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Economy

RPT-Big bond investors bet ECB will ride to Italy's rescue with QE package

(Repeats MARCH 11 story, no change to text)

* Aberdeen, Allianz GI, Franklin Templeton buy Italian debt

* ECB expected to ramp up QE asset purchases on Thursday

* Many funds also like longer Gilts after UK rate cut

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By Dhara Ranasinghe and Tommy Wilkes

LONDON, March 11 (Reuters) – European bond investors have piled back into Italian bonds amid this week’s sell-off, betting that the European Central Bank will on Thursday unveil a big increase in asset purchases and boost a market hit hard by panic over the coronavirus outbreak.

Yields on 10-year bonds yields in Italy, the country worst-affected by coronavirus outside China, have risen around 40 basis points in the past month as investors positioned for the outbreak to deal a heavy blow to the indebted economy.

But several large investors told Reuters on Wednesday they were moving back into the market, believing the ECB was likely to follow other central banks and unveil several supportive measures when it meets on Thursday, including an increase in monthly asset purchases.

On Wednesday, Italian yields dropped nearly 20 basis points .

“It’s clear that the Italian situation is dire, but as it’s been proven in the past, the ECB has proven the most important driver of the Italian spread and clearly there is a lot of pressure building on the need to step up efforts, especially on QE (quantitative easing),” said Ross Hutchison, a rates fund manager at Aberdeen Standard Investments.

“We are still underweight Italian bonds, but have bought some bonds back recently on expectations for a ECB policy response,” said Hutchison, part of the ASI rates team managing 30 billion pounds ($38.79 billion) worth of assets.

Trading volatile Italian debt has been popular among managers searching for yield in recent years, but the complex political situation and Rome’s economic vulnerabilities have made it a tricky trade – and many managers have been caught out. Italy is currently in lockdown to tackle the coronavirus, and its economy is expected to slow sharply.

The ECB is widely expected to take action on Thursday to protect the euro zone economy. Major central banks including the Federal Reserve and Bank of England have already announced emergency rate cuts.

John Taylor, co-head of European fixed income at AllianceBernstein, said he expected the ECB to announce an increase in bond purchases to at least 40 billion euros ($45.04 billion) monthly.

The ECB currently buys 20 billion euros of bonds monthly. Its asset purchases, worth over 2.6 trillion euros since 2015, have pinned down bloc-wide borrowing costs.

“During the sell-off, we have returned to our overweight (position on Italy). We think spreads should come in,” said Taylor.

The closely-watched gap between 10-year Italian and German government bonds on Tuesday rose to almost 230 bps – its widest in seven months – after blowing out by 50 bps in Monday’s brutal selloff.

Taylor said he was targeting the spread to tighten back to 150 bps.

The ECB risked being “left behind” if it did not loosen policy. Knowing that a limited response would send the euro higher when the economy could not handle a stronger currency would drive the ECB to act, Taylor said.

David Zahn, head of European fixed income at Franklin Templeton, said Italian and Spanish bonds offered “good value” in a world of plunging government bond yields.

Key to a credible European response to deal with the coronavirus would be coordinated monetary and fiscal policy, Zahn said.

While he would normally worry about the euro area’s ability to co-ordinate, he had been impressed by the European Union’s display of unity on the virus so far.

Allianz Global Investors has also bought back into Italian debt, head of UK fixed income Mike Riddell said.

BOE HEADING FOR QE?

Several investors said they also saw value in British government bonds, known as gilts, especially longer-dated ones.

On Wednesday, the Bank of England slashed rates and announced support for bank lending just hours before the unveiling of a budget splurge.

Gilt yields have dropped sharply in the past week as expectations rose for an aggressive policy response to the outbreak.

“The front end of the gilt market cannot rally much more from where it is right now, but that doesn’t mean gilts overall can’t rally,” said Allianz Global Investors’ Riddell.

“The rate cut was not a surprise to the market, but what this means is that QE is far closer than the market anticipated just a few days ago.”

Earlier this week short-dated gilt yields fell into negative territory for the first time. Thirty-year gilt yields are trading around 0.67%. ($1 = 0.8880 euros)

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Economy

U.S. bans foreign nationals who have been in Europe from entering U.S.

WASHINGTON, March 11 (Reuters) – Travel restrictions announced on Wednesday by President Donald Trump bans most foreign nationals who have traveled to Schengen Area countries in Europe during the previous 14 days from entering the United States, the Homeland Security Department said.

