Asia Shares Bounce After Rout, Rush For Dollars Causing Stress
Investors in Asia were merely happy Wall Street had not plunged again and South Korean shares bounced 3.5%, though that still left them down 14% for the week.
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Asian shares staged a rare rally on Friday as Wall Street eked out gains, bonds rallied and oil boasted its biggest bounce on record, though the panicked rush into U.S. dollars suggested the crisis was far from done.
MSCI's broadest index of Asia-Pacific shares outside Japan rose 3.2%, after seven sessions of losses.
As the spread of the coronavirus brought much of the world to a halt, nations have poured ever-more-massive amounts of stimulus into their economies while central banks have flooded markets with cheap dollars to ease funding strains.
The U.S. Senate was debating a $1 trillion-plus package that would include direct financial help for Americans, relief for small businesses and steps to stabilise the economy.
Sources told Reuters that China was set to unleash trillions of yuan of fiscal stimulus to revive an economy facing its first contraction in four decades.
"The speed and aggression with which authorities are wheeling out measures to cushion the economic fallout from the virus and sowing the seeds for a hopefully rapid recovery, has resonated somewhat in equity markets," said Ray Attrill, head of FX strategy at NAB.
"Yet there is little doubt that funds need to buy dollars to rebalance hedges in light of the 30% fall in equity markets so far this month," he added. "The dollar remains the pre-eminent safe-haven asset during times of extreme market stress."
The dollar's surge is a nightmare for the many countries and companies that have borrowed heavily in the dollar, leading to yet more selling of emerging market currencies in a negative feedback loop.
Such was the stress that dealers hear whispers of a new Plaza Accord, the 1985 agreement when major central banks used mass intervention to restrain a rampant dollar.
For now, investors in Asia were merely happy Wall Street had not plunged again and South Korean shares bounced 3.5%, though that still left them down 14% for the week.
Australia's beleaguered market gained 4.2%, and futures for Japan's Nikkei were trading up at 17,435, compared to a cash close of 16,552.
E-Mini futures for the S&P 500 eased 1.2%, perhaps unsettled by news California' governor had issued a statewide "stay at home" order to residents.
Aiding sentiment was a 25% rally in oil prices overnight.
U.S. crude added another 26 cents to $26.17 a barrel on Friday, up from a low of $20.09, while Brent crude stood at $28.25.
This was a major relief as the collapse of crude prices had blown a huge hole in the budgets of many oil producers and forced them to dump any liquid asset to raise cash, with U.S. Treasuries a particular casualty.
That was one reason yields on U.S. 10-year Treasuries had climbed over 100 basis points in just nine sessions to reach 1.279%, before steadying a little at 1.15%.
At the same time, funds across the world were fleeing to the liquidity of U.S. dollars, lifting it to peaks last seen in January 2017 against a basket of its peers.
"Such price action suggests significant market stress, particularly on the wide range of entities outside the U.S. that have borrowed in dollars," said Richard Franulovich, head of FX
strategy at Westpac.
"It could last until global capital flows and investor risk appetite normalises, possibly months away."
The euro was not far from three-year lows at $1.0731, having shed 3.3% for the week so far - the steepest decline since mid-2015. The dollar did ease back a touch to 110.22 yen, but was still up 2.1% on the week.
Sterling continued its wild swings with a rally to $1.1646, having earlier hit its lowest since 1985 around $1.1404. It was still down a hefty 5.2% for the week.
The jump in the dollar has made gold more expensive in other currencies and pushed its price down 3% for the week to $1,482.70 per ounce.