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Broken Markets Seeking Lifeline Struggle to Look Past Infections

Justin Carrigan

(Bloomberg) --

Look all you like at the stimulus packages and data releases. The reality is that traders probably have eyes for only one number: the infection rate.

And with little sign of a let-up in the pace at which people are succumbing to the coronavirus -- and consequently no indication of how deep and lasting the economic damage will be -- analysts expect markets to remain under unprecedented strain Monday.

In foreign-exchange markets, early moves in Asia-Pacific trading were cautious with the dollar holding close to its closing levels from last week against the euro and yen. The Norwegian krone was weaker, while New Zealand’s dollar slipped and remained down after the country’s central bank announced quantitative easing.

Asian equity futures pointed to a negative start to the week, with contracts that track indexes in Japan, China, Australia, Hong Kong, South Korea, Taiwan, Singapore, Indonesia and India all falling. Stocks in the Middle East also extended losses Sunday, with traders drawing scant comfort from regional governments’ stimulus measures. Abu Dhabi’s main gauge dropped the most, while shares in Dubai, Saudi Arabia, Qatar and Bahrain also retreated.

“Proof the virus is being brought under control is needed before investors can begin to focus on the economic fallout from the lockdowns,” said Charles Robertson, the London-based head of research at Renaissance Capital. “There is increased bearishness among many we speak to.”

So while the U.S. readies a rescue package worth some $2 trillion and other countries draw up their own plans, including debt moratoria and emergency credit lines, the prospect of a recovery remains distant. Federal Reserve Bank of St. Louis President James Bullard predicted the U.S. unemployment rate may hit 30% in the second quarter because of shutdowns to combat the coronavirus, with an unprecedented 50% drop in gross domestic product.

Still, few commentators anticipate price gyrations to be as extreme as last week.

U.S. stocks capped the worst week since the global financial crisis in the five days through Friday, with the S&P 500 tumbling 15%. The 10-year Treasury yield fell back below 1%, oil had its biggest weekly decline in almost three decades and the Bloomberg Dollar Index jumped 4.8% as the clamor for U.S. currency intensified.

“Perhaps we reached peak panic this past week,” Ole Hansen, head of commodity strategy at Saxo Bank in Copenhagen, wrote in a note on Sunday. “At least we’re seeing some stabilization emerging, not least from the stock market. For now, however, the strong dollar due to exceptionally strong demand and a broken bond market, especially on the corporate side, highlights the challenging road that lies ahead.”

Here are more comments on what to expect as markets open Monday:

Sebastien Galy, senior macro strategist at Nordea Investment Funds SA in Luxembourg.

“We are through the eye of the needle in the financial markets, which doesn’t mean the S&P 500 doesn’t still have some downside, but we should increasingly find a firm footing.“We maintain our more constructive view, namely less extreme caution on equities, and continue to expect the next wave to be profit warnings, defaults and a collapse in economic indicators. Some is priced into high-yield, less investment grade. Over time, the Fed and U.S. government will win the day.”

Ali Malik, senior investment adviser at Bank of Singapore Ltd.

“We are seeing a liquidity crunch like never before. We are seeing a real shortage of dollars. Some of the international banks, especially the European banks, are far underfunded in dollar reserves. So swap lines for central banks are a very important key component.“It is very hard to comprehend and to add to positions right now. We have seen clients frenetically selling out of positions even where they felt the industries might not be impacted as much.“We have been very careful in advising clients to take a very cautious stance towards U.S. equities because we think the worst is yet to come.”

Marc Ostwald, chief economist and global strategist at ADM Investor Services International:

“Quarter end: banks should be fine given relaxation of capital, reserve rules, but the corporate sector will probably more challenged. It is also Japan’s financial year-end, and the dollar shortage -- above all offshore -- is still very evident.“How much more will credit spreads continue to widen? Volatility to remain high.”

Chiro Ghosh, an analyst at SICO BSC in Bahrain.

“Everyone is looking for safe havens in this market. Banks used to be an all-season savior. However, they are in a really tough spot too, with a weak economic environment as well as a low interest-rate scenario.”

Robertson of Renaissance Capital:

“A slowdown in Italy’s cases might help, but U.S. markets are unlikely to stabilize when active cases are rising by nearly 40% a day. We think we need to see at least half that figure.“It is time for the IMF and World Bank, G-7 and China to offer significant support to emerging and frontier markets.”

Analysts at Allied Capital Partners:

“Market volatility might continue in global equities but the downside risk appears to be limited after declining by an average of 30% since the start of 2020.“Long-term investors might access the current environment in analyzing fundamental companies that are expected to benefit once the current environment has been stabilized.”

(Updates currency markets, adds Bullard comments and New Zealand announcement.)

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