The restrictions, meant to combat the spread of the coronavirus, do not apply to legal permanent residents of the United States, nor does it generally apply to immediate family members of American citizens, DHS said in a statement.

DHS acting Secretary Chad Wolf said in the statement he plans to issue a notice in the next 48 hours that would require U.S. passengers who have been in Schengen Area countries to travel through select airports with enhanced screening. (Reporting by Eric Beech; Editing by Sandra Maler)

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WRAPUP 7-WHO says coronavirus outbreak is now a pandemic, UK and Italy shore up defences

(Adds Ryan comments, updates markets)

* Britain, Italy try to mitigate impact of virus

* U.S. considering new steps to fight outbreak

* First virus hotbed Wuhan slowly getting back to business

* WHO officials says situation in Iran “very serious”

By Emma Farge and William Schomberg

GENEVA/LONDON, March 11 (Reuters) – The World Health Organization described the coronavirus outbreak as a pandemic for the first time on Wednesday, and Britain and Italy showed growing concern about the economic impact by announcing multi-billion-dollar war chests to fight the disease.

The United States also said it was considering new steps to battle the virus that emerged in China in December and has spread around the world, halting industry, grounding flights, closing schools and forcing events to be postponed.

“We are deeply concerned both by the alarming levels of spread and severity and by the alarming levels of inaction,” Director General Tedros Adhanom Ghebreyesus told reporters in Geneva.

“We have therefore made the assessment that COVID-19 can be characterised as a pandemic,” he said, using the formal name of the coronavirus.

There are now more than 118,000 infections in 114 countries and 4,291 people have died of the virus, with the numbers expected to climb, Tedros said.

The number of cases outside China rose 13-fold in the past two weeks, and the number of countries affected tripled, with Iran and Italy the worst-hit countries in the Middle East and Europe. There have been 354 deaths in Iran and 827 in Italy.

“Italy and Iran are in the frontline and are suffering but other countries will be in that situation very soon,” Tedros said.

Use of the word pandemic does not change the WHO’s response, said Dr Mike Ryan, the head of the Geneva-based agency’s emergencies programme.

He also said there was “a strong element of controllability” and “a real chance to blunt the curve… and reduce the number of cases”.

Use of the word “pandemic” carries no legal significance. The WHO classified the outbreak as a “public health emergency of international concern” on Jan. 30, triggering an increase in the coordination of the global response.

“The use of this term however highlights the importance of countries throughout the world working cooperatively and openly with one another and coming together as a united front in our efforts to bring this situation under control,” said Nathalie MacDermott, an expert at King’s College London.

Mark Woolhouse, professor of infectious disease epidemiology at Britain’s Edinburgh University, added: “It is now clear that COVID-19 is going to be with us for a considerable length of time and the actions that we take must be actions that we can live with for a prolonged period.”

WAR CHESTS

Britain launched a 30-billion-pound ($38.54 billion) economic stimulus plan as new finance minister Rishi Sunak said the economy faced a “significant impact” from the spread of the virus, even if it was likely to be temporary.

“Up to a fifth of the working-age population could need to be off work at any one time. And business supply chains are being disrupted around the globe,” Sunak said in an annual budget speech to parliament.

He announced measures to help companies facing a cash-flow crunch, and said the health system and other public services would receive an extra 5 billion pounds to help counter the spread of the coronavirus.

Italy is in already in lockdown and close to recession, and Prime Minister Giuseppe Conte earmarked $28.3 billion to ease the economic impact.

He said restrictions on movement might be tightened further after the northern region of Lombardy, home to Italy’s financial capital Milan, asked for all shops to shut and public transport to close.

Steps against the virus in the United States may include tax relief that could channel hundreds of billions of dollars into the U.S. economy. New restrictions on travellers from Europe are also under consideration, potentially mirroring the ban on foreigners who visited China in the prior two weeks coming to the United States, which was later extended to Iran, sources familiar with discussions said.

“Bottom line, it’s going to get worse,” Anthony Fauci, head of the U.S. National Institute of Allergy and Infectious Diseases, told Congress.

GOING BACK TO WORK IN WUHAN

German Chancellor Angela Merkel said up to 70% of the population was likely to be infected as the virus spreads around the world in the absence of a cure.

A rebound in stocks ran out of steam on Wednesday despite the Bank of England move. Money markets are fully pricing in a further 10 basis-point cut by the European Central Bank when it meets on Thursday.

