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Asia stocks rebound, Fed pits endless QE against economic reality

The Nikkei index outside a brokerage in Tokyo, Japan, REUTERS/Athit Perawongmetha

Asian stocks rebounded sharply on Tuesday as the U.S. Federal Reserve’s promise of bottomless dollar funding eased painful strains in financial markets, even if it could not soften the immediate economic hit of the coronavirus.

While Wall Street seemed unimpressed, investors in Asia were encouraged enough to lift E-Mini futures for the S&P 500 by 3% and Japan’s Nikkei 6.2%. If sustained it would be the biggest daily rise for the Nikkei since late 2016.

MSCI’s broadest index of Asia-Pacific shares outside Japan jumped 4.2%, to more than halve Monday’s drop. Shanghai blue chips gained 2.7%.

Europe also looked a shade brighter as EUROSTOXXX 50 futures climbed 3.3% and FTSE futures 3.1%.

In its latest drastic step, the Fed offered to buy unlimited amounts of assets to steady markets and expanded its mandate to corporate and muni bonds.

The numbers were certainly large, with analysts estimating the package could make $4 trillion or more in loans to non-financial firms.

“This open-ended and massively stepped-up programme of QE is a very clear signal that the Fed will do all that is needed to maintain the integrity and liquidity of the Treasury market, key asset-backed markets and other core markets,” said David de Garis, a director of economics at NAB.

The Fed’s package helped calm nerves in bond markets where yields on two-year Treasuries hit their lowest since 2013, while 10-year yields dropped back to 0.79%.

Analysts cautioned it would do little to offset the near-term economic damage done by mass lockdowns and layoffs.

Speculation is mounting data due on Thursday will show U.S. jobless claims rose an eye-watering 1 million last week, with forecasts ranging as high as 4 million.

Goldman Sachs warned the U.S. economy growth could contract by 24% in the second quarter, two-and-a-half times the pace of the previous postwar record.

A range of flash surveys on European and U.S. manufacturing for March are due later on Tuesday and are expected to show deep declines into recessionary territory.

Surveys from Japan showed its services sector shrank at the fastest pace on record in March and factory activity at the quickest in about a decade.

DOLLAR OFF HIGHS

While governments around the globe are launching ever-larger fiscal stimulus packages, the latest U.S. effort remains stalled in the Senate as Democrats said it contained too little money for hospitals and not enough limits on funds for big business.

The logjam combined with the stimulus splash from the Fed to take a little of the shine off the U.S. dollar, though it remains in demand as a global store of liquidity.

“The special role of the USD in the world’s financial system – it is used globally in a range of transactions such as commodity pricing, bond issuance and international bank lending – means USD liquidity is at a premium,” said CBA economist Joseph Capurso.

“While liquidity is an issue, the USD will remain strong.”

For now, the prospect of massive U.S. dollar funding from the Fed saw the currency ease back to 110.38 yen from Monday’s one-month top of 111.56.

The euro bounced 0.8% to $1.0805, up from a three-year trough of $1.0635. The dollar index slipped 0.4% to 101.720 and off a three-year peak of 102.99.

Commodity and emerging market currencies that suffered most during the recent asset rout, also benefited from the Fed’s steadying hand. The Australian dollar climbed 1.5% to $0.5915 and away from a 17=year low of $0.5510.

Gold surged in the wake of the Fed’s promise of yet more cheap money, and was last up 1.7% at $1,578.45 per ounce having rallied from a low of $1,484.65 on Monday.

Oil prices also bounced after recent savage losses, with U.S. crude up $1.09 at $24.45 barrel. Brent crude firmed 97 cents to $28.00.



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