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Economy

China unexpectedly cuts key rate rate by most in 5 years to support coronavirus-hit economy

SHANGHAI (REUTERS) – China’s central bank unexpectedly cut the rate on reverse repurchase agreements by 20 basis points on Monday (March 30), the largest in nearly five years, as authorities ramped up steps to relieve pressure on an economy ravaged by the coronavirus pandemic.

The People’s Bank of China (PBOC) announced on its website that it was lowering the 7-day reverse repo rate to 2.20 per cent from 2.40 per cent, but it did not give a reason for the move.

Ma Jun, a central bank adviser told state media that China still has ample room for monetary policy adjustment and the rate decision took into consideration the return of Chinese companies to work, the global virus situation and a deterioration in the external economic environment.

It was the third cut in the 7-day rate since November, and comes as the coronavirus infections in China – where the outbreak originated late last year – has slowed from a peak in February. The country has so far reported 3,304 deaths from 81,470 infections.

In a note to clients, Capital Economics said “a lot more easing will be needed, especially on the fiscal front, to help the economy return to its pre-virus trend.”

Global policymakers have rolled out unprecedented stimulus measures in the past few weeks, cutting rates sharply and injecting trillions of dollars to backstop their economies as many countries have been put under tight lockdowns to contain the pandemic.

Yan Se, chief economist at Founder Securities in Beijing, said the rate cut was China’s commitment to a pledge it made during the Group of 20 major economies meeting last week to combat the coronavirus and stabilise financial markets.

“China was the only major economy that had not yet implemented large-scale easing measures” Yan said, noting that many other nations have implemented more drastic steps such as quantitative easing and deeper cuts to benchmark rates.

Leaders of the G20 pledged on Thursday to inject over US$5 trillion (S$7.1 trillion) into the global economy to limit job and income losses from the coronavirus, which has so far infected more than 700,000 people and killed nearly 34,000 worldwide.

Earlier in the day, the PBOC injected 50 billion yuan (S$10 billion) into money markets through seven-day reverse repos, breaking a hiatus of 29 trading days with no fresh fund injections.

Chinese 10-year government bond futures initially responded positively to the cut, with the most-traded contract for June delivery rising as much as 0.23 per cent, before pulling back to last trade down 0.1 per cent.

Xing Zhaopeng, markets economist at ANZ in Shanghai, said the latest cut follows the ruling Communist Party’s Politburo meeting last Friday.

“The medium-term lending facility (MLF) rate and Loan Prime Rate (LPR) will be cut at the same pace this month. We believe this cut is a signal to urge all loans to refer LPR as the benchmark so that the PBOC can improve the effectiveness of monetary policy transmission,” he said.

At Friday’s meeting, the politburo said the government will step up policy measures and tighten enforcement in a bid to achieve full-year economic and social development targets.

The coronavirus hit the Chinese economy just as it was starting to show some signs of stabilising after growth cooled last year to its slowest pace in nearly 30 years amid a trade war with the United States.

Analysts expect China’s economy to contract sharply in the first quarter due to widespread disruptions to business and consumer activity caused by the virus as authorities put in place tough public measures to contain the pandemic.

Nomura has lowered its annual GDP growth forecast for China to 1.0 per cent this year, from 1.5 per cent previously, and adjusted quarterly GDP forecasts to a 9.0 per cent annual contraction, from an earlier prediction of 0.9 per cent contraction.

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With 660,000 job losses, rich Nordic economies are in deep shock

STOCKHOLM (BLOOMBERG) – In one of the richest and stablest corners of the globe, well over half a million people are suddenly out of a job due to the economic standstill triggered by the spread of the coronavirus.

With a combined population of roughly 27 million people, the Nordic region has seen 580,000 workers put on temporary leave, many without paychecks in recent weeks. Another roughly 80,000 have been fired, according to calculations by Bloomberg based on company statements and data provided by national authorities.