Oil prices fell further, the dollar weakened and global equities markets slid again as hopes of government stimulus to tackle the coronavirus faded.

The Dow Jones Industrial Average fell 5.25%, the S&P 500 was down 4.85%.

But not all the news was bad. Some key industries in Wuhan, the Chinese city at the epicentre of the epidemic and a hub of car manufacturing, were told they could resume work on Wednesday. ($1 = 0.8865 euros) ($1 = 0.7783 pounds)

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Economy

HIGHLIGHTS-UK announces budget plan as coronavirus risks mount

LONDON, March 11 (Reuters) – British finance minister Rishi Sunak delivered the first annual budget statement of Prime Minister Boris Johnson’s new government on Wednesday.

Below are highlights from the speech:

CORONAVIRUS DISRUPTION TO THE ECONOMY

“The challenge is this: There is likely to be a temporary disruption to our economy. On the supply side, up to a fifth of the working age population could need to be off work at any one time. And business supply chains are being disrupted around the globe. This combination of people being unable to work… …and businesses being unable to access goods… …will mean that for a period our productive capacity will shrink. There will also be an impact on the demand side of the economy, through a reduction in consumer spending.”

MEASURES TO TACKLE CORONAVIRUS IMPACT

“Our response will be temporary, timely and targeted. This is the right response – and at the right time. That response is closely coordinated with the Bank of England. The Governor and I have been in constant communication about the evolving situation and our responses have been carefully designed to be complementary and to have maximum impact, consistent with our independent responsibilities.

“Whatever extra resources our NHS needs to cope with COVID-19 – it will get. So, whether its research for a vaccine, recruiting thousands of returning staff, or supporting our brilliant Doctors and Nurses… …whether its millions of pounds or billions of pounds… …whatever it needs, whatever it costs, we stand behind our NHS.

“Taken together, the extraordinary measures I have set out today represent £7bn to support the self-employed, businesses and vulnerable people. To support the NHS and other public services, I am also setting aside a £5bn emergency response fund – and will go further if necessary.

“Those measures are on top of plans that I will set out later in this Budget, which provide an additional fiscal loosening of £18bn to support the economy this year. That means I am announcing today, in total, a £30bn fiscal stimulus to support British people, British jobs and British businesses through this moment.”

HELP FOR BUSINESSES

“If we expect 20% of the workforce to be unable to work at any one time, the cumulative cost would hit our small and medium sized businesses hard. So, in recognition of these exceptional circumstances, today I am taking a significant step.

“For businesses with fewer than 250 employees… …I have decided that the cost of providing Statutory Sick Pay to any employee off work due to coronavirus… …will, for up to 14 days, be met by the Government in full. That could provide over £2bn for up to 2 million businesses.

“Our manifesto promised that for shops, cinemas, restaurants, and music venues… …with a rateable value of less than £51,000… …we would increase their business rates Retail Discount to 50%.

“Today I can go further, and take the exceptional step, for this coming year, of abolishing their business rates altogether. But there are tens of thousands of other businesses in the leisure and hospitality sectors, currently not covered by this policy.

“Museums, art galleries, and theatres; Caravan parks and gyms; Small hotels and B&Bs; sports clubs, night clubs; club houses, guest houses. They would not benefit from today’s measure – but they could be some of the hardest-hit. So for this year I have decided to extend the 100% retail discount to them as well.”

PUBLIC CONCERNS

“I know how worried people are. Worried about their health, the health of their loved ones, their jobs, their income, their businesses, their financial security. And I know they get even more worried when they turn on their TVs and hear talk of markets collapsing and recessions coming. People want to know what’s happening, and what can be done to fix it.

“I want to set out our economic response so we bring stability and security. Let me say this: We will get through this – together. The British people may be worried, but they are not daunted. We will protect our country and our people. We will rise to this challenge.”

ECONOMIC FORECASTS

“The OBR have said that, as a direct result of the plans I’m announcing, growth over the next two years will be 0.5 percentage points higher than it otherwise would have been.

“The GDP forecast without fully accounting for the impact of coronavirus would have led to growth of 1.1% in 2020 and 1.8% in 2021, then 1.5%, 1.3%, and 1.4% in the following years.

“Today the OBR report a current budget surplus in every one of the next five years. And in the target year of 2022-23, we have fiscal space of nearly £12bn. What does that mean for borrowing and debt? The OBR forecast that borrowing will increase slightly from 2.1% of GDP in 2019-20 to 2.4% in 2020-21 and 2.8% in 2021-22.

