be around where they are now, it’s definitely a positive”

Richard Segal, a senior analyst at Manulife Investment Management in London:

• “Markets will open down a lot, but more likely because of the virus spreading in the US The Chinese PMI was bad but I don’t think worse than expected. Super Tuesday in the US is also a preoccupation”
• “Until last week, investors were apprehensive about the virus and mainly worried about the impact on the Chinese economy given its status as the locomotive of global growth. However, the mood darkened a lot on Monday when it began to spread more widely in Italy and Korea. This led many to sell at any price and ask questions later”
• “The mood shifted from hoping it could be controlled and contained to expecting the worst. Mainly though, markets are searching for a new base”

Divye Arora, a portfolio manager at Daman Investments in Dubai:

• “Given the increasing spread of virus in the West, we expect global equity markets to remain under pressure. However, the pace of decline would be much lower versus last week as markets seem to have priced in a significant amount of uncertainty in the form of lower consumer demand, travel and supply chain disruptions”
• “We also expect some institutional investors to start buying the dip on expectation of fiscal and monetary stimulus, virus spread being more contained in the West versus China due to the timely response from the respective health authorities and declining supply-chain disruptions in China. Overall people will continue to diversify into safe-haven assets such as US treasuries, gold and the US dollar”

Edward Bell, a commodity analyst at Emirates NBD in Dubai:

• “The virus has just begun to become rooted in other markets such as Italy and, while the economic hit may not be as sharp as in China’s case, it will nevertheless be significantly negative”
• “The fixation for oil markets this week will be the OPEC meeting taking place on March 5, followed by a meeting with partners outside the bloc the next day”
• Despite the collapse in prices, speculative net longs in both Brent and WTI rose last week as investors may have expected crude prices to have hit a bottom
  • “As many of these new long inflows will have burned by the price decline last week we may see another round of selling pressure in the coming days if doubts grow about how committed OPEC+ is to limiting production”

Han Tan, a Kuala Lumpur-based market analyst at FXTM:

• “Equities are set to continue hogging the limelight over the immediate term. Although a lot of the coronavirus-related pessimism has been discounted over recent sessions, investors will be wondering if the correction may eventually give way to a bear market, though perhaps not at the same ferocious pace that we saw last week”
• “With China reporting its lowest ever manufacturing PMI, the hard economic data from around the world is not expected to provide enough resistance against the rising tide of risk aversion in the markets”