|Bid||8.00 x 1100|
|Ask||19.33 x 1100|
|Day's range||17.78 - 18.32|
|52-week range||15.00 - 24.10|
|Beta (5Y monthly)||1.36|
|PE ratio (TTM)||0.85|
|Forward dividend & yield||1.00 (5.51%)|
|Ex-dividend date||22 Jan 2020|
|1y target est||N/A|
(Bloomberg) -- Mexico President Andres Manuel Lopez Obrador said Sunday he’ll boost public works projects and low-interest loans to soften the blow from the coronavirus outbreak.In a speech that was short on new announcements and broad stimulus measures, Lopez Obrador said he’d tap into the rainy day oil fund, known as FEIP, along with disbursing more than 2 million loans for housing and small businesses to aid in the recovery. Disappointment over the policy helped send the peso to a record low in Asian trading on Monday.He also vowed to create 2 million jobs in nine months, a major undertaking considering Mexico created only about 342,000 jobs in all of 2019, Lopez Obrador’s first year in office.The president, having spent much of his life criticizing the close relationship between the political and the business elite in Mexico and vowing to protect the poor, now finds it difficult to propose measures that he furiously objected to in previous administrations.Some analysts are concerned that the stimulus package won’t be nearly enough to help pull the economy out of a recession they say will be worse this year than the devastating Tequila Crisis of the mid-1990s. The peso fell as much as 2.7% to a record 25.7110 per dollar.Read More: Mexico GDP Expected to Shrink 8% This Year, Bank of America Says“His message, as we expected, did not have anything new,” said Carlos Petersen, an analyst with Eurasia Group in Washington. “It’s more of the same: his social and infrastructure plans, with some additional resources or through credits.”Lopez Obrador reiterated he will continue with the construction of the new Santa Lucia airport in Mexico City and the Dos Bocas refinery, two of his pet projects that will draw billions of dollars from public coffers and which he argues will increase jobs.His government is also cutting Pemex’s tax burden by an extra 65 billion pesos ($2.5 billion), although it wasn’t immediately clear if this is a new measure.The fiscal plan is “underwhelming,” Alberto Ramos, chief Latin America economist for Goldman Sachs, wrote in a note following the president’s speech. Mexican authorities “seem to be underestimating the economic impact of the viral pandemic and the need for a deeper re-orientation of fiscal policy.”Lopez Obrador added that the government will announce this week an investment package of 339 billion pesos in energy infrastructure with private companies. He said he’ll cut salaries from top government officials including his own, and require further operational expenditure cuts.“It is extremely concerning that the president is not willing to adjust and change plans in a moment that the economy will really need it,” Petersen said. “It’s clear that Lopez Obrador is convinced that his plans will work, which will make any change in his strategy very difficult. And the later he reacts the worse it will be for the economy.”(Updates second and fifth paragraphs with peso’s moves.)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg) -- The Bank of Israel is set to ease monetary policy again although economists are split over how given interest rates are already close to zero.The central bank’s long-held reluctance to push borrowing costs into negative territory means its first rate cut since 2015 may also be its last. Most economists expect a decrease on Monday to 0.1%, matching a record low, from 0.25%, according to a Bloomberg survey.As the Bank of Israel quickly runs through its crisis playbook from a decade ago, a near-total shutdown of domestic business and a liquidity squeeze in the market are making low rates a less potent stimulus. Buying corporate debt could be on the table if the government’s fiscal aid doesn’t help overcome the economic ordeal caused by the coronavirus outbreak.“Monetary policy could be more expansionary,” said Jonathan Katz, an economist for Leader Capital Markets who expects a cut. “The next step has to be -- and quickly -- a corporate bond-purchasing scheme.”The challenge is to offer immediate relief to an economy fast sinking into a recession while crippled by a dramatic upsurge in unemployment to roughly 25%. Deputy Governor Andrew Abir said in an interview last month that the focus for the Bank of Israel will be on market operations instead of joining a global wave of rate cuts.Cutting the benchmark rate to 0.1% “might have a signaling effect, but it’s only a signaling effect if you put other tools in place,” he said.Stimulus ToolkitThe central bank has already re-started a government bond-buying program for the first time since 2009, committing to purchase nearly triple the amount of sovereign debt it did amid the financial crisis. It’s additionally offering swaps transactions with banks to ease demand for dollars and has relaxed regulations on local banks.The Bank of Israel has also sharply reduced its offerings of short-term debt, a way of loosening policy by absorbing less money.“While a rate reduction has less of an impact than usual at this point in time, it would still reinforce the effect of liquidity measures and would serve as a precautionary hedge against further slowdown in economic activity and any decline in asset prices,” Deutsche Bank AG analysts including Kubilay Ozturk said in a report.Governor Amir Yaron has meanwhile been asking for a primarily fiscal response, saying in his first-ever television interview in mid-March that “the central tool for now is budgetary.”The government last week announced a substantial expansion in aid to a total of 80 billion shekels ($22 billion), equivalent to some 6% of Israel’s output. Much of it will be in the form of low-cost loans, while some is earmarked for the health care and a social safety net.The program has come under criticism for its reliance on loans rather than grants, and for what some analysts say is a lack of clarity on the package’s targets. Many are also urging wider assistance to preserve the economy, with the Manufacturers Association calling for 100 billion shekels in aid.“Given the severity of the measures taken against the outbreak, we expect the economy to contract sharply in the second quarter,” Goldman Sachs Group Inc. economists including Kevin Daly said in a note. “Against this background, we do not see any costs associated with cutting rates and think the Bank of Israel will opt for a rate cut.”An even more ambitious quantitative easing plan may soon follow. A corporate bond-purchasing program should lower yields, making it cheaper for companies to seek financing while the pandemic dries up their cash flow.“The monetary effect will not be very strong” from a rate cut, said Guy Beit-Or, head of macro research at Psagot Investment House Ltd. “It’s not really relevant these days. The key measure is QE.”(Updates with economist comment under ‘Stimulus Toolkit’ subheadline)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg) -- Emerging-market stocks and currencies resumed losses last week as the relentless spread of the coronavirus fueled concern over the damage being done to the global economy. Record unemployment claims in the U.S. gave investors a sense of how big the impact will be as analysts slashed growth forecasts for emerging markets from Indonesia to Mexico. Oil prices rebounded, providing a brief relief for crude exporters.The following is a roundup of emerging-market news and highlights for the week ending April 4:Highlights:Faced with projections that as many as 240,000 Americans will die from coronavirus, President Donald Trump largely abandoned his optimistic tone, telling the U.S. on Tuesday to brace for one of its toughest stretches as a nationThe Federal Reserve is acting as central banker to the world by seeking to provide the global financial system with the dollar liquidity it needs to avoid seizing up. In its latest measure to combat the economic fallout from the coronavirus, the Fed said Tuesday it was establishing a repurchase agreement facility to allow foreign central banks to swap any Treasury securities they hold for cashThe OPEC+ oil cartel is pressing to form a global coalition to cut output and stem the historic rout in crude pricesU.S. employment plummeted last month by a degree not seen since the last recession and jobless claims soared to a recordChina’s central bank cut the interest rate it charges on loans to banks by the most since 2015 as authorities ramp up their response to the coronavirus pandemic. Singapore’s central bank took unprecedented easing steps to support a trade-reliant economy by lowering the midpoint of the currency band and reduced the slope to zeroChina is moving forward with plans to buy oil for its emergency reserves after a price crash, according to people with knowledge of the matterCentral banks from Seoul to Oslo have taken advantage of the Fed’s recently expanded foreign-exchange swap line facilities, although the Bank of Japan and European Central Bank continue to be the largest users of the facilityThe White House and congressional Democrats are preparing for a fourth round of economic stimulus to get the U.S. through the coronavirus outbreak, even while they’re still arguing over the $2 trillion measure Trump signedChina concealed the extent of the coronavirus outbreak in the country, under-reporting total cases and deaths, the U.S. intelligence community concluded in a classified report, according to three U.S. officials. China rejected the claimsAsia’s factories contracted further in March as the coronavirus wreaked havoc on supply chains. China was the standout, with a private survey showing an improvement in manufacturing in line with the government’s official measureSaudi Arabia made good on its pledge to ramp up oil exports in April, with a first wave of crude already on its way toward Europe and the U.S., a sign the price war remains in full swingSaudi Aramco delayed the release of its key monthly oil-pricing list until later this week as the kingdom trades barbs with Russia about an OPEC+ meeting aimed at ending the collapse in oil prices; President Trump ramped up threats to use tariffs to protect the U.S. energy industry from the historic glut of oilQatar hired banks to raise more than $5 billion in bonds as early as this week, according to people with knowledge of the matterIsrael sold the first-ever century bond from a Middle Eastern government as part of a $5 billion deal, taking advantage of the plunge in global borrowing costs over the past year; shortly before that, it raised 700 million euros in the private-placement marketZambia’s Eurobonds extended losses and its currency tumbled after Africa’s second-biggest copper producer asked banks for proposals on reorganizing as much as $11.2 billion of foreign debt, including $3 billion of EurobondsEgypt held interest rates on Thursday, counting on last month’s record cut being enough to support the economy without exposing its debt to an emerging-market sell-offChile’s central bank cut borrowing costs to 0.5%, expanded a bank-bond purchase program by $4 billion and extended it to all maturities as it expects the economy to face the biggest recession since the early 1980sAsia:Chinese manufacturing activity rebounded in March, signaling the economy is restarting just as it faces a growing threat from slumping external demandChina’s cabinet said the central bank should enact further cash injections and local authorities should issue more infrastructure bonds, as the country ramps up its efforts to support the economyChina’s share in MSCI Inc.’s index of developing-nation stocks rose 6 percentage points in the past quarter to a record 36.5%. The country’s weighting in a Bloomberg Barclays gauge of local-currency debt has increased to 34.9%, also an all-time high. Chinese stocks and bonds were the best performers in both measures in the periodInvestor credit at China’s brokerages is disappearing at the fastest pace in 10 months as a bleak earnings outlook prompts the country’s investors to conserve cashOfficials from leading Southeast Asian central banks have agreed to coordinate efforts to boost their economies, all struggling under the blow from the coronavirusBank of Korea’s loan offer