“It falls to 2.5%, 2.4% and 2.2% in the following years.

“And the OBR forecast that headline debt will be lower at the end of the Parliament than it is today, falling from 79.5% this year to 75.2% in 2024-25.

“I’m sure the House will understand that given how urgently we’ve developed our economic response to the coronavirus… …that package of measures have not yet been captured in the fiscal forecasts, and nor have the fiscal impacts of the Bank’s actions.

“But the House will also note that the target year for our current budget fiscal rule is not until 2022-23. So even within our current framework, I have the flexibility to act as required over the next two years.” (Compiled by Costas Pitas, editing by Estelle Shirbon)

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EU coronavirus aid package won't fail because of Germany – Merkel

BERLIN, March 11 (Reuters) – The European Union’s fiscal monitoring framework has enough flexibility built in to cope even with extraordinary situations like the coronavirus epidemic, for Italy as well as Germany, Chancellor Angela Merkel said on Wednesday.

Italy, the country worst-afflicted by the epidemic that has begun to rage across Europe, has announced that its government deficit will have to grow to deal with the unexpected costs and slowing growth resulting from the crisis.

“I believe the growth and stability pact has enough flexibility for extraordinary situations,” Merkel told a news conference in Berlin. “And also for Italy, of course we aren’t saying you can’t invest in your healthcare system.”

She added Berlin would do its part in countering the impact of the epidemic and that a proposed European Union package with fiscal measures would not fail because of Germany. (Reporting by Thomas Escritt Editing by Michael Nienaber)

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No plans to shut UK parliament despite positive coronavirus test

LONDON, March 11 (Reuters) – Britain’s parliament has no plans to shut over coronavirus, a spokeswoman said on Wednesday, after a minister tested positive for the virus and another lawmaker was advised to stay at home as a precaution.

Junior health minister Nadine Dorries said she had tested positive for coronavirus and was self-isolating. An opposition lawmaker who met Dorries was also advised to isolate herself by health authorities.

“At present there are no plans to suspend parliament,” a parliamentary spokeswoman said in a statement.

“We are closely following guidance from Public Health England in response to the situation and have been reassured that the measures we are taking are proportionate and appropriate.”

Lawmakers have expressed concern that the ageing parliamentary estate is ill-equipped to deal with an outbreak of the virus, and that lawmakers pose a higher risk because they travel a lot and meet people.

Any decision to close parliament would be taken after consultation between parliamentary authorities, the speakers of both houses of parliament and the government.

Britain’s finance minister is due to deliver a budget statement later on Wednesday, one of the biggest days in the parliamentary calendar. (Reporting by William James, editing by Elizabeth Piper)

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RBC CEO sees 'fairly material' short-term impact from measures to control coronavirus

TORONTO, March 10 (Reuters) – A “fairly material short-term impact” from global measures to contain the coronavirus outbreak is likely, although the economic effects remain difficult to predict, Royal Bank of Canada Chief Executive Officer Dave McKay said on Tuesday.

“An abundance of caution is appropriate as we try to figure out how to get global control” of the coronavirus, McKay said at the RBC Capital Markets Financial Institutions Conference in New York, which was held as a remote event due to the outbreak.

McKay said he envisions three scenarios: one where the crisis is contained within four to six weeks, leading to a V- or U-shaped economic recovery; one where the disruptions remain for about six to eight months and the precautions slow demand and affect a number of industries; and the worst-case scenario, where it goes on for a prolonged period.

“I don’t think any of us really know yet which of those variations and hybrids of those scenarios will come into play,” he said. (Reporting By Nichola Saminather Editing by Chizu Nomiyama)

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Singapore business confidence falls to record low on coronavirus worries: Survey

SINGAPORE (THE BUSINESS TIMES) – Business sentiment among Singapore firms plunged to an all-time low in the second quarter of 2020 because of coronavirus health risks and potential economic impact.

This is according to the Singapore Commercial Credit Bureau’s (SCCB) latest Business Optimism Index study out on Tuesday (March 10).

Business sentiment tumbled to -7.88 percentage points in Q2 2020 from 5.31 percentage points in Q1 2020 as all six of the study’s indicators reported negative numbers.

Year on year, the index dipped strongly, losing 12.96 percentage points from +5.08 percentage points in the first quarter of 2019.

The Q2 2020 figure is the lowest since SCCB started polling businesses for the study in Q3 2010, the bureau told The Business Times.