The head of the Confederation of Norwegian Enterprise, Ole Erik Almlid, likened the development to “a tsunami” that’s rolled over the country’s businesses. “And it’s getting worse,” he said.

Knut Hallberg, senior economist at Swedbank, said the situation across the entire Nordic region is “severe.”

Nordic populations rely on generous welfare states that ensure those dropping off payrolls still get some form of monthly support. And the region’s universal health care and free education add an additional layer of security. But even with those safety nets, the economic shock is painful.

The Numbers:-

Temporary layoffs in Norway: 263,000; 27,000 jobs lost

Short-term layoffs in Finland: 259,000; 4,000 redundancies

Temporary furloughs in Sweden: 49,000; 18,000 job cuts

Job losses in Denmark: 31,000; estimated 70,000 people’s wages partially paid by the government

People reduced to part-time work in Iceland: 9,700

Some of the biggest Nordic companies are among those caving under the strain of the crisis. Truckmaker Volvo Group has temporarily laid off its entire 20,000-strong Swedish workforce. Airlines SAS, Finnair and Norwegian Air have all put most of their employees on leave. Scandic Hotels Group has locked the doors of more than 60 hotels, while retailers including Hennes & Mauritz have sent thousands of shop staff home.

It’s “easy to imagine that the high numbers we are seeing will increase dramatically if the economy doesn’t get restarted within a relatively short time,” said Helge Pedersen, chief economist at Nordea Bank in Copenhagen.

Meanwhile, Nordic governments are struggling to provide disaster relief, including subsidies of as much as 75 per cent of wages. The goal is to prevent temporary layoffs becoming permanent.

But despite these programmes, there’s one group that still faces a “very, very dark situation,” according to Hallberg at Swedbank, and that’s young graduates.

“If it lasts only a couple of months or a couple of quarters, it’s not a problem,” he said. “But three to four years of unemployment after school could destroy career potential and lead to lower income for life.”

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Economy

South Africa may approach the IMF for "health funding" -Mboweni

JOHANNESBURG, March 29 (Reuters) – South Africa may approach the International Monetary Fund and World Bank for funding to fight the coronavirus that threatens to drag the country’s economy deeper into recession, Finance Minister Tito Mboweni said in the Sunday Times newspaper.

“This morning in a conversation with the (central) Reserve Bank and the Treasury I indicated that we should proceed and speak to the IMF and the World Bank about any facility that we can access for health purposes,” Mboweni said in an interview with the weekly newspaper.

South Africa entered a 21-day lockdown on Friday, with people restricted to their homes and most businesses shuttered. The country has reported 1,187 cases of coronavirus and now almost certainly faces a deep recession.

On Friday, the country lost its last investment-grade credit rating when Moody’s downgraded South Africa to junk, citing persistently weak growth, fast-rising debt and the impact of an unreliable electricity supply.

“We take no ideological position in approaching the IMF and World Bank. They are creating facilities for this environment and SA should also take advantage of those facilities in order to relieve pressure on the fiscus,” Mboweni said in the interview. (Reporting by Mfuneko Toyana; Editing by Catherine Evans)

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Economy

UPDATE 1-Brazil central bank calls for emergency bond-buying powers

(Adds draft constitutional amendment)

By Jamie McGeever and Marcela Ayres

BRASILIA, March 27 (Reuters) – Brazil’s central bank on Friday called for emergency powers to buy bonds to stabilize financial markets during the coronavirus outbreak, with a draft constitutional amendment seen by Reuters giving the ability to buy “public or private financial assets.”

The central bank should be able to support markets with its huge balance sheet by “buying credit directly” as monetary policymakers have been doing around the world, bank president Roberto Campos Neto told reporters in a news conference.

The draft amendment seen by Reuters cites the need to intervene in bond markets in times of “public calamity” or “grave economic rupture”, adding that the current outbreak is a “grave situation” for the Brazilian people and markets.

The proposed changes center on Article 164 of the Brazilian constitution, which analysts say has created a gray area around the untraditional monetary policy known as quantitative easing.

