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Economy

Coronavirus damage to China's economy clear from early indicators

BEIJING (BLOOMBERG) – A range of early indicators of China’s economy in February confirm that the coronavirus outbreak has crippled production and consumption, as factories remain below capacity and transport is curtailed.

Five of the eight indicators tracked by Bloomberg dropped in February from January, with two indicators of business confidence plunging to the lowest on record.

The improvement in the headline South Korea exports in first 20 days of the month hides a drop in shipments to China and was flattered by the distortions from the Lunar New Year. Expectations of fresh stimulus have also kept financial markets more buoyant than real activity would suggest.

While businesses are restarting and the official data shows the rise in infections slowing, the virus is not yet overcome, and companies and various levels of governments have to weigh the desire to return to normality quickly with the need to stop the disease. The economy is forecast to grow the slowest since 1990 according to the median of recent economists’ reports, with Goldman Sachs Group estimating it will expand only 2.5 per cent in this quarter, before rebounding later.

A slowdown of that magnitude could lead to higher unemployment, bad loans, and bankruptcies. Already car sales are plummeting and property developers are being squeezed as people hold back on spending as they wait to see what will happen with the disease, and when they can go back to work.

The reaction to the outbreak will be visible in the first official statistics for February – the Purchasing Manager Indexes due on Feb 29. The indicator for manufacturing is forecast to drop to the lowest since the global financial crisis, although five economists are forecasting it to be even worse than that.

“The earliest business surveys have already shown record declines of demand and output. The overall momentum reversed strength in previous months to weakness in February, as the virus hit industrial production, supply chains and consumption,” according to Bloomberg Economics’ Qian Wan. “We expect activity to start to recover from March. Efforts to contain the virus continue, but the government is clearly shifting” toward pro-growth policies to and help companies get back to work after the extended Lunar New Year break, she said.

A monthly survey on the health of China’s small and medium-sized businesses plummeted to a record-low in February, highlighting the negative economic impact of the outbreak. A sub-index from the survey by Standard Chartered evaluating “current performance” dropped even more sharply, while the reading for the outlook was better than the headline number, signaling some hope for recovery once the outbreak is contained.

About two-thirds of small- and medium-sized companies only have enough cash on hand to survive for up to three months, according to the report from Shen Lan and Ding Shuang at Standard Chartered. Earnings in the first quarter will fall 43 per cent, according to their survey, with the biggest drops in wholesale and retail industries.

One bright spot in the indicators Bloomberg tracks has been Chinese stocks, which took just weeks to recover from a record selloff earlier this month triggered by the virus. But that almost 10 per cent rally since Feb 3 is built on little more than liquidity, surging partly on hopes that monetary easing and fiscal support measures would help companies weather economic headwinds. Leverage on Chinese exchanges rose above 1 trillion yuan (S$198.8 billion), the highest since early 2016.

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Economy

EMERGING MARKETS-Virus fears keep Latam FX pressured, Argentine peso hits 6-month low

    By Susan Mathew
    Feb 26 (Reuters) - Argentina's peso touched a six-month low
on Wednesday, and most other most Latin American currencies
continued a coronavirus-fueled slide as the outbreak spread to
more countries.
    As Argentina returned from an extended weekend, the peso
 fell 0.4% to 62.09 to the dollar, while the Merval stock
index plummeted as much as 6.6% as they caught up with
the rout across global markets this week.
    Mexico's peso looked to extend losses to a sixth
session running, down 0.5%, against a stronger dollar, while 
the Colombian peso touched a two-week low.
    "The mood in the market is cautious as market participants
closely monitor the spread of the outbreak," said Wilson
Ferrarezi, an economist at TS Lombard in Sao Paulo.
    Brazil markets, also returning from a long weekend, are
scheduled to open at 1 pm local time (1600 GMT) on account of
Ash Wednesday, and analysts expect them to fall as the country
reported its first case of the virus. 
    Frankfurt-listed depository receipts of Brazilian oil firm
Petroleo Brasileiro, planemaker Embraer and
lender Itau Unibanco lost between 2.6% and 4% amid a
report of the country's first case of the virus.
    "For Brazil, the virus will impact the trade balance as a
hit to commodities exports and a fall in commodities prices will
hamper export revenues," TS Lombard's Ferrarezi said.
    As the virus spreads to more parts of Asia, Europe and the
Middle East, the number of infected cases has risen to about
80,000 globally, while the death toll exceeds 2,700. 
    The U.S. Centers for Disease Control and Prevention on
Tuesday issued a warning to citizens to prepare for the virus
spread, saying it was not a question of if, but when, the virus
would become a pandemic.
   Fears have risen that the economic fallout from the travel
curbs, disruptions to operations and falling demand might be of
a far greater degree than previously anticipated. MSCI's index
of world stocks has lost $3.3 trillion over the
last four sessions.
    Chile stocks fell to a three-year low, down 0.4%,
while the currency eked out gains. 
    Chile's finance minister, Ignacio Briones, said he expected
the outbreak to have a "limited" impact on the country's economy
despite its dependence on China for the export of its key
commodity, copper.
    Colombia's main stock index rose half a percent
after a four-session sell-off when it declined almost 4%.
    