of $12 billion using the currency swap line with the Fed drew demand of only $8.7 billion from local banksJust two weeks after South Korea adopted one extra budget, President Moon Jae-in said another is being planned to help insulate households against the impact of the coronavirusSouth Korea’s exports fell after a brief recovery as the coronavirus hit supply chains and suppressed global demandIndia opened up a wide swath of its sovereign bond market to overseas investors, taking its biggest step yet to secure access to global indexes as the government embarks on a record borrowing planLimit for foreign portfolio investments in corporate bonds was increased to 15% of the outstanding stock for fiscal year starting April 1Trading volumes in India’s financial markets continue to thin out as thousands of traders and stock brokers work from homeIndonesia slashed its growth forecast by more than half as the coronavirus takes a toll on the economy, prompting the government to adopt a series of emergency measuresIndonesia unveiled a string of emergency measures, including corporate tax cuts and a temporary removal of the budget-deficit cap, as the government steps up efforts to head off an economic crisis caused by the coronavirusBank Indonesia predicted the rupiah will strengthen to 15,000 per dollar by year-end, Governor Perry Warjiyo said on Thursday. Finance Minister Sri Mulyani Indrawati said the rupiah might slide to 20,000 under a worst-case scenarioIndonesia barred foreign nationals from entering the country as the country stepped up efforts to contain the spread of the coronavirusMalaysia’s economy may shrink this year as it struggles with a month-long coronavirus lockdown and a slide in commodity prices. Gross domestic product could shrink as much as 2% this year or grow as much as 0.5%, Malaysia’s central bank saidMalaysia is imposing limits on the hours of operation for restaurants, taxi services and some shops as the country steps up restrictions in a lockdownThailand unveiled plans for fresh government stimulus as well as rule changes to improve monetary policy flexibility, stepping up efforts to cushion the blow from the novel coronavirus outbreakPhuket in Thailand is on lockdown, with most transportation to the island banned, in the latest effort to contain the spread of the coronavirus in the tourist destinationThai Prime Minister Prayuth Chan-Ocha intensified the country’s fight against the coronavirus by ordering a nationwide curfew following a surge in infectionsBank of Thailand’s widening liquidity backstop for the fixed-income mutual fund sector is calming investors after panic selling led to the closing of some portfoliosBank of Thailand and Bank of Japan signed a bilateral local currency swap pact to allow exchanges between the two central banks of up to 800b yen ($7.4b)Philippine President Rodrigo Duterte gave authorities the green light to shoot dead protesters who attempt to riot or disrupt food distribution during a lockdown prompted by the Covid-19 outbreakPhilippines is crafting a stimulus package as it weighs extending a month-long lockdown in the main island of Luzon to curb the coronavirusPhilippines rejected all bids for Treasury bills for a second week as banks sought higher returns, showing the challenges in raising funds amid the economic risks posed by the coronavirusPhilippines doesn’t need to sell foreign-currency bond at this time after getting a 300 billion-peso lifeline from the central bank, Treasurer Rosalia de Leon saidTaiwan’s cabinet plans to add NT$250 billion ($8.3 billion) to the NT$100 billion already in its special budget to cope with the coronavirus impact, according to a cabinet statementTaiwan rejected the World Health Organization’s claims it has worked with the island in combating the global coronavirus outbreak, adding fresh criticism of the organization’s handling of the epidemicEMEA:Turkey’s President Recep Tayyip Erdogan is seeking access to the U.S. Fed’s dollar swap lines to bolster its coronavirus-hit economy, after the central bank ran down its foreign-currency buffer to prop up the lira this yearTurkey’s central bank added to its emergency program to help contain the economic fallout from the coronavirus as the country’s number of confirmed cases surged 25% and the death toll climbedA deluge of economic sanctions and the threat of more to come has pushed Russia’s authorities to boost reserves and strip back debt over the past five years. As governments across the globe prepare for what’s set to be the worst economic slump since 2008, the fortress approach that had been pushing Russia’s economy into stagnation is starting to look like good foresightRussia is planning for oil prices at $20 a barrel this year and will ramp up borrowing in rubles to make up for a budget shortfallPoland needs to increase this year’s issuance plan by about 70% to finance its anti-crisis stimulus, less than some analysts fearedHungary’s central bank moved to arrest a record slide in the country’s currency, pivoting away from its looser monetary policy bias as the effects of the coronavirus hammer the economyHungary’s parliament handed Prime Minister Viktor Orban the right to rule by decree indefinitely, effectively putting the European Union democracy under his sole command for as long as he sees fitCzech government set a record for the size of a domestic bond sale in a sign of investors’ confidence in the country’s debt even after the central bank curbed speculation that it was about to start asset purchasesIsolation measures imposed to staunch the spread of the coronavirus thrust central European manufacturing, the region’s main growth engine, into the deepest declines since at least the global economic crisisMoody’s Investors Service singled out Kuwait and Oman for potential downgrades, focusing on the credit ratings of two nations at opposite ends of the economic spectrum as the combined shock of collapsing oil prices and the coronavirus pandemic stretches their financesSaudi Aramco, the world’s largest oil producer, is weighing the sale of a stake in its pipeline unit to raise money amid a slump in crude prices, according to people familiarCollateral damage from the implosion of NMC Health Plc is piling upUAE Exchange, set up by the founder of the embattled hospital operator, defaulted on a loan of about $300 million to a group that includes Goldman Sachs Group Inc. and JPMorgan Chase & Co., according to people familiar. Abu Dhabi Commercial Bank PJSC hired Lazard Ltd. to advise on its more than $1 billion of exposure to the Abu Dhabi-based companyDubai’s deputy ruler Sheikh Hamdan bin Rashid Al Maktoum said the state will grant unspecified financial aid to Emirates airline, and that the government is committed to providing the full support by injecting fresh capitalOrganizers of Expo 2020 Dubai are recommending a one-year delay to the exhibition, the latest global event that looks set to be claimed by the coronavirus pandemicThe widening pandemic could see Dubai property prices falling to levels last seen 10 years ago, according to S&P Global RatingsFitch downgraded South Africa further into junk territory on Friday, a week after Moody’s removed the nation’s last investment-grade ratingSouth Africa’s revenue collection came close to the budget estimate even as the economy’s slump deepens. The South African Revenue Service took in 1.356 trillion rand ($73 billion) tax in the 2019-20 fiscal year, an increase of 5.3% from the previous yearSentiment in South Africa’s manufacturing industry had the worst quarter in 11 years, and it’s expected to deteriorate even further due to a nationwide lockdown to limit the spread of the coronavirusSouth Africa recorded its biggest trade surplus in 14 months in February as exports to Europe surgedCredit ratings of South Africa’s five largest banks were downgraded deeper into junk by Fitch Ratings, which cited a deteriorating operating environment following the coronavirus outbreakGhana’s Finance Minister Ken Ofori-Atta cut the country’s growth forecast for 2020 to the lowest in 37 years due to the collapse in oil prices and the impact of the coronavirusNigeria’s currency depreciated to its weakest level since February 2017 in the black market after the central bank cut supply to dealersLatin America:Brazil’s President Jair Bolsonaro said his main concern “was always to save lives,” changing the tone from previous speeches, when he compared the virus to a “small flu”; his disapproval rating roseTwitter, Facebook and Google’s YouTube have all removed posts shared by Bolsonaro for including coronavirus misinformation; the president said the anti-malaria prescription drug hydroxychloroquine was an effective treatment and encouraged the end of social distancingCongress was set to vote on a bill that allows the government to spend more to fight the pandemic and also authorizes the central bank to trade private credit in the secondary marketBrazil suspended the release of jobs data as companies have been unable to provide complete information, and postponed for a month the quarterly publication of trade balance estimates for this yearIndustrial production rose for the second month, supported by investment in capital goods before the coronavirus pandemicMexico’s President Andres Manuel Lopez Obrador rejected calls for fiscal stimulus, saying he won’t step in to aid the corporate sector, and does not agree with the Finance Ministry’s lower growth expectationsMexico’s central bank announced a second dollar-denominated credit line auction using the swap line with the Fed, while the government abandoned its goal for a primary surplus to project a deficit of 0.4% of GDPFitch Ratings said it will discuss whether to cut Pemex further into junk territory at a review committee before the end of AprilArgentine officials are at odds with overseas bondholders over a proposal for a four-year moratorium on payments to creditors, according to people with knowledge of the discussionsEcuador extended the shutdown through April 12 as coronavirus cases swellPetroecuador canceled a crude sale after receiving disappointing offersCentral bank carried out a one-month gold swap as a precaution against the decrease in foreign liquid assets in international reservesPeru tightened quarantine rules and will allow men and women to leave home on alternate days only, with no one allowed on the streets on the next two SundaysA majority of lawmakers in Peru’s congress support a bill to pull about $11 billion of private pension funds, a quarter of the total, while central bank President Julio Velarde said this will make it more difficult for the government to raise fundsColombia was downgraded by Fitch Ratings to BBB-, just one notch above junk, due to a loss of fiscal credibility as well as slumping oil prices amid a weaker economic performanceFor more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg) -- Stock prices were tanking, the Federal Reserve was pouring unprecedented relief into the markets and Wall Street firms were in panic mode. Steven Mnuchin was due to gather the central bank chairman and other top financial regulators to assess the damage from the coronavirus outbreak.But the Treasury secretary was stuck on Capitol Hill.Lacking both a chief of staff and a legislative director, Mnuchin was personally negotiating details of what would become the largest stimulus legislation ever passed. The critical March 23 meeting with market overseers would have to wait.As it confronts the worst economic disaster since the 2008 financial crisis, the Treasury Department is riddled with vacancies among its political appointments.Of 20 Senate confirmed roles reporting to the secretary, seven aren’t filled, and four are occupied by acting officials. The domestic finance unit, which should be handling the brunt of the work related to the coronavirus outbreak, is particularly empty. It has no top boss and is missing three assistant secretaries, who are the next level down.Treasury’s head of legislative affairs, Brian McGuire, left the agency while rescue legislation was still being hammered out. McGuire worked on the second phase of the virus-aid bill and his departure was planned earlier in the year, according to a person familiar with the matter. Mnuchin, who boasts about his tendency to micro-manage, hasn’t chosen a new chief of staff since the departure of Eli Miller to Blackstone Group LP a year ago.The lack of leadership and expertise, bank executives say, was on display this week as the department rushed to meet its goal of beginning the small business loan program on Friday. Lenders complained they were urged to start pushing money out the door without detailed guidance from the Treasury on how to process the loans. One problem, the banks said, was how to show they’d verified the identity of applicants, a requirement of anti-money laundering laws.The disarray caused some of the biggest banks, including Wells Fargo & Co., to say they wouldn’t be able to accept requests immediately. Another, JPMorgan Chase & Co., held off until Friday afternoon.Ultimately, more than $5.4 billion in loans were issued on the first day, according to the Small Business Administration, within one week of President Donald Trump signing legislation to create the new loan facility.