The article currently bans the central bank from lending “directly or indirectly” to Treasury, but the following clause allows the central bank to buy government bonds on the secondary market to manage interest rates and the money supply.

Some economists have said it is inevitable that the central bank will resort to quantitative easing given the gravity of the economic crisis Brazil faces this year. (Reporting by Jamie McGeever and Marcela Ayres Editing by Brad Haynes)

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Economy

UPDATE 1-Portugal headed for recession, says central bank

(Adds details, background)

By Sergio Goncalves and Catarina Demony

LISBON, March 26 (Reuters) – Portugal’s economy will enter a recession this year as the coronavirus outbreak hits private consumption and investment, and its export sector will collapse, the central bank said on Thursday.

Portugal has 3,544 confirmed cases of coronavirus, with 60 reported deaths, far below other southern European countries such as Italy and Spain.

In its economic bulletin, the first data set showing the impact the fast-spreading coronavirus will have on Portugal’s economy, the Bank of Portugal said gross domestic product will drop between 3.7% and 5.7% in 2020. Last year the economy grew 2.2%.

Private consumption is set to fall 2.8% and 4.8% and exports will decrease 12.1% and 19.1% this year, according to the bulletin. Private investment will drop between 10.8% and 14.9%.

The unemployment rate is set to increase to between 10.1% and 11.7% this year, compared to 6.6% in 2019.

“The outlook for the Portuguese economy deteriorated sharply and significantly as a result of the impact of the Covid-19 pandemic,” the Bank of Portugal said in a statement, adding the outbreak will have “very significant and potentially long-lasting effects”.

Portugal declared a state of emergency on March 18, which meant the closure of non-essential businesses, a measure affecting thousands of jobs across the country.

The government also announced a 9.2 billion euro ($9.98 billion) package worth 4.3% of annual GDP to support workers and provide liquidity for companies affected by the outbreak.

Boosted by the exports sector, the tourism industry and private investment, Portugal’s economy has been steadily growing since 2014, when the country exited a strict bailout programme following the 2008 financial crisis.

On Wednesday Portugal reported a budget surplus of 0.2% of gross domestic product in 2019 – its first in 45 years of the country’s democratic history – after a deficit of 0.4% in 2018.

That day Finance Minister Mario Centeno said all scenarios pointed to an economic recession due to the impact of the coronavirus and restrictive measures implemented to stem the pandemic. (Reporting by Sergio Goncalves and Catarina Demony Editing by Raissa Kasolowsky)

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US joblessness set to spike as Covid-19 takes toll on businesses

WASHINGTON (AFP) – With streets in major cities barren, and shops and restaurants forced to close due to the coronavirus pandemic, economists warn of a record explosion of Americans filing for unemployment benefits.

The Labor Department on Thursday (March 26) will release its weekly data on first-time applications for jobless benefits covering the week ending March 21 – the first to show the epidemic’s impact on the US economy.

“Whatever the number, it will be horrific,” said Ian Shepherdson of Pantheon Macroeconomics.

The data have been mundane for the past two years amid a very strong US labor market, but the situation has changed for this lowly report on the frontlines of the virus fallout.

Last week’s report showed jobless claims surged to their highest level since September 2017, especially with a jump in applications from hotel and restaurant workers.

But that was just the tip of the iceberg.

“The consensus for today’s first post-apocalypse jobless claims number (1.5 million), looks much too low,” Shepherdson said, adding that he is expecting a staggering 3.5 million.

White House economic adviser Larry Kudlow acknowledged the report would show a jump, but said the market is expecting it.

“It’s going to be a very large increase,” he said on Fox Business Network.

But economists cautioned that forecasting data in unprecedented times is dicey at best.

The models “are based on prior experience and we have no prior experience of an economy that has largely been shut down,” said Rubeela Farooqi of High Frequency Economics.

“These are extraordinary times that will result in extraordinary outcomes.”