    Key Latin American stock indexes and currencies at 1458 GMT:
    
   Stock indexes            Latest    Daily %
                                      change
 MSCI Emerging Markets       1050.62    -0.56
                                      
 MSCI LatAm                  2659.38     0.12
                                      
 Brazil Bovespa                    -        -
                                      
 Mexico IPC                        -        -
                                      
 Chile IPSA                  4351.66    -0.22
                                      
 Argentina MerVal           36342.34   -5.855
                                      
 Colombia COLCAP             1621.09     0.53
                                      
                                             
       Currencies           Latest    Daily %
                                      change
 Brazil real                       -        -
                                      
 Mexico peso                 19.2020    -0.64
                                      
 Chile peso                    810.2     0.12
                                      
 Colombia peso                3433.9     0.02
 Peru sol                     3.4108    -0.02
                                      
 Argentina peso              62.0750    -0.38
 (interbank)                          
                                      
 
 (Reporting by Susan Mathew in Bengaluru;)

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Economy

UPDATE 2-Keep spending under control, pleads former UK finance minister Javid

(Adds PM’s spokesman)

By William James

LONDON, Feb 26 (Reuters) – Former British finance minister Sajid Javid urged the government on Wednesday to stick to its fiscal rules, in a personal statement to parliament to explain his sudden and unexpected exit from government.

Javid resigned on Feb. 13 after Prime Minister Boris Johnson demanded he sack his team of advisers and instead rely on a team of aides hired jointly by the finance ministry and Johnson.

His replacement, Rishi Sunak, is reported to be considering loosening the fiscal rules that aim to bring Britain’s day-to-day spending into balance within three years. That would help Johnson meet promises of higher public spending.

Javid said he continued to support Johnson’s government but argued against any watering down of commitments to fiscal discipline.

“At a time when we need to do much more to level up across generations, it would not be right to pass the bill for our day-to-day consumption to our children and grandchildren,” Javid said.

“The fiscal rules that we are elected on are critical,” he added. “To govern is to choose, and these rules crystallise the choices that are required to keep spending under control, to keep taxes low, to root out waste, and to pass that litmus test … of debt being lower at the end of the parliament.”

Johnson responded by thanking Javid for his “immense service” to the country but did not say whether his government would stick to those fiscal rules.

A spokesman for Johnson said later that the details of the fiscal rules the government will use would be set out in the March 11 budget.

Setting out the reasons for his departure, Javid said a minister should be free to choose advisers and a chancellor had to be able to “give candid advice to a prime minister, so he’s speaking truth to power.”

He made an oblique reference Dominic Cummings, Johnson’s senior adviser who is thought to have been behind the demand to dismiss Javid’s aides.

“I don’t intend to dwell further on all the details and the personality – the comings and goings, if you will,” Javid said. (Editing by Elizabeth Piper and Stephen Addison)

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Economy

German finance ministry plans softening of constitutional debt brake

BERLIN, Feb 26 (Reuters) – Finance Minister Olaf Scholz plans to modify the debt brake provision in the German constitution so that the federal government can assume some of the obligations of heavily indebted municipalities, Die Zeit newspaper reported.