“We have a great team of political appointees and professional Treasury career people that are hard at work to support American workers and American business!” Mnuchin said Saturday in a tweeted response to the Bloomberg News report.Stretched JobsThe Treasury vacancies are forcing the few senior managers who remain to stretch their job descriptions, sometimes dramatically. Deputy Secretary Justin Muzinich, for example, now oversees two-thirds of the agency: domestic finance and the sanctions office, neither of which has an undersecretary, the top official at the units.But that’s not all. As a former Morgan Stanley executive, Muzinich is Wall Street’s main contact in the department. He’s also likely to supervise a half-trillion dollar loan program for big businesses hit by the outbreak, according to people familiar with the matter.Bimal Patel, assistant secretary of financial institutions -- who is responsible for watching over the banking industry -- now is helping execute the small business loan program.And Brent McIntosh, undersecretary of Treasury’s international affairs unit, is playing a leading role in deciding how to dole out federal aid to U.S.-based airlines, the people said. They asked not to be identified discussing the department’s personnel issues.A Treasury spokeswoman disputed Bloomberg News’ tally of confirmed officials in the agency, saying that with Muzinich serving as deputy secretary and filling two undersecretary roles in an acting capacity, along with similar other examples, all portfolios are covered.Mnuchin must now help to rescue a U.S. economy in paralysis. That’s in addition to his regular full-time duties overseeing a dozen sanctions programs, monitoring the $16 trillion Treasuries market, and consulting with finance ministers across the globe -- all of which are more important than ever as the economic crisis deepens.“That becomes a lot for one individual,” said Clay Lowery, who worked at Treasury when the global financial crisis began during the George W. Bush administration. Mnuchin’s team has done a “pretty darn good job, but it probably needs a little more strength, especially on the domestic finance side.”Praise for StimulusMnuchin, who brings deal-making experience as a former Goldman Sachs Group Inc. partner, Hollywood producer and banker, has been widely praised for his work smoothing passage of the $2.2 trillion rescue package.“Mnuchin was steady and focused on those negotiations -- he got results quickly,” said Tony Fratto, who worked in the Bush White House during the global financial crisis.Since the virus outbreak brought the economy to a halt, Mnuchin has authorized Federal Reserve Chair Jerome Powell to launch six lending programs within a week of Trump signing the bill that authorized the funding.He’s also rethinking U.S. debt-management strategy to finance the stimulus. That includes consideration of ultra-long bonds, which may require updating the agency’s bond auction technology.Still, as his postponed meeting with the Financial Stability Oversight Council shows, the 57-year-old is operating more as a one-man band than as the leader of the president’s economic team. And he can’t be everywhere at once.“That needs to be resolved over time, by bringing in people to take part of that responsibility off their shoulders, because they also have their day-jobs to do,” said Lowery. “You don’t want to have corruption or fraud, or even inefficiency holding things up.”Economy CollapsingThe U.S. economy may shrink an annualized 34% in the second quarter, according to Goldman Sachs. Nearly 10 million Americans lost their jobs in the past two weeks, as many as in the first six months of the Great Recession more than a decade ago.The FSOC meeting that Mnuchin postponed was eventually held three days later, after which consequential decisions were announced: Regulators will seek to keep financial markets open, despite wild market swings triggering circuit breakers, and a task force will be created to focus on the liquidity shortfall that mortgage service firms may soon face.Amid all the crisis-fighting, Mnuchin will have to contend with two new oversight panels. Democrats fought for the latest stimulus bill to create a special inspector general and a five-member congressional committee to oversee how Treasury doles out some $500 billion in loans and grants for distressed businesses.As the department’s work becomes increasingly urgent due to the coronavirus, officials have reached out for advice to a number of ex-Treasury staff members who were instrumental in fighting the last financial crisis in 2008 and 2009, according to people familiar with the matter.Mnuchin is also considering bringing in people with experience in the markets and investment banking to assist, and the Treasury is also contracting out some work. This week it announced the hiring of three Wall Street firms -- PJT Partners Inc., Moelis & Co. and Perella Weinberg Partners -- to assist with the loan programs.Paulson’s CrisisThe financial crisis rescue, led at first by Secretary Henry Paulson during the Bush administration, consumed the Treasury Department even though it played out slowly compared to the coronavirus pandemic, giving officials more time than Mnuchin has had to plot strategies.Under Paulson, there were all-nighters, weekend work often conducted at the secretary’s Washington home, and many testy phone calls with top bank executives.Treasury’s experience in 2008 offers some lessons for the current crew, people who worked at the department at the time said in interviews. Most asked not to be identified so they could speak candidly, saying that much of the history points up holes that Mnuchin will need to fill.Most notably, the people said, then-President Bush gave Paulson, the former chief executive officer of Goldman Sachs, free rein to the set up bailout programs and communicate with both Wall Street and the public.That was partly due to the recession sending Bush’s approval rating plummeting and partly, they said, because that president was known for trusting his advisers. Trump, they noted, is not.(Updates with detail on legislative affairs director in 15th paragraph.)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
Goldman Sachs is buying two corporate jets for the use of chief executive David Solomon and other top bankers, after officials concluded that the aircraft would help meet the group’s goal of saving $1.3bn over the next three years. “We have long made private aircraft available to senior executives who travel extensively to see clients, and that travel was arranged through a fractional ownership arrangement with NetJets,” Goldman said.
(Bloomberg) -- Oil posted a record weekly jump on hopes that global producers will decide to make historic output cuts next week, though optimism was tempered by concern that the curbs won’t avert a glut.The OPEC+ coalition including Saudi Arabia will hold a meeting of its members by video conference on Monday, with the gathering open to even producers outside the group. While it’s unclear who will attend, market watchers are predicting that stockpiles are likely to swell even if global supplies are cut by 10 million barrels a day.Investors will be closing watching the guest list of the meeting -- especially names outside the Organization of Petroleum Exporting Countries and its allies -- after Saudi Arabia made clear it will only cut production if others, including the U.S., shoulder some of the burden.U.S. West Texas Intermediate futures ended the week up 32%, while Brent crude jumped 37%. Still, prices are less than half the levels at the start of the year, with the coronavirus crisis crushing demand.See also: Trump’s Push for Huge Deal to Cut Oil Supply Draws Disbelief“I think Russia, Saudi Arabia and OPEC are coming to the conclusion that if they don’t agree to something, it will be forced on them by the market,” said Brian Kessens, a portfolio manager at Tortoise Capital Advisors. “Any cuts will extend the run way to June instead of May, which is helpful as countries try to work through the coronavirus lockdown. But it only softens the blow.”One delegate from the producer group said a global cut of 10 million barrels a day is a realistic goal. Russian President Vladimir Putin told the country’s top oil executives that producing countries should join together to slash output to reverse the collapse in prices, adding that worldwide curbs of a little above or below 10 million barrels a day are possible.Meanwhile, U.S. President Donald Trump is convening an extraordinary gathering of the nation’s biggest refiners and producers at the White House on Friday. They are expected to discuss possible relief efforts from the administration, including potential American output cuts.Getting countries from all over the world to agree would be a tough task. Even if that’s successful, an output reduction of the size that’s being discussed will be just a fraction of the 35 million barrels of daily demand destruction some traders now see.Citigroup Inc. and Goldman Sachs Group Inc. have argued any supply-reduction deal would anyway be too little, too late as consumption craters due to efforts to stem the spread of the coronavirus.“A near-term return to production cuts still seems unlikely, and we are skeptical that such a large coalition could be put together,” Morgan Stanley analysts wrote in a note. Some of the necessary production shut-ins are likely to occur in the U.S. due purely to market forces.The announcement of a potential supply cut first came from Trump, who tweeted on Thursday that he had spoken to Saudi Crown Prince Mohammed bin Salman, who had in turn spoken with Russia’s Putin.However, the U.S. leader’s goal is purely aspirational and will ultimately hinge on whether Riyadh and Moscow can reach a deal, a person familiar with the situation said.Apart from benchmark futures, hopes for the curbs have boosted every corner of the market over the last 24 hours, from time spreads used to gauge market health, to key North Sea swaps. Those gains are now easing as traders worry that the undertaking may be too fraught with hurdles.The physical oil market of actual barrels of crude continued to remain under pressure, giving producers more urgency to act. Belarus said Russian companies are offering Urals oil for $4 a barrel.For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg) -- Voodoo SAS’s backers are exploring the sale of a stake in the French mobile game developer, people with knowledge of the matter said.Shareholders of Voodoo are working with an adviser as they consider selling part or all of their holdings in the company, according to the people, who asked not to be identified because the information is private. A deal could value the Paris-based firm at more than 1.5 billion euros ($1.6 billion), the people said.They are gauging interest from potential investors including rival game developers such as Ubisoft Entertainment SA and Zynga Inc., the people said. Deliberations are at an early stage, and there’s no certainty they will lead to a transaction, the people said.The plan to sell is a rare example of a Europe deal process launching in the middle of the coronavirus-led market rout that’s hampered M&A activity globally. The game industry is one of the few that’s benefited from the crisis, which has confined millions of people across the continent in their homes.Mobile game downloads globally