Reports from states and even data on Google searches show that unemployment offices have been overwhelmed in recent days and may have to estimate their totals.

Shepherdson noted that New York alone reported receiving 1.7 million calls last week, “though it’s not clear if all of these calls led to a formal claim.”

Economists are projecting the pandemic’s shutdown could lead to a staggering 14 per cent contraction of the US economy, and the Conference Board on Wednesday said unemployment could rise to as high as 15 per cent later in the year – far beyond the 10 per cent peak hit in October 2009 during the global financial crisis.

Congress is pushing through a massive $2 trillion rescue package to dampen the blow to the economy, which includes a huge expansion in unemployment insurance, boosting the weekly payment by US$600 and extending the benefits to workers who would not normally qualify.

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Investors look to 2008 for guidance on when to jump back in

LONDON, March 25 (Reuters) – Investment banks are dusting off models from the 2008 financial crisis to gauge the right time to buy back into stock markets that have plunged 30% from their February record highs because of the coronvirus crisis.

That inflection point is not easy to model when the virus is still spreading rapidly across Europe and the United States.

But the U.S. government’s $2 trillion in fiscal stimulus, coming on top of unprecedented measures from the U.S. Federal Reserve and other central banks on Tuesday triggered one of the sharpest global equity market rallies in decades.

Wall Street’s so-called fear gauge, the Cboe Volatility Index has also fallen.

For some, the signals for a reversal are in place.

Veteran investor Bill Ackman told investors in his listed Pershing fund he had turned increasingly positive on stocks and credit, and taken off hedges he put in place in early March when markets first started cratering.

He said Pershing was “redeploying our capital in companies we love at bargain prices that are built to withstand this crisis”.

Goldman Sachs’ view was that this week’s record stock market rally had been led by “underweight” sectors, suggesting many funds had been covering short positions. Indeed, energy, travel and auto stocks were Tuesday’s biggest gainers.

At Morgan Stanley, Andrew Sheets, head of cross-asset strategy, said in these situations, including in 2008, markets often trough well before the crisis actually ends.

From the 2008 trough there followed a decade of stunning gains that added more than $25 trillion to global equity value.

“(The market) won’t need to see a peak in U.S. (Covid) cases, it just needs to see some confirmation of the path and it nees to be happy with the path,” Sheets said.

But so far he remains underweight credit and has only marginally upped equity exposure.

GETTING IT RIGHT

JPMorgan says there is more than one way of measuring it, especially given the unique nature of the crisis which hit the real economy first, with financial markets following.

John Normand, JPM’s head of cross-asset strategy said one model suggested now is the time to re-enter — a quarter before a recession is likely to end. His view is that the coronavirus-induced recession will be “undoubtedly deep but also possibly the shortest-ever.”

Normand also said investors could wait for “green shoots” or evidence of an actual upturn — reflected in a trough for JPMorgan’s global Purchasing Managers Index.

A third, valuation-based model triggers a “Buy” signal when risk-premia across several asset classes fall to certain “deep value” thresholds.

Norman said the latter two models were not yet signalling it was time to buy.

Notably, U.S. and European stock valuations based on a 12-month forward price-to-earnings ratios now have dipped well below historical averages, according to Refinitiv data.

Meanwhile, credit markets are still sending out distress signals — yields on junk-rated U.S. bonds are around 10% currently compared to 6% a month ago, meaning many companies may find it hard to service debt.

In Europe, an index of European credit default swaps, that measure the default risk of a basket of sub-investment grade companies, is off its peaks but remains elevated at 545 basis points, almost double end-February levels.

The volatility index’s (VIX) 30% drop from recent peaks is a clear positive for riskier assets. But if 2008 is any guide, its decline may not yet signal the market trough. In 2008, the VIX retreated from highs in October, but markets took another five months to bottom out.

The recession in 2008 was a long one — economists this time reckon a turnaround in global growth will come by the third quarter.

