Market themes for the week ahead

Tapping The Fed

Recent blowouts in dollar swap prices are a sign economic lockdowns across the world are starting to pressure business cashflows, forcing companies to look elsewhere for greenbacks to pay suppliers and creditors.

So what the US Federal Reserve does to keep those dollars flowing smoothly is crucial. Keep an eye on global central banks tapping the Fed for currency swaps. The Fed, which releases data on this every Thursday, has agreements with five major central banks - in Canada, the euro zone, Britain, Japan and Switzerland - so they can get their hands on dollars easily when called on to provide liquidity to financial institutions at home.

As of now, the swap lines data shows little strain - foreign central banks tapped $58 million in swaps in the latest week, the most in four weeks but up only $10 million from the week before.

Meanwhile, interest rate cuts won't cure the coronavirus but markets are still banking on the Fed to do so, even after the recent 50 basis-point emergency cut. The target rate is priced to be slashed by another 75 to 100 basis points to near zero, the CME FedWatch website shows.

Graphic: Forex swap lines from the Fed

Feeling The Stones In China

China now has 80,000 confirmed cases. Shuttered businesses, quarantined towns, overflowing ports and a disrupted supply chain indicate a collapse in domestic demand and exports — upcoming data on retail sales, investment and industrial output for January and February should confirm that.

So what of Beijing's pledge to keep 2020 growth at 6%? So far, it's taken only baby steps on monetary and fiscal policy, instead resorting to money market cash injections, loans to small businesses and tweaks to equity-raising rules. It cut bank reserve requirements again on Friday and benchmark prime loan rates may drop further next week. Talk is it might cut its main deposit rate for the first time since 2015.

But, having learned the lessons of unrestrained investment and borrowing, China may be doing what former leader Deng Xiaoping advised: crossing the river by feeling for stones. Even as authorities elsewhere announce hundreds of billions of dollars' worth of stimulus, it is unlikely there will be a 2008-style multi-trillion yuan Chinese bazooka.

Graphic: Passenger flows at metros in China's major cities

Central Banks Flash The Cash

With markets buckling under the toxic combo of COVID-19 and an oil price war, central banks are centre stage — from the Fed Reserve to the Bank of Japan, they are all pump-priming, boosting liquidity and cutting interest rates.

In emerging markets, currency losses have forced central banks such as Chile, Brazil and Indonesia to intervene with dollar sales. In coming days we hear from central banks in South Africa, Turkey and Indonesia, countries whose domestic situations are only being exacerbated by the glum backdrop.

Russia, so far considered one of the better placed emerging economies due to its solid central banking credentials, has suddenly found itself grappling with a $30-per-barrel fall in oil prices. It's central bank meets on Friday.

Graphic: Coronavirus and central bank policy rates

No Time For Leisure

The coronavirus has propelled the travel and leisure industry into an existential crisis, which many firms will struggle to survive. Announcements on revenue losses are coming thick and fast; Cinema operator Cineworld summed up the mood, warning of a potential "total loss of revenue" for up to three months in a worst case scenario.

Among others, Princess Cruises, two of whose ocean liners became coronavirus hotbeds, suspended all voyages for two months. Airports operator Fraport reported a 30% drop in passenger numbers at its Frankfurt hub in the first week of March. Disney has shuttered its US and French amusement parks.

If the crisis lasts another two or three months, it could force airlines to collapse, the International Air Transport Association reckons. Revenue losses will be "probably above" the $113 billion it estimated a week ago. Air France has drawn down on 1.1 billion euros worth of its revolving credit facility to help its financial position. Others might be preparing to follow its example.

Graphic: Travel and leisure stocks take a beating

Mind Your Language

Amid the struggle to assess the coronavirus fallout came a curveball from ECB chief Christine Lagarde who told Thursday's news conference that it was not the central bank's job to "close the spread".

It was a reference to the widening yield spread or premium over German bond yields that riskier southern European countries must pay investors when they borrow. The reaction from investors, long accustomed to the ECB backstopping these markets was severe to say the least: Italian 10-year bond yields soared 55 bps, the biggest one-day jump since 2011.

And the "spread" ballooned over 65 bps — one of its biggest daily moves ever. Spanish and Portuguese bonds were thrashed too.

Other policymakers have jumped in since then to limit the damage but fears have set in. Lagarde's latest steps to contain the impact of coronavirus have real value, say investors, but their impact is lessened without effective communication. A lesson learned for the ECB's new chief.

Graphic: Italian-German bond spread sees biggest daily jump since 2013 on Lagarde comments