The debt relief plan, proposed by the finance ministry some months ago, would see the federal government assume some of the debts already built up by the municipalities. Currently, however, the constitution sets strict limits on debt accumulation by the government.

The constitutional amendment will require two thirds majorities in the directly elected lower house of parliament and in the upper house, which represents regional governments. Chancellor Angela Merkel’s ruling conservative-Social Democrat coalition can only deliver this with the support of opposition parties. (Reporting by Thomas Escritt Editing by Scot W. Stevenson)

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Economy

Singapore factory output surprises with 3.4% rise in January, thanks to pharma

SINGAPORE – Singapore manufacturing output rose 3.4 cent year on year in January, compared to the 3.7 per cent drop in the previous month, according to figures released by the Economic Development Board (EDB) on Wednesday (Feb 26).

Excluding biomedical manufacturing, output fell 3.8 per cent last month.

The latest figures, with or without the biomedical segment’s contribution, were better than the 5.8 per cent year on year contraction analysts had predicted in a Bloomberg poll.

On a seasonally adjusted month on month basis, overall manufacturing output increased 18.2 per cent, while excluding biomedical production the expansion was 11.8 per cent.

The biomedical sector’s 41.1 per cent year on year growth in January was lifted by pharmaceuticals output that surged 59.4 per cent.

The jump in growth was on the back of a different mix of active pharmaceutical ingredients being produced and higher production of biological products.

Output of the medical technology segment fell 5.3%.

Electronics output decreased 7.2 per cent from a year ago in January. The sector that accounts for over a quarter of Singapore’s factory production had managed a 1.1 gain in December, recovering from a 19.1 per cent slide in November.

January’s decline in electronics was spread over most segments within the sector, expect for infocomms & consumer electronics that grew 17.7 per cent.

Precision engineering output expanded 18.1 per cent in January compared to the same period in 2019.

The machinery & systems segment rose 25.3 per cent, due to higher production of semiconductor and process control equipment. The precision modules & components segment grew 1.5 per cent amid an increase in output of optical products.

Chemicals production fell 5.5 per cent year on year last month. Most of the chemical segments saw a drop in output, except specialties which grew 7.2 per cent on higher output of industrial gases and additives.

Transport engineering output shrank 9.3 per cent with all segments recording declines. The marine & offshore engineering segment shrank 10.5 per cent, amid less activity in offshore projects. The aerospace segment also fell, contracting by 6 per cent with seasonally lower levels of repair and maintenance activities from commercial airlines. The land transport segment reported lower output in vehicle parts and accessories.

General manufacturing contracted 10.6 per cent, in part, due to the Lunar New Year holidays. The miscellaneous industries segment contracted 8.8 per cent with lower output of batteries and wooden furniture & fixtures. The food, beverages & tobacco segment declined 11.8 per cent on account of lower production of milk powder products, while the printing segment fell 11.2 per cent.

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U.S. junk energy index spread widens to three-year high

NEW YORK, Feb 25 (Reuters) – Credit investors nervous about the threat the coronavirus poses to the global economy have pulled money out of riskier bonds, widening the spread of U.S. junk-rated energy debt over Treasuries to a three-year high on Tuesday.

The ICE/BofAML U.S. high yield energy index saw its spread over Treasuries rise to 851 basis points on Tuesday, its highest since August 2016. The move in high-yield energy has come as part of a broader selloff in the high-yield market, with the spread of the corresponding ICE index widening 37 basis points on Monday alone.

Energy bonds in particular have been battered in the high-yield selloff as the price of oil has slid. Concern about the demand impact from the coronavirus has pushed Brent crude down by almost $10 a barrel this year.

This week’s selloff exacerbates an existing trend in high-yield energy: prior to Monday, high-yield energy spreads had widened 14.7% since the start of the year. Weak earnings and high leverage in the sector have put investors off, wrote Justin Lenarcic, global alternative investment strategist at Wells Fargo Investment Institute.

In January, 36 of the 50 worst-performing high-yield bonds in the ICE/BofAML high-yield index were energy companies, he wrote, with an average return of minus 14%.

Those losses may be stinging investors who rushed into new junk-rated energy deals at the start of the year after having refrained for much of 2019. The first two weeks of the year brought as many junk-rated energy bond deals as the last half of 2019.