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Banks ask for flexibility as sponsors eye falling valuations

NEW YORK, March 25 (LPC) – Private equity firms sitting on a stockpile of cash are eyeing companies that have dived in value as the coronavirus pandemic causes a sell-off across financial markets. Standing in sponsors’ way could be the flexibility some banks are demanding, concerned about lending into an economy on the cusp of a recession.

With memories of the 2008 financial crisis on many bankers’ minds, lenders are being cautious in extending credit, ensuring agreements include strict so-called ‘flex language.’ This flexibility allows lenders to increase the rate companies pay to borrow, which in some instances has been a deal-breaker for sponsors.

Concerns about the fast-spreading virus have sent markets into a frenzy. The Dow Jones Industrial Average fell almost 35% since the start of the year through Monday, but rose Tuesday on optimism the US Congress was close to finalizing a stimulus package. The LPC 100, a cohort of the 100 most liquid US loans, dropped more than 20% since the start of February to 78.54 cents on the dollar Tuesday.

Some of the largest private equity shops are sitting on roughly US$2trn in cash, according to a March 18 report from Morgan Stanley, and are keen to capitalize on the dip in valuations. There are potential targets that could go for prices significantly cheaper than just a few weeks ago.

“Most private equity firms have a ton of dry powder to put to work and have been complaining about high valuations,” said Jake Mincemoyer, head of law firm White & Case’s Americas banking unit. “If there is a reset on equity valuations, there could be a ton of activity once things settle down.”

WAITING GAME

Any activity, however, may take time to play out as financial markets navigate the new terrain brought on by the dislocation created by the coronavirus.

The virus has interrupted supply chains, closed retail operations and reduced consumer demand, pushing the world economy toward a recession.

In the immediate-term, private equity firms are expected to focus on their existing portfolios and ensure companies have enough liquidity, Morgan Stanley analysts wrote in the report. Buying opportunities may be available but sponsors’ access to financing will be limited.

“Private equity firms have assets to harvest, and their (immediate) priority is protecting the value of these assets and stress-testing them,” said Todd Albright, chief revenue officer at Datasite, formerly known as Merrill Corp, a software services provider focused on the lifecycle of mergers and acquisitions.

At least 14 loans worth about US$19.25bn in the US have been pulled since February 28, according to Refinitiv LPC data. Concerns about access to capital have prompted companies including hotel operator Hilton Worldwide and automobile manufacturer Ford Motor Co to draw on their credit lines.

As companies shore up their cash balances, it likely won’t be until the second half of 2020 before private equity shops move on businesses they’ve eyed in the past, the Morgan Stanley analysts wrote.

“The bigger issue is uncertainty, including duration and severity, and how to determine what valuations truly are,” said Jay Kim, a private equity partner at law firm Ropes & Gray. “While there is an opportunity for private equity to use dry powder, the coronavirus pandemic clouds the sale process due to the uncertainty of the valuations, which also affects (the) ability to raise financing.”

SIDELINES

Lenders have been speaking with their legal counsel, trying to determine if the new market reality would allow them to drop out of committed financings or not fund existing revolving lines of credit. They are looking to see if the fallout from the coronavirus constitutes a so-called material adverse change or if a company’s financial health has deteriorated so that it may not be able to provide a solvency representation indicating it could repay its debt.

For new deals, banks are requesting more flexibility in pricing when committing to new acquisition and buyout financings, Mincemoyer said. And there has been a general tightening of language in documents with regard to shareholder dividends and investment availability.

In some instances, the additional flex banks have required has risen by about 100bp, according to two sources, while the starting interest rate companies would need to pay to borrow also jumped. After loan prices plunged in recent weeks, one banker said new financings would need to be extremely enticing to convince institutional investors to buy a fresh deal rather than purchase something at a discount in the secondary market.

For now, private equity shops are focused on ensuring their existing investments have enough cash to navigate life after the coronavirus.