jumped 23% in March from February, hitting the highest-ever level for a single month, according to data from analytics firm Sensor Tower Inc. Gross revenue from mobile games rose 7% from the previous month, the data show.Voodoo sold a stake in 2018 to a Goldman Sachs Group Inc. private equity fund called West Street Capital Partners VII. It said at the time that cofounders Alexandre Yazdi and Laurent Ritter retained a majority holding.The company, which was started in 2013, makes easy-to-play casual games including “Helix Jump,” “Roller Splat” and “Snake VS Block.” Many are free to download with optional in-game purchases. The company’s games have over 300 million monthly active users and have generated more than 2 billion downloads, according to its website.Representatives for Voodoo, Goldman, Ubisoft and Zygna declined to comment.For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg Opinion) -- Private equity firms are crying foul, fearful that companies they own are largely cut off from the $377 billion of small business loans and grants baked into the U.S.'s $2 trillion coronavirus relief bill. But do they really deserve any part in a bailout?Statistics from corporate loan borrowers that make $50 million a year or less in Ebitda don’t paint a pretty picture. An average middle-market business has a debt-to-Ebitda ratio of 4.8 times and is paying an interest rate of 7.7%, data from S&P Global Market Intelligence show. Put another way, this company is using about 37% of its operating earnings to pay interest alone(1) — and that was before the outbreak. So if this business were running at, say, one-third of its full capacity because of regional lockdowns, it wouldn’t even be able to cover its interest payments. A cheap loan from the Small Business Administration would certainly help. But before asking Uncle Sam for money, private equity firms should consider their role in this mess. Should they be liable if this virus morphs into a full-blown credit crisis?In the past decade, the sector started urging portfolio companies to tap the loan market rather than issue high-yield bonds, which were largely closed off to businesses their size. Today, roughly half of leveraged loans, or about $1.5 trillion, are issued by sponsors for their holdings.There’s certainly a good case for private equity firms to back leveraged loans. Unlike bonds, these loans can be called immediately — that is, borrowers can redeem them at any time — which allows portfolio companies to refinance more easily. What’s more, these businesses tend to be closely held; the loan market’s opaque reporting standards spare firms from quarterly financial disclosures to the Securities and Exchange Commission.But private equity’s large presence in the market has caused a fast deterioration of loan quality. Roughly half of borrowers are rated B or worse, up from 30% in 2012, data compiled by Citigroup Inc. show. After all, levering up to juice returns is the sector’s forte. Last year, more than 75% of deals included debt multiples greater than six times Ebitda, compared with 25% after the collapse of Lehman Brothers Holdings Inc., as I’ve noted.Everyone suffers in times of distress, private equity firms and corporate issuers alike. In March, the average yield of the S&P/LSTA U.S. Leveraged Loan 100 Index shot as high as 13% from 5.6% just a month earlier, as the Big Three ratings agencies were busy downgrading high-yield issuers at the fastest pace in at least a decade. If the Federal Reserve hadn’t stepped in with new financing facilities, how would Middle America roll over its loans?According to the parameters of the rescue bill, companies with more than 500 employees aren’t eligible for small-business relief. That number includes affiliates, meaning staff at portfolio companies are being added together. To get around this, the industry wants the Trump administration to view their investments as independent entities. In reality, these holdings don’t operate separately, at least not in terms of financing decisions. Private equity firms have teams of lawyers and advisers dedicated to crafting credit agreements that give them as much financial flexibility as possible, such as removing caps on leverage ratios. As a result, the leveraged loan market is now filled with covenant-lite loans, as my colleague Brian Chappatta has written. The wheel of fortune is turning. Banks that agreed to help private equity firms may be too busy with other obligations right now. With blue-chip companies drawing at least $124 billion from their credit lines in the first three weeks of March alone, and dollar funding tight, do lenders have the bandwidth? There are $66 billion leveraged loans mandated, or in the works, and about $10 billion under syndication — that is, marketed but not priced, data compiled by Bloomberg show.There’s good reason to believe the current jitters go beyond a few canceled deals, and could threaten to trigger system-wide margin calls. Leveraged loans aren’t mark-to-market, but the financing facilities that banks provide to asset managers (which allow the latter to buy such loans before packaging and selling them as bonds) tell a lot about the quality of these assets. Goldman Sachs Group Inc. and JPMorgan Chase & Co. already demanded their clients to put up extra collateral, or face the risk of liquidation, Bloomberg News reported last month.It’s unclear if industry titans can convince President Donald Trump to bail out their investments. For its part, the Federal Reserve is loath to make loans to distressed companies. Since the passage of the Dodd-Frank Act in 2010, the Fed isn’t allowed to take big credit risks and can only lend with a high degree of protection.Private equity may be in the eye of the storm, but it certainly doesn’t need a bailout. Last year, capital committed to this sector grew 20% to a record $1.3 trillion, according to data provided by PitchBook, a Morningstar company. So instead of trying to pass off their portfolio companies as small businesses, firms can use that dry powder to shore up the balance sheets of their investments.These firms came out of the collapse of Lehman Brothers fairly unscathed. Perhaps the coronavirus could finally teach them a lesson: Using cheap debt to pay themselves dividends isn’t such a savvy investment model after all. (1) 4.8 times 7.7% comes to 37%.This column does not necessarily reflect the opinion of Bloomberg LP and its owners.Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.For more articles like this, please visit us at bloomberg.com/opinionSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg) -- Oil soared after U.S. President Donald Trump said Saudi Arabia and Russia would make major output cuts, though uncertainty swirled over the volume of curbs and whether reductions would be made at all.While Trump tweeted that cuts of 10 million to 15 million barrels were possible, he didn’t specify if that reduction would be per day. He also said he spoke to Saudi Crown Prince Mohammed Bin Salman about the market.His comments immediately triggered skepticism, even within the U.S. government. One person familiar with the administration’s discussions with the Saudis said there was widespread internal confusion about what the president was referring to and the numbers he mentioned may not be reliable.The prospect of the U.S. joining in on any output cuts was raised after Ryan Sitton of the Texas Railroad Commission, in a rare move for the state’s oil regulator, spoke with Russian Energy Minister Alexander Novak on reducing global supplies by 10 million barrels a day. He said he would also talk to the Saudi oil minister soon.Meanwhile, Kremlin spokesman Dmitry Peskov said Russian President Vladimir Putin hasn’t spoken to the Saudi crown prince and hasn’t agreed to cut oil production to boost prices.The Middle East kingdom also didn’t confirm the cuts, but called for an urgent meeting of the OPEC+ producer alliance to reach a “fair deal” that would restore balance in oil markets, state-run Saudi Press Agency reported. Any curbs by the group would be conditional on other countries joining, according to a delegate.U.S. West Texas Intermediate futures jumped as much as 35%, before closing up almost 25% -- their biggest single-day advance ever. Brent crude increased as much as 47%, the global benchmark’s largest surge in intraday trading.“The 10, 15 million barrel a day cut is just not going to happen. On top of that, Russia has older oil wells, so they can’t restart in the same way that Saudi Arabia can,” said Tariq Zahir, a fund manager at Tyche Capital Advisors.If Trump meant 10 million barrels per day, that would equal both Moscow and Riyadh curbing nearly 45% of their production in what would prove an unprecedented move. If collective action does remove that much from the market, that would be the equivalent of about 10% of world demand prior to the impact of coronavirus crisis.Still, that may not be enough to stop the pain that’s rippled across the energy industry as demand craters with the coronavirus outbreak shutting down economies around the world.Oil’s move comes after prices were already climbing following China’s instruction to government agencies to start buying cheap crude for its strategic reserves.The Trump administration will also rent space in the U.S. emergency oil reserve to domestic producers that are scrambling to find places to store excess barrels. After years of saying OPEC should work to reduce oil prices, Trump has recently changed tack as American shale producers struggle in the wake of crude’s collapse.The person familiar with the administration’s discussions with Saudi Arabia said U.S. leverage had been undermined by the president’s conflicting messages.The sudden jerk in prices Thursday also reverberated across the oil futures curve, with the prompt WTI timespread narrowing by almost 58% to trade at negative $1.45 a barrel in the 15-minute period following Trump’s tweets. The six-month spread, or gap between the May and November contracts, also narrowed by as much as $3.78 a barrel.Meanwhile, Brent’s premium over WTI, which had been hovering at around $1 barrel, widened to as much as $3.09 a barrel.Before the news on Thursday, Saudi Arabia hadn’t appeared to relent on its bid to flood the market, saying a day prior it was pumping at a record and had this week loaded almost 19 million barrels of oil in a single day.Goldman Sachs Group Inc. also doesn’t see a bright outlook. In a note earlier this week, it said any conceivable oil production cut by the U.S., OPEC+ and Canada would still “fall well short” of its estimated 26 million barrels a day of demand loss and only provide “fleeting support to inland crude prices.”Meanwhile, the physical crude market continues to show deepening signs of strain.Dated Brent, the benchmark for two-thirds of the world’s physical supply, was assessed at $15.135 on Wednesday, the lowest since at least 1999. Crude has slipped below $10 in some areas including Canada and shale regions in the U.S., Belarus wants to buy Russian oil for $4, while some grades have posted negative prices.As supply balloons, there are growing signs that the world is running out of places to store the glut.For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg) -- As Canada’s oil producers wait for a bailout to aid the hurting sector, one research firm has a suggestion: Sell crude to the government.RBC Capital Markets said that an aid package could allow companies that shut in production to sell barrels of oil that they’re not producing to the federal government at a mutually agreed upon market price. They will be free to actually produce that crude later on, when prices are better, and refund the government the revenue it paid them earlier, smoothing out the producers’ revenue and “leaving taxpayers whole.”