Apr 2, 2020

Axios Markets

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🎙 "If you cannot find peace within yourself, you will never find it anywhere else." - See who said it and why it matters at the bottom.

1 big thing: Debt crisis awaits in emerging markets

Illustration: Eniola Odetunde/Axios

Many of the world's poor and developing countries could begin defaulting on their bonds in the coming weeks as the coronavirus outbreak has led to massive outflows from emerging market assets and real-world dollars being yanked from their coffers.

Why it matters: The wave of defaults is unlikely to be contained to EM assets and could exacerbate the global credit crisis forming in the world's debt markets.

Driving the news: Investors pulled a record-breaking $83.3 billion from EM securities in March, dwarfing outflows seen during previous "stress events" like the global financial crisis, the 2014 taper tantrum, and China's devaluation scare of 2015, the Institute of International Finance says.

  • The outflows will be particularly damaging for emerging economies that are heavily reliant on foreign capital, especially as foreign direct investment has been drying up since early 2019 as a result of the U.S.-China trade war.

What they're saying: "The huge fiscal costs and humanitarian consequences of coronavirus could incentivize a slew of distressed governments to default on their debts," Edward Glossop, emerging markets economist at Capital Economics, wrote last week.

  • The World Bank and IMF already have called for an immediate suspension of debt payments from International Development Association countries, which are the world's poorest.
  • However, both Fitch and Moody’s warned that any restructuring of private-sector debt could trigger restrictive defaults.

State of play: The emerging world is being battered on all sides by a slowdown in manufacturing, cratering oil prices and the depression of aggregate demand as a result of the COVID-19 outbreak.

  • The suffering expected in developed economies like the U.S. and eurozone will be compounded significantly in emerging economies, like those in Asia, Latin America and Africa, which are expected to drive the world's growth in the coming years.
  • There are at least 20 EM countries that have bond yields already trading at distressed levels of more than 10 percentage points above comparable U.S. Treasuries, with Venezuela, Argentina and Lebanon having already entered defaults.

Yes, but: Bullish investors are banking on the IMF and World Bank to deploy up to $1 trillion in relief to help stave off mass defaults and worst possible outcomes.

Yes, but, but: That may not be nearly enough.

  • IIF's data show total debt for 30 large EM countries reached $72.5 trillion in 2019, a 168% increase over the past decade.
  • EM countries also have around $5.5 trillion of debt coming due this year, with a sizable percentage held by investors in the industrialized world.
Bonus: QE worldwide
Data: Institute of International Finance; Chart: Axios Visuals

A number of emerging market central banks will likely begin quantitative easing measures, Capital Economics analysts say, further flooding the world with an abundance of cash never before imagined.

  • Major central banks from the U.S., Japan, China and the eurozone already have run up more than $21 trillion on their respective balance sheets and are expected to deliver much more in the coming months.

Why it matters: Quantitative easing is an extreme measure that has an unproven track record at stimulating economic growth and has never been attempted in emerging countries, which have higher interest rates than their industrialized peers.

  • In the hands of potentially politically conflicted central banks like those in Brazil, Poland, Turkey and others in the emerging world, such a program carries a very real risk of spiking inflation and eroding the credibility of policymakers, says Liam Peach, Capital Economics' emerging Europe economist.
2. Catch up quick

Cruise line operator Carnival Corp. sold $4 billion worth of 3-year bonds at an astounding 12% coupon in a debt auction that was oversubscribed, with orders exceeding $10 billion.

  • Credit markets have seen more than $200 billion of debt sold in the U.S. and Europe over the past week. (Bloomberg)
3. Coronavirus cases and deaths likely far higher than data show
Data: The Center for Systems Science and Engineering at Johns Hopkins, the CDC, and China's Health Ministry. Note: China numbers are for the mainland only and U.S. numbers include repatriated citizens and confirmed plus presumptive cases from the CDC.

U.S. intelligence has concluded China intentionally underreported both total cases and deaths related to its coronavirus outbreak, Bloomberg reported, citing unnamed U.S. officials who had viewed a classified report to the White House.

Why it matters: China's efforts to deal with and economic recovery from the outbreak are being closely watched by governments across the globe as a precursor of what's to come in their countries.

What they're saying: “The medical community ... interpreted the Chinese data as: This was serious, but smaller than anyone expected,” Deborah Birx, the State Department immunologist advising the White House on its response to the outbreak, said at a news conference Tuesday.

  • “Because I think probably we were missing a significant amount of the data.”

The big picture: The conclusion that China likely had substantially more cases than it reported, and the fact that the U.S. still has not instituted a nationwide quarantine despite mounting infection numbers, suggest the outbreak and commensurate economic impact will be more damaging than most economic models predict.

Threat level: It's not just China. Italy is undercounting thousands of deaths caused by COVID-19 because many who die don't make it to hospitals and are never tested, WSJ reports.

  • The country has seen the highest number of COVID-19 deaths with an official toll of 13,155.
  • There are also concerns about other nations misrepresenting their numbers, including Iran, Russia, Indonesia, Saudi Arabia, Egypt and North Korea, which has not reported a single case of the disease.

Of note: Using the numbers reported by China, Italy and others, the World Health Organization predicts the world will reach 1 million confirmed cases in the coming days.

4. Why March's ADP job report was worse than advertised

Job losses over the past month have likely been worse than even some of the more extreme economic estimates, and are expected to get worse.

Driving the news: Led by small businesses, U.S. companies cut payrolls by 27,000 in early March, ADP's latest private payrolls report showed Wednesday, in a surge of cuts that predated many municipalities' mandated business closures.

Go deeper: The ADP headline number significantly underplays the level of carnage in labor markets, as service-related industries saw losses of just 18,000 during the month.

  • Most of the decline came from sectors not associated with restaurants or leisure and hospitality, with the biggest losses coming from trade, transportation and utilities (-37,000), followed by construction (-16,000) and administrative and support services (-12,000).
  • Small businesses saw 90,000 job losses during the period ending March 12, and 66,000 of those came from companies that employ 25 people or less. 

What they're saying: Mark Zandi, chief economist at Moody’s Analytics, notes that just 6% of companies indicated they are hiring, a level worse than during the financial crisis and comparable to about 40% during a typical month.

  • He expects total job losses will total 10 million to 15 million, a number that is beginning to look positively quaint by comparison.

Goldman Sachs predicts unemployment will peak at around 15%, with a little more than 20 million unemployed.

  • Economists at the St. Louis Fed project about 47 million people will lose their jobs, which would translate to a 32.1% unemployment rate.
5. The nightmare chart worsens
Expand chart

After exceeding the record for weekly unemployment claims by more than five fold last week, economists are predicting even greater job losses when the government's report is revealed later today.

Details: The number of first-time jobless claims, which will reflect filings last week, could rise to 5.6 million, according to an analysis of individual state reports and Google search data by economists Paul Goldsmith-Pinkham and Aaron Sojourner.

  • Weekly job losses could reach as high as 6.1 million, they say.
  • Goldman Sachs estimates 5.3 million claims and Citigroup predicts 4 million.

Putting it in context: Sojourner and Goldsmith-Pinkham last week predicted claims would rise to 3.4 million, well above early economist predictions of around 1 million.

  • If their forecast is accurate, there will have been as many unemployment claims filed in two weeks as there were in the first six months of the Great Recession.

Quote: "If you cannot find peace within yourself, you will never find it anywhere else."

Why it matters: Marvin Gaye, the legendary crooner who made the gold standard for albums with "What's Going On," was born on April 2, 1939.