The slide in optimism levels was caused by negative spillover effects of heightened global health risks posed by the virus, slowing Chinese demand and disruption of supply chains, said SCCB chief executive officer Audrey Chia.

Among indicators, selling price, volume of sales and new orders fell the most. Selling price slid 17.42 percentage points to -8.46 percentage points in Q2 2020 from +8.96 percentage points in Q1 2020.

Volume of sales dropped 16.92 percentage points to -9.95 percentage points from +6.97 percentage points and new orders fell 16.42 percentage points to -12.44 percentage points from +3.98 percentage points.

The study polled 200 business owners and senior executives representing major industry sectors across Singapore, with figures calculated by subtracting the percentage of respondents expecting decreases from the percentage expecting increases, said SCCB.

Among sectors, only transport and finance had any positive indicators. Transport’s only positive indicator – inventory levels – jumped to +42.86 percentage points from -14.29 percentage points, while net profits were the sole positive indicator for finance, down to +16.67 percentage points from +100 percentage points.

In construction, selling price tumbled to -30 percentage points from +30 percentage points, while inventory levels dropped to -30 percentage points from +10 percentage points.

The services sector saw volume of sales sentiment diving to -51.61 percentage points from +54.84 percentage points, while net profit dropped to -19.36 percentage points from +54.84 percentage points in Q1 2020.

Manufacturing had the largest drops in selling price and new orders. Both fell to -10 percentage points from +15 percentage points.

“The recent Budget 2020 measures, such as the Stabilisation and Support Package to help businesses tide through the Covid-19 outbreak, will to some extent provide some short-term relief to firms in managing their cash flow and manpower,” said Ms Chia.

However, Ms Chia warned that with so many uncertainties in the trajectory and development of the spread of Covid-19, the downside risks and potential disruptions are real.

“Firms will have to brace for tougher times and continued uncertainties ahead.”

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OPEC and non-OPEC states might need to reconsider supply cuts -Nigerian minister

ABUJA, March 9 (Reuters) – OPEC and non-OPEC states might need to meet again to reconsider production cuts, Nigeria’s oil minister said on Monday, expressing frustration with the collapse in oil prices after Saudi Arabia and Russia embarked on a battle for market share.

Minister of State for Petroleum Timipre Sylva told reporters that the sharp drop in Brent crude, which fell as much as 30% on Monday before rebounding, could force a change in tactics.

Saudi Arabia and Russia have pledged to ramp up production despite substantially weakened global demand, having failed to come to an agreement last week on supply cuts. (Reporting By Felix Onuah Writing by Libby George Editing by David Goodman )

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Brazil real's natural exchange rate is weaker, due to low rates -Guedes

BRASILIA, March 9 (Reuters) – The Brazilian real’s natural exchange rate is weaker now given the record low level of interest rates, Economy Minister Paulo Guedes said on Monday, adding that the currency is also being determined by the progress – or otherwise – of economic reforms.

Speaking to reporters in Brasilia as the real slumped to a new low and the central bank intervened selling dollar reserves for the first time since November, Guedes reiterated his view that the real is a floating exchange rate, albeit at a different level now than before.

“Brazil has lower interest rates and a slightly higher (dollar) natural exchange rate, but it is a floating exchange rate,” Guedes said outside the Economy Ministry in Brasilia.

“There’s coronavirus, there’s crisis, and if reforms aren’t progressing the (dollar) goes up; if reforms are moving, it (the dollar) goes down,” Guedes said.

The real fell as low as 4.7939 per dollar on Monday, extending its losses so far this year to 16%, before the central bank’s auction of $3 billion worth of reserves pulled it back to around 4.72 per dollar.

Brazil’s Congress passed a landmark social security reform bill last year that will save the Treasury some 1 trillion reais over the next decade via a range of measures including raising the minimum retirement age and increasing pension contributions.

But so far this year, the government has made little tangible progress on its aim to push through tax reform, “administrative reform” of the public sector and “federative pact” overhaul of state and federal government finances.

Asked if this was the time to sell international FX reserves, Guedes again highlighted the need to accelerate the reform process.

“If reforms go ahead and people are (still) trying to buy dollars, the central bank has said it will sell (dollars). On the other hand, if reforms stall … then uncertainty continues. But this is a problem for the central bank,” he said.

In 2018, Guedes said that in a case of “speculative attack” on the real at around 4.50 or 5.00 per dollar, the central bank could sell $100 billion, which would also help improve the public finances.

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