“As a voluntary arrangement, Shut & Swap rests on market forces, and temporarily utilizes the balance sheet liquidity afforded by the Canadian government,” Greg Pardy, an analyst at RBC, said in a research note published Thursday.Canada’s energy sector has been collateral damage in the Saudi-Russia oil price war and the Covid-19 pandemic. Storage tanks worldwide are brimming with crude as the global pandemic destroys demand, while Saudi Arabia and Russia ramp up output in a fight for market share.At one point last week, a benchmark of Canadian heavy crude tumbled as low as $3.82 a barrel. The price of Western Canadian Select for May was $16.25 below West Texas Intermediate Thursday, according to NE2 Group.And while Prime Minister Justin Trudeau has opened the government’s coffers to businesses in an effort to save the Canadian economy, nothing specific has been done for the energy sector yet. Finance Minister Bill Morneau said last week that further relief measures, specifically for the oil and gas and airline sectors, will come in the “not too distant future.”The twin shock has taken its toll on all energy producers, big and small.Canadian oil giant Suncor Energy Inc. said last week it will shut in one of its two production lines at its two-year-old, 194,000 barrel-a-day Fort Hills oil sands mine. Additionally, demand losses could see commercial inventory levels to be breached within two to three weeks if Canadian production isn’t further reduced, Goldman Sachs estimated earlier this week.RBC’s Pardy said Canadian oil producers will need to shut in or curtail about 1.1 million to 1.7 million barrels per day, or one-quarter to one-third of supply, in the second and third quarters of this year.“We have fielded a number of queries regarding the potential role that policymakers in Canada could play in providing energy sector support,” he said. “We believe that Shut & Swap -- a conceptual arrangement aimed at revenue smoothing -- could be a partial remedy.”For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg Opinion) -- With $250 billion of new U.S. bond issues at investment grade since the middle of March, and 150 billion euros ($164 billion) in Europe, the high-end credit market is an undoubted beneficiary of the central banks’ coronavirus stimulus plans. The debt capital market is definitely back open.Indeed, analysts at Goldman Sachs Group Inc. have bravely ventured that the worst of the widening of credit spreads — where the yield on corporate debt starts to increase faster than that of benchmark bonds — may be over for high-grade issuers.As I’ve written before, it’s important not to see this as a sign that all is well in the entirety of the credit markets: Companies with non-investment grade paper are crucial to the real economy too, but junk bonds are a long way from being in a good place. Defaults are looming.Setting aside the broader economic concerns of this state of affairs, there will be opportunities for investors in finding companies that will emerge from the crisis stronger — or the ones that will get most state support, if you’d prefer to be cynical. Credit selection, akin to stock-picking, will be the answer for those hunting yield. Tread carefully among the rubble and you might find some sparklers.As the Goldman analysts say, the high-grade part of the market is functioning well. There are 16 new issues slated in the euro debt capital markets on Thursday, including bonds from corporate giants such as BP Plc, British American Tobacco Plc and Royal Dutch Shell Plc. There’s even a rare deal coming in sterling, a market that’s been largely shut, from carmaker Volkswagen AG. That will be a significant test for a sector that’s been effectively shutdown by Covid-19.Credit spreads blew out spectacularly in March, and while things have improved, the environment has changed profoundly — even for the higher quality stuff. The premium offered on yields for new issues and overall credit spreads are significantly wider than during the first two months of this year, before the coronavirus struck the West in earnest. For corporate issuers, the heady days of rock-bottom interest rates are over, but this is better news for investors. The potential for positive performance is phenomenal, explaining why so many are diving back in to try to outperform the index. The European Central Bank has 1 trillion euros of bond purchases to complete this year, with as much as 20% of that to steer into eligible investment grade companies. That will be a major tailwind for a spike in the value of corporate debt.The ECB excludes financial firms and junk bonds from its Quantitative Easing program, but the crowded demand for high-quality paper will no doubt steer people toward non-investment grade sales, helping issuers. Also, whisper it, but the eligibility criteria for QE might well be softened.High-yield is still suffering badly from blown-out credit spreads. But it can offer the biggest opportunities to investors, especially if the particular company is critical to any economic recovery. Government credit and bailout plans might add to the appeal of certain sectors such as infrastructure, health and utilities. Less vital industries in the junk bond space will have to pay up to attract buyers. The beleaguered cruise liner company Carnival Corp had to pay a whopping 11.5% coupon to raise $4 billion this week. To get a sense of how far things have gone south for Carnival, at the beginning of March the yield on its existing three-year dollar bond had slipped below 2%. Bank debt might be popular too. Lenders’ senior investment-grade paper is already practically backstopped by national central banks. Subordinated bank debt remains for the brave, albeit the riskiest additional tier-1 perpetuals (known as CoCos, where investors lose out if a company goes bust) will always have their fans among those clamoring for proper yield. Selecting which companies can weather a crisis versus the dead ducks has probably been the most overlooked financial skill-set since the Lehman Brothers crisis, especially in corporate bonds. Blanket QE and the remorseless rise of passive investing has masked what active managers should be best at. It will pay in future to invest in a more selective fashion rather than simply buying the index.This column does not necessarily reflect the opinion of Bloomberg LP and its owners.Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.For more articles like this, please visit us at bloomberg.com/opinionSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg Opinion) -- I spent the better part of the last three weeks on the phone with clients of my asset-management firm and friends who wanted a sounding board about markets. That’s not a complaint. For me, one bright spot of this crisis has been a return to indulgently long phone conversations, a throwback to a simpler time before smartphones and social media. Three questions came up routinely in those conversations, which makes me think they’re on a lot of investors’ minds. My thoughts are certainly not novel. They borrow liberally from investing giants such as Warren Buffett, Jack Bogle, Seth Klarman and others too numerous to name, and financial writers who have covered similar ground over the years and in recent days. But given the opportunity for costly mistakes during market upheavals, it never hurts to revisit some common pitfalls. The question that came up most is whether investors should sell their stocks now and buy them back later when they decline further. The spread of coronavirus and the resulting economic damage is expected to worsen. As it does, the thinking goes, stocks will continue to decline.It’s a natural impulse, but it misses a crucial aspect of the way markets work, which is that prices instantly reflect investors’ expectations about the future. That’s probably why, to many investors’ surprise, the U.S. stock market held its ground after dreadful news last Thursday that 3.28 million workers filed for unemployment the previous week, nearly quintupling the previous record. While exact numbers are never known in advance, a surge in initial jobless claims was widely expected well before the Labor Department released its official tally.More bad news is expected. Goldman Sachs Group Inc. said on Tuesday that it expects the U.S. economy to shrink by an annualized 34% in the second quarter and unemployment to rise to 15% by mid-year before a recovery takes hold in the third quarter. That, too, is reflected in stock prices. The prospect of future declines depends on whether expectations become even more dire. But unless investors can predict if the outlook will darken further, there’s no reason to think they can anticipate the market’s next move. And that’s only half the battle. Those who manage to get out before another market drop must decide when to get back in, which is never clear. Market turns tend to be sudden. By the time it feels safe, the market is often sharply higher, leaving investors with regret about missing the bottom. Then comes the temptation to wait for the market to revisit its lows, an opportunity that may never come.I know investors who sold their stocks when Lehman Brothers collapsed in September 2008, months before the market bottomed around the financial crisis. What seemed like a stroke of genius at the time became a harrowing trial. The market unexpectedly turned higher in March 2009 and never looked back. More than a decade later, some of those investors are still waiting for that elusive re-entry despite the likelihood that the market will never revert to that September 2008 level. There’s plenty of evidence showing that binary market timing, or all-in-all-out moves around markets, is a good way to lose money. I’ve never even seen it work in back tests, which have the formidable advantages of perfect hindsight, zero emotion and no cost. Every time someone tells me binary market timing is possible, I ask for a successful back test, and I have yet to see one. A second question is whether retirees have time to wait for stocks to recover. If history is any guide, the answer is most likely yes. There have been 10 bear markets in the U.S. since 1948, excluding the current one, as measured by a 20% or greater decline in the S&P 500 Index. The average number of years from peak to recovery — that is, the time it took for the S&P 500 to climb back to its previous high — was 3.9 years, and the median was 2.7 years. On five of those occasions, the market recovered in two years or less. In other words, market downturns tend to feel a lot longer than they are.The third question cuts entirely in the opposite direction: With markets down and interest rates at historic lows, should investors borrow money to buy stocks? The answer is no. While it’s safe to assume that markets will recover eventually, the path is unknowable. That’s a problem for investors playing with other people’s money. If markets fall further before recovering — a distinct possibility given all the uncertainty, particularly in the U.S., where stocks aren’t cheap — those investors may be forced to sell at even lower prices to meet margin calls. Borrowed money robs investors of time, which is arguably their only edge. Market downturns tend to provoke extreme reactions, and this one is no different. Yes, savvy investors can pick up some bargains by rebalancing their portfolios or even tilting toward their most beaten-down investments. U.S. investors might also lighten up on home bias, as there are better bargains in overseas stocks. But when markets are roiling, don’t discount the value of doing nothing. I had a seventh-grade shop teacher who used to say, “Sometimes I sit and think, and sometimes I just sit.” For many investors, this is probably a good time to just sit. This column does not necessarily reflect the opinion of Bloomberg LP and its owners.Nir Kaissar is a Bloomberg Opinion columnist covering the markets. He is the founder of Unison Advisors, an asset management firm. He has worked as a lawyer at Sullivan & Cromwell and a consultant at Ernst & Young. For more articles like this, please visit us at bloomberg.com/opinionSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg Opinion) -- Oil markets are in pain. Demand has plummeted, with about three billion people under lockdown just as the world faces a historic supply glut. The world’s crude storage, meanwhile, is filling fast, from underground caverns to rail cars and tankers. For landlocked producers, that hardly matters: Some are already paying customers to take their oil away.The consequences will be long-lasting. Drillers in the U.S. and elsewhere are scaling back or shutting down production. Against a background of steep spending cuts, not all of that will be swiftly reversible. Price relief will hinge on the world’s convalescence.The collapse in appetite for gasoline, jet fuel and diesel has been