“Markets are dealing with aspects of liquidity and are in a wait-and-see mode. After this, comes the unfreezing of the capital markets,” Albright said. (Reporting by Kristen Haunss and Aaron Weinman; Editing by Michelle Sierra)

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UPDATE 2-Some Indian ports declare force majeure, could delay oil discharges – documents, sources

(Updates with force majeure by Gujarat Maritime Board)

By Nidhi Verma, Shu Zhang and Jessica Jaganathan

SINGAPORE/NEW DELHI, March 25 (Reuters) – Some ports in India including those owned by Adani Ports & SEZ Ltd (APSEZ) have declared force majeure after Asia’s third-biggest economy announced a 21-day lockdown to prevent the spread of the coronavirus, documents seen by Reuters showed.

The federal shipping ministry has issued a letter allowing ports to use the COVID-19 pandemic as valid grounds to declare force majeure, according to a separate shipping ministry order also seen by Reuters.

“All our ports are operating. Force majeure is for ensuring that wherever APSEZ has commercial contracts, the time taken for handling and delivery of cargo doesn’t apply,” APSEZ said in a statement.

India’s shipping ministry could not be immediately reached for comment.

The force majeure declaration could delay discharge of crude oil tankers, an Indian refining source told Reuters.

“Though FM (force majeure) is declared, some operations are continuing. Ports will not be responsible for any delay and any other thing as per the notification of Adani,” said the source.

Port services are categorised as essential, so ports are remaining open with minimal operations, the source said.

Ashok Sharma, managing director of shipbroker BRS Baxi in Singapore, said the lockdown would impact oil demand but not really imports at this stage.

“Indian (crude) imports are by and large term contracts and what may be impacted are the speculative spot lifting. Also, 21 days is a relatively short period of time, but if it is extended beyond this period and if the (coronavirus) really bites then we would see a slowing down (in crude imports) for sure,” he said.

No government-owned ports have declared a force majeure as yet, although they have been given the liberty to do so, Sharma also said.

Besides APSEZ, Reuters has also seen letters from Krishnapatnam Port, Gopalpur Port, Karaikal Port and Gangavaram Port declaring force majeure on loading and unloading delays.

Gujarat Maritime Board has also announced force majeure at its 10 ports including Dahej port, according to a document seen by Reuters. Dahej port is used by India’s top gas importer Petronet LNG for importing liquefied natural gas.

Calls to these ports seeking comment went unanswered.

Petronet has already served force majeure notice to its top gas supplier Qatargas seeking to delay import of cargoes, a source privy to the matter said earlier in the day. (Reporting by Jessica jaganathan, Shu Zang and Roslan Khasawneh in Singapore, and Sudarshan Varadhan and Nidhi Verma in New Delhi; Editing by Muralikumar Anantharaman, Tom Hogue and Mark Potter)

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UK changed its approach after ventilator demand estimate doubled, doctor says

LONDON, March 25 (Reuters) – Britain toughened its approach to the coronavirus outbreak after estimates of the number of people who would need invasive mechanical ventilation in intensive care doubled, a top epidemiologist who advised the government said on Wednesday.

“The revision was basically that the proportion of patients requiring invasive ventilation, mechanical ventilation, which is only done on a critical care unit, roughly doubled,” Neil Ferguson, a professor of mathematical biology at Imperial College London, told a British parliamentary committee.

Intensive care estimates were initially too optimistic so were revised, Ferguson said, after a variety of research including an analysis of the outbreak in Italy.

Ferguson led a study that helped convince the British government to impose more stringent measures to contain COVID-19, painting a worst case picture of hundreds of thousands of deaths and a health service overwhelmed with severely sick patients.

“Since we did that initial analysis, the NHS have refined their ICU surge capacity estimates, those have more than doubled,” he said. “This current strategy being adopted now, we think in some areas of the country ICUs will get very close to capacity but it won’t be breached at the national level.” (Reporting by Guy Faulconbridge; editing by Kate Holton)

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