Natural gas producer Range Resources’ 9.25% bond worth $550 million issued on Jan. 24 now trades at 79.5 cents on the dollar. A $750 million offering from offshore driller Transocean , rated Caa1, the lowest category of junk by Moody’s Investors Service, is now trading at 89 cents on the dollar.

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GLOBAL MARKETS-Stocks, oil fall further on accelerating coronavirus concerns

* U.S. 10-year Treasury note yield hits record low

* World FX rates in 2020 tmsnrt.rs/2egbfVh

* Global assets year-to-date tmsnrt.rs/2jvdmXl (Updates prices)

By Rodrigo Campos

NEW YORK, Feb 25 (Reuters) – Stocks and oil prices tumbled on Tuesday and the benchmark U.S. debt yield hit a record low on growing concern about the effects of the spread of the novel coronavirus on the global economy.

The market sell-off accelerated after the U.S. Centers for Disease Control and Prevention said Americans should begin to prepare for community spread of the virus.

The Japanese yen strengthened against the dollar for a third session running, in a sign that traders were in search of relatively safer assets.

The flu-like virus has now infected more than 80,000 people, 10 times more cases than the SARS coronavirus. Several European countries were dealing with their first infections, feeding worries about a pandemic.

The World Health Organization, however, has said the epidemic in China, where it began in December, peaked between Jan. 23 and Feb. 2 and has been declining since.

On Wall Street, where stocks fell the most in two years on Monday, indexes shed over 3% at session lows.

“For the first time in a while we’re finally waking up to the fact that this issue could go on for a while and have a significant impact on Chinese and global economic growth and potentially the United States,” said Randy Frederick, vice president of trading and derivatives for Charles Schwab in Austin.

“When people react to it because they don’t travel or go to restaurants or go shopping, that’ll have an immediate impact on the economy. It depends how long it goes an how wide the spread,” he said.

The Dow Jones Industrial Average fell 739.32 points, or 2.64%, to 27,221.48, the S&P 500 lost 79.28 points, or 2.46%, to 3,146.61 and the Nasdaq Composite dropped 192.51 points, or 2.09%, to 9,028.77.

The pan-European STOXX 600 index lost 1.76% and MSCI’s gauge of stocks across the globe shed 1.98%.

MSCI’s broadest index of Asia-Pacific shares outside Japan closed 0.14% higher, while Japan’s Nikkei futures lost 0.56%.

BET ON RATE CUTS

The risks are such that bond markets are betting that central banks will have to ride to the rescue with new stimulus.

Futures for the Federal Reserve funds rate have surged in the last few days to price in a 50-50 chance of a quarter-point rate cut as early as April. In all, they imply more than 50 basis points of reductions by year end.

The indication of falling U.S. rates hit the dollar against a basket of its peers.

“Signs of the USD being penalized for having a central bank with some capacity to cut rates raises the question of whether rate spreads are likely to become a key driver any time soon,” said Alan Ruskin, chief international strategist at Deutsche Bank.

The dollar index fell 0.345%, with the euro up 0.22% to $1.0876.

The yen strengthened 0.56% versus the greenback at 110.12 per dollar. Sterling was last trading at $1.3, up 0.56% on the day.

The rush to bonds dragged yields on 10-year U.S. Treasury notes to a record low of 1.307%. The U.S. benchmark last rose 15/32 in price to yield 1.3271%, from 1.377% late on Monday.

The 30-year bond set a fresh record low at 1.786 and last rose 29/32 in price to yield 1.7983%.

Gold ran into profit-taking after hitting a seven-year peak overnight, and last dropped 0.8% to $1,647.81 an ounce.

Oil prices continued to fall as demand concerns linked to the virus’ spread outweighed supply cuts.

U.S. crude fell 3.07% to $49.85 per barrel and Brent was last at $54.75, down 2.75% on the day.

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UPDATE 1-Bank of Canada preparing for possible digital currency – deputy governor

OTTAWA, Feb 25 (Reuters) – The Bank of Canada said on Tuesday it has no plans to issue a central bank digital currency at this time, but preparations are underway to create capacity to do so should Canada’s payment ecosystem change.