unprecedented in speed and scale. Goldman Sachs Group Inc. estimated Monday that with economies representing 92% of global gross domestic product now under some form of social distancing, the loss of demand this week stands at 26 million barrels per day, roughly a quarter below last year’s levels. Over a month, that’s almost 800 million barrels lost. Numbers since published from the shuttered economies of Italy and Spain suggest levels of destruction could be even worse. Spanish diesel demand is down 61%. The collapse is translating into a surplus that’s straining refineries, pipelines and the world’s limited ability to squirrel away oil.There is no precise estimate for how much capacity the world has to store oil products. Analysts at S&P Global Platts estimate 1.4 billion barrels, including 400 million of floating storage. So far, 50% of that has been used: The figure will rise to 90% by the end of April. It’s a squeeze visible in freight rates, with fleets of very large carriers filling up, making it harder to use them to store oil or even move it to a buyer. Costs for the benchmark journey from the Middle East to China have risen sevenfold; Reliance Industries Ltd. paid $400,000 a day for a supertanker to haul oil from the Middle East to India’s west coast in early April.For landlocked drillers, though, there are greater worries. They are facing a lack of local storage, and pipeline companies asking them to cut back or prove they have a buyer for their crude before loading. They simply can’t get oil to the right place, at the current price. Meanwhile, refineries are cutting back as they reach storage limits.This all means that negative oil prices — when producers are effectively paying customers to take the oil — aren’t only possible, but already a reality. The global benchmarks for oil, West Texas Intermediate and Brent, have dropped about two-thirds this year. They aren’t about to dip below zero. You won’t get paid for filling up at the pump. In the neighborhood of $20 a barrel, though, where your oil is now matters almost more than how much it costs you to produce it.Check out grades that demand expensive refining or in locations requiring costly transport. Wyoming Asphalt Sour, used in paving, was among the first to slide into the red at a negative $0.19 per barrel in mid-March, as my colleagues Javier Blas and Sheela Tobben reported last month. Other producers may be selling at a loss, effectively subsidizing buyers to take their output. Western Canadian Select, the benchmark price for the giant oil-sands industry in Canada, is at around $5, with Bakken crude in Guernsey, Wyoming, in single digits too. The gap with WTI has become wider.Many of these producers are already cutting back, or shutting down. Whiting Petroleum Corp., a shale champion, filed for bankruptcy Wednesday. Oil explorers, servicing companies and others are in severe pain too, and the squeeze won’t be felt only in the U.S. Russia says it won’t boost supply at current prices. Ecuador has failed to find buyers.What does this mean for an eventual recovery? First, the extent of demand loss means that even a resolution to the Saudi-Russian spat would help only a little, perhaps easing pressure on the world’s fleet of very large oil carriers, known as VLCCs.A real pick-up in prices will require demand to come back. At that point, it may not require much to prompt a temporary spike, depending on how much is stored, locked up by traders through financial contracts, or taken out for good. Geopolitics, with oil-producing nations strained, may also help a little. For the time being, though, negative prices are here to stay.This column does not necessarily reflect the opinion of Bloomberg LP and its owners.Clara Ferreira Marques is a Bloomberg Opinion columnist covering commodities and environmental, social and governance issues. Previously, she was an associate editor for Reuters Breakingviews, and editor and correspondent for Reuters in Singapore, India, the U.K., Italy and Russia.For more articles like this, please visit us at bloomberg.com/opinionSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg) -- The Federal Reserve is trying to call time on a fire sale of Treasuries by foreign governments and central banks.Foreign official holders of Treasuries dumped more than $100 billion in the three weeks to March 25, on course for the biggest monthly drop on record, according to weekly Fed custody data that captures much of the pandemic-fueled turmoil.Countries reliant on oil exports and smaller Asian economies have been selling U.S. debt, and central banks have been primarily offloading older, less-liquid Treasuries, according to traders and market makers familiar with the transactions.The Fed on Tuesday rolled out its latest effort to restore functioning in markets, on top of moves to ramp up debt purchases and backstop several sectors. It introduced a temporary repurchase agreement facility that let other central banks swap Treasuries for dollars.“The fall in custody holdings is a clear signal that foreign central banks -- which have a lot of Treasury holdings -- have been selling them to source dollars,” said Subadra Rajappa, head of U.S. rates strategy at Societe Generale. “They need access to dollars as a lot of their payments are in dollars and that has driven them to sell Treasuries.”The Fed stopped short of saying it wanted to prevent a snowball effect from the selling, but said the new program will provide “an alternative temporary source of U.S. dollars other than sales of securities in the open market.”As fear swept through markets last month and fueled unprecedented volatility, liquidity -- the ability to trade without causing significant price moves -- deteriorated in Treasuries to its worst since the 2008 financial crisis. At the same time, the greenback surged as investors sought refuge in the world’s primary reserve currency.The Bloomberg Dollar Spot Index rose 3.1% in March, the most since 2016.Liquidity BufferSome of the foreign official Treasury selling may simply be building up of a liquidity buffer, wrote William Marshall of Goldman Sachs in a client note. Though, “we suspect the rest may have been to either support a currency peg (in the case of oil-exporting countries like Saudi Arabia) or their respective domestic dollar liquidity needs,” he added.The Fed has acted to calm debt markets to avert knock-on economic effects, by announcing trillions of dollars of purchases of assets including Treasuries and mortgage-backed securities. It also unveiled measures that would let other central banks tap expanded dollar swap lines.Tuesday’s Fed statement regarding the new repo facility didn’t specify if all central banks would be involved.The new repo program “is a sensible second-best solution for major countries that are outside the enlarged Fed FX swaps network but have substantial corporate dollar funding needs,” Krishna Guha, head of central-bank strategy at Evercore ISI and a former New York Fed official, said in a report. “This group includes China, which ought to be eligible for the new program, though the Fed release is not clear on this point.”Line of FireThis isn’t the first time Treasuries have been in the line of fire as the dollar gained. In 2016, a surge in the greenback saw central banks across Asia intervening to stabilize currency markets.Another indicator of central banks’ positioning in Treasuries is primary dealer holdings, which tend to rise when official accounts are selling. Fed data on these holdings are available with a lag, but their stock of the securities had surged to $272 billion as of March 18, from $193 billion at the start of February.The new repo facility “effectively backstops foreign central banks from forced liquidation of their Treasury holdings into dysfunctional markets,” Jonathan Cohn, a rates strategist at Credit Suisse, said in a note.Emerging-market “reserve managers sometimes need to sell U.S. Treasuries to defend their currency when the dollar is appreciating,” he wrote. “These types of forced flows can contribute to dislocations along the curve and weigh on dealer balance sheets.”(Updates with Goldman quote in ninth paragraph)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg) -- Twelve years ago, politicians saved the world’s banking system from collapse by providing billions of dollars in bailouts. The coronavirus is confronting them with an even bigger and more complicated task.This time, it’s not the financial industry that needs government intervention to survive. Whole swathes of the rest of the U.K. economy have been brought to a standstill by the pandemic, and businesses as varied as airlines, carmakers and real estate developers are all looking to dip their hand into the public purse.“There’s going to be government money going into all sorts of places that would have been unthinkable just weeks ago,” said Philip Hampton, former chairman of Royal Bank of Scotland Group Plc, which in 2008 received the biggest bailout of any lender in the world.For U.K. Chancellor of the Exchequer Rishi Sunak, the crisis means tearing up four decades of economic orthodoxy in a country that more than any other in Europe has pulled the state out of the sphere of business. The 39-year-old former Goldman Sachs Group Inc. banker has pledged to do everything necessary to put the world’s fifth largest economy back on its feet -- at the risk of leaving himself vulnerable to a future political and financial reckoning.In a sign of how preparations are advancing, U.K. Government Investments, the 120-strong arm of the Treasury that oversees the state’s remaining holding in RBS, is preparing to draft in staff from other arms of the government, according to a person with knowledge of the unit’s workings.Political DecisionsAs he grapples with what is likely to be the biggest bailout of private business since the collapse of Lehman Brothers Holdings Inc., Sunak will have to deal with some of the same controversial questions but on a far broader scale: Which companies should be helped? What losses should the government inflict on private shareholders, some of whom had until very recently been receiving dividends? And how will the government get its money back?“This is obviously an exceptional time, with exceptional measures called for,” said Robert Colvile, co-author of the most recent Conservative Party election manifesto and director of the Centre for Policy Studies, the London-based think tank co-founded by the late U.K. Prime Minister Margaret Thatcher.“But there’s a crucial difference between helping companies with a short term cash-flow or liquidity problem, caused by a crisis outside of their control, and taking on responsibility for those whose business models were already running into trouble,” he added. “Bailouts should very definitely be an option of last resort, once all others have been exhausted.”Fred GoodwinThen there’s the complication of whether to punish existing managers and shareholders financially by wiping out their stakes in any bailout. Unlike 2008, when bankers such as RBS’s former CEO Fred Goodwin and Lehman’s Richard Fuld became the targets of public anger, few in Westminster blame today’s executives for the situation they find themselves in.“I make a clear distinction between bailouts that are due to errors and management from something that is an act of God,” said Paul Myners, who as City minister under the last Labour government helped direct the bailout of RBS.Rather than rescuing companies by injecting fresh equity, one option the government is considering is the use of convertible debt, where the state provides support in the form of loans that can be exchanged for shares in a company subject to ensure taxpayers’ money is protected as far as possible.“Government should never be an attractive place for companies to come for capital,” said Myners. “Businesses must make the maximum effort to find the best possible solution on their own and use their existing capital before they come to the government.”Virgin Atlantic Airways Ltd., the airline partly owned by billionaire Richard Branson, has already called on the government to provide 7.5 billion pounds ($9.3 billion) of support for an industry that has been effectively shut down by international restrictions on travel brought in by many countries to fight the spread of coronavirus.Hands in PocketsOn Tuesday, Transport Secretary Grant Shapps told the BBC shareholders would have to “put their hands in their pockets to rescue their businesses as well,” adding that any aid would be more likely to take the form a loan than an injection of fresh equity.