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Economies coming roaring back

Restrictions on activity have lifted in both countries. While some states in Australia still limit the size of groups and capacity at restaurants, New Zealand has now lifted all domestic restrictions. The reduction in restrictions has contributed to a pick-up in spending in both countries with consumption bouncing back further than expected in May and surely rising again in June. However, we think the borders of both countries will remain closed until the middle of next year which prevents a full bounce-back of either services exports or migration. That will keep GDP below its pre-virus level in both countries for at least the next year.

30 June 2020

Beijing adds to bond deluge, floods flag climate risks

China's central government has embarked on a borrowing spree. This month's bond sales were the highest since 2007 and more is in the pipeline as the finance ministry plans to complete the issuance of RMB1trn in special sovereign bonds by the end of July. Further details that have emerged over recent weeks confirm our expectation that the bulk of these funds will be directed towards investment.

26 June 2020

Financial conditions ease but headwinds remain

After tightening dramatically in March following the outbreak of the coronavirus, our proprietary index shows that financial conditions in India have eased substantially over the past couple of months. This is in large part due to the RBI’s swift and emphatic response. Policy rates have been slashed to record lows, while large-scale liquidity injections have been unveiled. Looking ahead, we think the central bank will keep monetary policy very accommodative for the foreseeable future, which should ensure that financial conditions remain loose. That will help prevent a more severe economic downturn from materialising this year. Nevertheless, India’s failure to control the spread of the virus, as well as the government’s underwhelming support package for households and corporates, means that the economy is still set to suffer a slower and more fitful recovery from the nationwide lockdown than many other countries in Asia.

24 June 2020
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Returns from gilts likely to be paltry even if policy remains loose

Gilt yields have risen slightly today, but we doubt that they will climb much further, given we expect the Bank of England to keep policy ultra-loose for many years. However, since we also doubt the Bank will cut interest rates into negative territory, we think that the returns from gilts are likely to be paltry at best.

Low inflation limits downside risks for bonds

If we are right that the world faces a period of low inflation over the next few years investors are unlikely to begin anticipating tighter monetary policy and so undermine the returns from government bonds. We think it is much more likely that returns from them in DMs will be paltry but stable as central banks keep a lid on yields. Returns from EM government bonds could be better if risk appetite continues to improve.

5 June 2020

Downgrade, locusts, activity edging up

The downgrade of India’s sovereign rating by Moody’s this week had little impact on financial markets, and we think that bond yields will remain close to their current low level over the coming months. Meanwhile, India is now facing the most severe locust attack in almost three decades, but there is hope that the impact on agricultural output will be limited.

What to make of steeper EM yield curves?

The steepening of EM local currency government bond yield curves since the crisis began in mid-February largely reflects a fall in short-term rates, but in some cases, like Brazil, Mexico and South Africa, it also reflects persistently high long-term borrowing costs. This adds to the reasons to expect policymakers there to turn to austerity and financial repression once the crisis is over, which will weigh on recoveries.

Normal still a long way off

As the lockdowns have largely come to an end in both countries, output is starting to recover. In New Zealand, most activity is now allowed to resume, though gatherings are limited to 100 people. In Australia, states are easing restrictions at different paces. In Victoria, a strict lockdown remains in place until June. Non-essential shops have begun to reopen and cafes and restaurants are allowed to seat a limited number of customers in both Queensland and New South Wales. However, people remain cautious and normal behaviour has not yet resumed. That is evident in the apple movement data which show only a gradual pick-up in Australia. And while movement has picked up more quickly in New Zealand, it’s coming from a lower base. With the border set to remain closed for most visitors for a prolonged period, we think it will take months if not years for activity to return to pre-virus levels.

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