In a speech to a business audience in Montreal, Bank of Canada Deputy Governor Tim Lane made no mention of future rate moves. He said the bank had concluded there was “not a compelling case” for the issuance of a central bank digital currency (CBDC) at this time and outlined two primary scenarios that could warrant the consideration of such a policy move.

“The first is where the use of physical cash is reduced or eliminated altogether,” he said. “The second is where private cryptocurrencies make serious inroads.”

Canadians, he added, are currently well-served by their current payments ecosystem, which is in the process of being modernized. Meanwhile, developing the capacity to issue a CBDC is expected to take several years.

CBDCs are traditional money, but in digital form, issued and governed by a country’s central bank. They differ from cryptocurrencies, like bitcoin, which are governed by disparate online communities and are produced by solving complicated math problems.

The Bank for International Settlements has found a growing number of central banks are likely to issue their own digital currencies in the next few years. While most of those launching pilot schemes are from emerging economies, China is the closest major economy to become the first to issue a CBDC.

On Tuesday, Lane said the Bank of Canada plans to consult with a wide range of stakeholders as it designs the capacity for a central bank digital currency.

Those consultations, he said, would include discussions with federal and provincial governments and regulators, payment service providers, and merchants.

The Bank of Canada, which has kept interest rates unchanged since October 2018, opened the door in January to a possible cut should a slowdown in the Canadian economic growth persist. The central bank’s next interest rate decision is set to be released on March 4. (Reporting by Kelsey Johnson in Ottawa; Editing by Dale Smith and Sandra Maler)

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UPDATE 1-Lebanon approves financial, legal advisers on debt restructuring-government source

(Adds background)

BEIRUT, Feb 25 (Reuters) – Lebanon has given approval for U.S. asset management company Lazard to be its financial adviser on debt restructuring, a government source said on Tuesday, with the heavily indebted state facing a major financial crisis.

At a cabinet meeting on Tuesday, approval was also given for law firm Cleary Gottlieb Steen & Hamilton LLP to act as the government’s legal adviser, the source said.

Lazard’s recent restructuring work has included large retailers such as Neiman Marcus, which reached agreement last March to extend maturities on more than $2.5 billion of its debt, and Forever 21, which filed chapter 11 bankruptcy last September.

Lebanon is grappling with a choking financial crisis. A foreign currency liquidity crunch has forced banks to impose tight restrictions on access to hard currency and transfers abroad and the Lebanese pound has slumped.

One of Lebanon’s most influential leaders, parliament speaker Nabih Berri, said last week that debt restructuring was the best solution for looming Eurobond maturities, which include a $1.2 billion Eurobond due on March 9.

S&P last week lowered Lebanon’s sovereign rating on the expected debt restructuring. Moody’s also downgraded Lebanon, saying the rating reflected expectations that private creditors would likely incur substantial losses in any debt restructuring.

Fitch also said Lebanon’s financing position points to debt restructuring. (Reporting by Samia Nakhoul; Writing by Tom Perry; Editing by Samia Nakhoul and Alex Richardson)

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Scotiabank quarterly profit tops estimates on strong markets unit

TORONTO, Feb 25 (Reuters) – Bank of Nova Scotia on Tuesday beat Wall Street estimates for quarterly profit, boosted by strong growth in its global banking and markets unit.

Adjusted net income at the unit surged 35%, driven by strong performance across Scotiabank’s trading businesses, and asset growth.

Meanwhile, adjusted net income from domestic banking rose 5% to C$908 million ($686.84 million), boosted by higher net interest income.

Known to have the biggest overseas presence among Canada’s major banks, Scotiabank is focused on the Pacific Alliance trading bloc of Peru, Mexico, Chile and Colombia.

However, adjusted profit from international banking fell 17%, hit by impact of its divested operations.

Net income rose to C$2.26 billion, or C$1.84 per share, in the quarter ended Jan. 31, from C$2.11 billion, or C$1.71 per share, a year earlier.

On an adjusted basis, the lender earned C$1.83 per share, compared with analysts’ estimate for profit of C$1.74 per share, according to IBES data from Refinitiv. (Reporting by Nichola Saminather, editing by Louise Heavens)

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