“I’m not terribly sympathetic to airlines,” said Myners. “As a whole, they have carried too much debt, paid massive amounts in executive compensation, and bought back massive amounts of stock.”EasyJet Plc, which this week grounded much of its 318-aircraft fleet, paid shareholders 174 million pounds in dividends as recently as last month. British Airways parent International Consolidated Airlines Group has returned a total of 4.4 billion euros ($4.8 billion) to its owners through dividends and buybacks since 2015.In any bailout, there is always the question of exactly why a government is supporting one company or industry over another. This calculation becomes even more complicated given the international nature of many large U.K. businesses. Take British Airways and its owner. London-based and with a little more than half of its staff in the U.K., IAG is a seemingly strong candidate for British government support. However, only about a fifth of its shareholders are U.K. institutions, while more than a third of its stock is held by the U.S. investors. Indeed, its largest individual shareholder with a 25% stake is Qatar Airways. For Sunak, the question then is: Should these foreign holders be compensated with U.K. taxpayers’ money?How Long?For the Treasury and its advisers, the other big issue to shape their level of support will be how long the crisis lasts. If the lockdown of large parts of the economy where to be brought to an end within weeks, firms could likely survive on temporary bridging loans, avoiding the need for bailouts. But if the disruption stretches on for much of the rest of the year, that line may not hold.The last financial crisis shows the inherent risk for a government when it takes a stake in a business. When the state bailed out RBS, the expectation was that its 84% holding would be sold off within a few years. More than a decade later, the government still owns a little over 60% of the bank, highlighting just how hard it can be to get back money injected during a moment of crisis.“In normal times, I’d be against bailing out companies altogether,” said Julian Jessop, an economics fellow at the Institute of Economic Affairs, a free-market think tank. “It’s clearly different though, on this occasion, because it’s a completely un-anticipatable external shock, also one the government itself has caused.”For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg Opinion) -- Don’t hold your breath. Massive Chinese stimulus isn’t coming to shore up the world.As China tries to get back on its feet from Covid-19, policy makers are announcing more fiscal help to deal with the worst economic hit in decades. This has included plans to spend trillions of yuan on standard measures from the Beijing playbook, such as issuing infrastructure bonds to boost activity, lower lending rates to help struggling companies, and cheap credit for small banks to support them.One measure from recent days stands out: Special central government bonds, a tool authorities have pulled out only twice before, in moments of dire financial pressure. This signals both seriousness and, ominously as the rest of the world looks for China to join in the rescue, that the country is being pushed into a corner. China’s economic engine, long a driver of global demand, may not rev up. Though China has been first-in and somewhat first-out on the virus, the measures laid out so far still amount to only 1.6% of gross domestic product on-budget and 1.7% off-budget. Compare that to Australia and South Korea, where off-budget measures already amount to 5.2% of GDP in addition to budgetary help, according to Credit Suisse Group AG analysts. Beijing is relying more on monetary policy to flush the system with liquidity and boost credit, unlike some countries where fiscal measures are playing a larger role. This reflects the reality that China is running out of effective tools. The special treasury bonds are therefore notable. They have only been deployed previously when things just had to get done. In 1998, Beijing used them out to recapitalize banks as the financial crisis pummeled Asia. In 2007, they were marshaled to set up sovereign wealth fund China Investment Corp. and strengthen foreign-exchange reserve management. They don’t end up on the government’s balance sheet and are earmarked for specific, targeted policy goals. This time, the bonds could directly fund China Inc. or recapitalize banks so they’ll have more room to lend. Nomura Holdings Inc. analysts estimate that almost 2 trillion yuan to 4 trillion yuan ($282 billion to $563 billion) of these long-maturity obligations could be issued to fill the gap between the official and actual fiscal deficit targets. Unlike regular central government bonds, these need to be put to spending that has returns, which could force some discipline.China doesn’t have the fiscal space of a decade ago, when it unleashed a 4 trillion yuan package to shore up what was then a much smaller economy and the rest of the world with it. Revenues plunged almost 10% in January and February from last year; those from land sales fell 16.4%. That’s only an early blow. At the local government level, revenue last year grew at the slowest pace in a decade. Property prices are dropping across several cities. With the need for expenditure and leverage rising, the ability to service borrowings has become difficult.There aren’t many places left to add more debt. China’s overall burden as a portion of its GDP is among the world’s highest. Local government debt has dominated in recent years as almost all of the 2.15 trillion yuan quota of municipal off-books bonds for specific projects was issued. Meanwhile, years of using state-backed enterprises’ balance sheets to boost economic growth has leveraged them to the hilt. Households are also strained.The special treasury bonds represent something of a last stand. They’re going to indirectly lean on China’s banks, which have other problems. Herein lies the risk. Banks are currently staring into a credit down-cycle made worse by the virus shock, which will amount to billions in yuan of non-performing assets, rising credit costs and slower profit growth. Jitters in the sector last year have hit confidence. Rounds of monetary-policy easing have pushed them to lend to the weakest borrowers. As Goldman Sachs Group Inc. analysts put it, issuing these bonds signals “a new round of loosening, monetizing fiscal stimulus via the central banking system, leveraging on banks to ramp credit growth.”Much of this will mean that prudent policies to unwind the leverage buried in China’s labyrinthine financial system will be thrown aside. More debt, on or off the books or contingent liabilities, will pile up. The type of stimulus China really needs — for consumers — won’t arrive.This time, China has limits that it has rarely faced in the past. As Beijing is constrained to turn inward, it’s no wonder that other countries are coming out with far more aggressive measures. This column does not necessarily reflect the opinion of Bloomberg LP and its owners.Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal. For more articles like this, please visit us at bloomberg.com/opinionSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg) -- Apple Inc. and Goldman Sachs Group Inc. are letting Apple Card users defer April payments without incurring interest to ease financial pressure from economic disruption caused by the Covid-19 pandemic.The card, backed by Goldman, offered the same program for March payments. Apple Card users need to opt in to the program by messaging a support representative via the Wallet app on an Apple device.“We understand that the Covid-19 situation poses unique challenges for everyone and some customers may have difficulty making their monthly payments,” Apple wrote in an email to card customers. “If you previously enrolled in the Customer Assistance Program in March, you will need to enroll again.”For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg) -- Coronavirus deaths continued to climb sharply in New York and New Jersey, the nation’s epicenter of the coronavirus outbreak, with governors of both states releasing data showing a doubling of fatalities in the past three days.New York reported a 25% one-day increase in fatalities on Wednesday and New Jersey reported a 33% increase, with nearly 500 people in the two states dying in a single day.New York’s death toll reached almost 2,000 victims, while New Jersey -- where infections spread more slowly and in smaller numbers at first but are now rapidly increasing -- has recorded more than 350 deaths. As of Sunday, the two states had a combined death toll of about 1,000.The rise in deaths has coincided with an uptick in the mortality rates of the disease in both states. After trailing the national mortality rate of 2.2%, both have risen as of Wednesday, with 2.3% of New York cases ending in death and 1.5% of New Jersey cases.New Jersey’s governor, Phil Murphy, warned that the state would soon need more space to store deceased victims, and that it may resort to using refrigerated trucks.The stark statistics came as evidence mounted that the region’s health care system was reaching its limits. New York moved patients from overtaxed hospitals in the New York City area to upstate facilities in Albany for the first time, and New Jersey temporarily approached the ceiling of its hospital capacity and began using converted anesthesia machines as ventilators.Even after New York gets past the apex of the crisis in late April, Cuomo said, the state is likely to have an elevated death rate into July. He also said that patients whose conditions became so severe that they require ventilator support don’t face strong chances of survival. By one model provided by a unit of the Gates Foundation, there could be 16,000 deaths in New York -- and 93,000 nationwide.“That means you’re going to have tens of thousands of deaths outside of New York. So to the extent people watch their nightly news in Kansas and say, ‘Well, this is a New York problem,’ no, that means right now it’s a New York problem. Tomorrow it’s a Kansas problem,” Cuomo said. “Look at our numbers today and see yourself tomorrow.New Jersey has the second-highest number of virus cases after New York. Both states have issued stay-at-home orders, closing schools and nonessential businesses.Murphy’s top priority this week has been securing ventilators ahead of an expected surge in Covid-19 hospitalizations. On Wednesday, he said the federal government had committed to sending another 350 ventilators, for 850 total. He said that he was grateful for the equipment but that it was far fewer than the 2,300 ventilators the state had requested. He also said the state had spent “tens and tens of millions of dollars” for millions of masks, gloves and other disposable medical goods.In an interview with Bloomberg Television, Murphy said he was also looking to recruit more health-care workers. On Wednesday, he signed an executive order for license waivers and other exceptions to admit out-of-state medical professionals.“We need to bolster their ranks,” Murphy said.For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg Opinion) -- Small businesses are in trouble. As the coronavirus spreads and more states close up restaurants, cafes, theaters, clothing stores, beauty salons and similar shops, small businesses are desperate for funds to avoid laying off their workers. Fortunately, the relief package signed by President Donald Trump last Friday is set to provide businesses some of the help they need.But the law’s passage isn’t the end of the story. Now, it needs to be put into effect in a way that encourages its use.Only half of U.S. small businesses have enough cash reserves to cover 15 days of operating expenses. Four in 10 small businesses have a three-week cash buffer. In Miami, the median firm has 11.8 cash-buffer days. In San Francisco, the median firm has 17.9 days. These statistics come from a 2019 report by the JPMorgan Chase Institute, which analyzes data on businesses that have deposit accounts with the bank.As of Monday evening, roughly three in four Americans are being told to stay home. Thirty-one states, 18 cities and the District of Columbia have issued shelter-in-place orders. This has already added millions of workers to the unemployment insurance rolls; 3.3 million new filers were added in the week ending March 21 alone. The previous weekly record, set in 1982, was 695,000. Economists at Goldman Sachs are currently forecasting that the unemployment rate will hit 15% — a 50% increase over the peak following the 2008 financial crisis.To do what it can to prevent soaring unemployment and mass business closures, Congress passed the Paycheck Protection Program as part of its $2 trillion dollar economic recovery package.The program lets a small-business owner go to a local bank and take out a loan that is guaranteed by the government. The business can borrow up to 2.5 times its monthly payroll costs, not to exceed $10 million. The amount of the loan spent on payroll, rent, utilities and similar operating expenses during the eight-week period after taking out the loan will be forgiven provided that the business does not lay off workers or cut wages by more than 25%. Businesses that lay off workers after receiving a loan would have a smaller amount of their loan forgiven. For businesses that have already had layoffs, provisions are made to extend grants to them if they rehire workers.To qualify for a forgivable loan, a business or nonprofit organization must typically have fewer than 500 employees, or be a sole proprietor or independent contractor. To get money out the door quickly, lenders don’t need proof of actual economic harm, but can rely instead on good-faith certifications that the business needs the money to avoid layoffs or continue operating, and that the business intends to use the money for payroll and other operating expenses.The program has several additional provisions designed to swiftly put cash in the hands of business owners. It delegates authority to lenders to make determinations on borrower eligibility and creditworthiness so that businesses don’t have to go through the usual government process. Lenders do not need to assess the ability of borrowers to repay the loan or conduct a credit-elsewhere test, and no collateral or personal guarantee is required.This is a good deal for banks, which can charge generous fees and interest for these loans, despite the fact that they are guaranteed by the government, have a zero weight in the bank’s capital requirements and come with a ready customer base.To protect lenders, the law has a “hold harmless” provision shielding them from any penalties imposed by the government as long as they receive documentation certifying that borrowers used the loan proceeds to prevent layoffs.The Treasury Department hopes to have the program operational this week. To make it as effective as possible, four things should happen.First, some banks are concerned that they may be on the hook if borrowers misrepresent their situations or go bankrupt a week or two after taking out the loan. Regulators must assure banks that this will not happen. The legislation envisions banks as a conduit to pass along what are essentially government grants. The regulations currently being written need to treat banks as such by offering ironclad guarantees that the hold-harmless provisions will be strictly enforced by government agencies.In addition, the government should send the message that more money will be provided to the program if needed. Congress allocated $349 billion, but Columbia University economist Glenn Hubbard and I estimate that the demand could easily rise above $1 trillion. Lenders want to know how those limited funds will be allocated if more are needed.Third, the government needs to work with banks to understand their technology and processing needs. A large number of loans will need to be made, and it will be hard for government systems to keep up with the demand. The government needs to make processing as easy as possible for banks, engaging with private firms for help and advice.Finally, all levels of government need to engage in an active program of public messaging to encourage both lenders and small businesses to participate, making sure businesses know that the program offers grants for payroll and operating expenses, not just loans.In my home state of Virginia, the big news on Monday was Governor Ralph Northam’s decision to extend the coronavirus lockdown to June 10. He said, “It is clear more people need to hear this basic message: Stay home.” Northam should have used this opportunity to send a second basic message: Don’t lay off your workers, payroll grants will be available very soon.At the federal level, Senator Marco Rubio of Florida, the chief author of the program, did exactly this on Twitter on Monday, the day after Trump extended social distancing guidelines to April 30. But where is Trump himself? He should be urging businesses every day to hold on to their workers until the grant program comes online later this week.Congress has taken an important step toward propping up the U.S. small-business ecosystem that will be crucial to the post-pandemic recovery. But this vital task is far from complete.This column does not necessarily reflect the opinion of Bloomberg LP and its owners.Michael R. Strain is a Bloomberg Opinion columnist. He is director of economic policy studies and Arthur F. Burns Scholar in Political Economy at the American Enterprise Institute. He is the author of “The American Dream Is Not Dead: (But Populism Could Kill It).”For more articles like this, please visit us at bloomberg.com/opinionSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg) -- Emerging markets have just taken a first-quarter battering. The fear on Wall Street is that it may hardly compare with what’s coming.While the advanced economies have gone into lockdown to contain the spread of Covid-19, triggering market turmoil of a kind unseen in generations, the world’s developing nations have yet to experience the full effects, both economic and humanitarian, of the pandemic. True, the global dollar squeeze, collapse in commodity prices and rising distressed-debt levels have prompted pre-emptive stimulus measures across many countries, but the success or failure of these is likely to remain unknown for a while yet.Little wonder then that some of the world’s foremost investors and strategists, from Goldman Sachs Group Inc. to JPMorgan Chase & Co. and Franklin Templeton, are telling clients to hold off on bargain hunting. They’re worried the coronavirus could devastate nations such as India, South Africa and Brazil, where infections are only now starting to gather pace.“Markets are discounting a catastrophic recession accompanied by massive defaults,” said Ricardo Hausmann, an economist at Harvard University. “As horrific as this sounds, the situation in the advanced economies is likely to be much more benign than what developing countries are facing. Not only in terms of the disease burden, but also in terms of the economic devastation.”Emerging markets are traditionally thought of as volatile, and perhaps it’s no surprise that their assets generally came off worse than their counterparts in the advanced economies of the U.S., Europe and Japan. But while banks such as JPMorgan and Morgan Stanley say developed-nation stocks have probably bottomed already, that’s not the case for their emerging-market counterparts.Equity markets in the developing world just capped their worst quarter since the 2008 financial crisis. Currencies tumbled as demand for U.S. dollars soared, led by a depreciation of more than 20% in the Brazilian real, South African rand and Russian ruble. A broad gauge of dollar bonds from emerging markets posted its sharpest sell-off since 1998.Developing-nation assets kicked off the second quarter on a negative note on Wednesday as stocks from India, South Korea and Colombia slid, currencies declined and the risk premium on bonds rose.With emerging economies reeling from a slump in demand for commodities such as oil and metals, supply-chain disruptions and dollar-debt burdens exacerbated by weakening currencies, outflows are likely to surge in the next few quarters, according to a JPMorgan model.“It’s unlikely this crisis is over as it moves from an acute to a chronic phase,” Luis Oganes, a London-based strategist at JPMorgan, wrote in a report. “Focus will turn to emerging-market country vulnerabilities over the coming months as capital outflows could mutate into a sudden stop.”Hausmann and Oganes may be gloomy, but they’re in good company. In fact, a “Who’s Who” of economists and investors, including Mohamed El-Erian, Michael Hasenstab and Carmen Reinhart, are also sounding the alarm.El-Erian, the chief economic adviser at Allianz SE and a Bloomberg Opinion contributor, said the current situation has elements of both the Great Depression and the 2008 financial crisis. While fiscal stimulus in the developed world has helped for now, investors need to eschew risk, he said. El-Erian advised selling lower-rated bonds, adjusting stock portfolios to favor companies with strong balance sheets and keeping more cash on hand for distressed opportunities down the road.Hasenstab, Templeton’s chief investment officer for global macro, agrees. He says it’s “too early” to try to cherry pick among distressed securities. His team favors so-called haven assets, while increasing allocations to cash and several higher-yielding emerging markets with more resilient economies.Gundlach Says ‘En Masse’ Defaults Likely for Some Junk IssuersThe list of developing nations seeking debt relief has already swelled in the past few months. Fifteen nations with more than $100 billion of Eurobonds outstanding had average spreads of at least 1,000 basis points over U.S. Treasuries as of March 19, according to data compiled by Bloomberg. Argentina is pursuing a restructuring, Ecuador is discussing a re-profiling and Zambia is seeking to reorganize its foreign bonds. Meantime, Lebanon defaulted in March on its first bond since independence in 1943.Another challenge is that China, a lender of last resort for many developing nations, is experiencing its own slowdown. Reinhart, an economist at Harvard University, warns that the world’s second-largest economy may contract this year for the first time since 1976, reducing Beijing’s lending capacity. Even Chinese officials have cautioned the road back will be a long one.The potential human misery as the coronavirus rips through developing nations even less equipped to cope with a pandemic than their advanced counterparts is what worries investors most. The stricter the rules to curb contagion, the more those countries will be forced to boost spending, in turn compelling them to borrow more. That chain of events will disproportionately hurt the weakest credits, many of them commodity producers already suffering from a collapse in exports as well as a drop off in remittances, according to Hausmann.Nouriel Roubini, a professor at New York University who predicted hard times before the global financial crisis in 2008, says money printing will flourish, with Mexican pesos, Indonesian rupiahs and Turkish liras about to spill forth from central banks.“How do you avoid a freefall of their currencies?” he asked.The consequences could be even worse in countries with poor policy responses or local dynamics that make the virus harder to contain, according to Fabiana Fedeli, the global head of fundamental equities at Robeco in Rotterdam. She singled out Brazil and Mexico for their lackluster efforts to fight the spread of the disease, and India because of its crowded slums.‘We Will Starve Here’: India’s Poor Flee Cities in Mass ExodusThe International Monetary Fund and World Bank have committed some $1 trillion in lending capacity to nations hamstrung by the pandemic, yet Roubini estimates the need may be three or four times that amount.Kamakshya Trivedi, a strategist at Goldman in London, says developing-nation bonds look more vulnerable now than during the 2008 financial crisis.“We see further downside risks across emerging-market assets as the global economic outlook remains fragile and is consistently shifting,” he wrote in a report.(Adds market moves in seventh paragraph.)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.