April 24, 2020 / 2:55 PM / a month ago

Take Five: The long road ahead

LONDON (Reuters) - 1/A BATTLE FAR FROM WON

The European Central Bank is set to spend just over a trillion euros on asset purchases this year alone, has eased its rules on what it can buy and when, and has stepped up supportive measures for banks to prevent the coronavirus crisis from hammering the economy.

But is it enough? That’s the question ECB President Christine Lagarde is sure to face after Thursday’s central bank meeting in the news conference to be held via a conference call.

Analysts estimate that at the current daily pace, the ECB’s 750 billion euros of emergency bond purchases will be exhausted by October. Some say the ECB will be left with no option but to top up its scheme by a further 500 billion euros soon — perhaps as early as Thursday.

For sure, rising government borrowing costs in the periphery led by Italy means pressure to act is building once again — not least as European governments struggle to agree details of their own emergency stimulus plan.

Graphic - The ECB's QE programme: here

2/BULGING BALANCE SHEETS

The Bank of Japan is kicking off a hefty central banking week on Monday. Analysts expect that the coronavirus may offer policy makers in Tokyo a justification to scrap what has become an obsolete, largely symbolic bond-buying target as it takes stronger action to cushion the economic blow from the pandemic.

Though they also predict that the BOJ will move closer to debt monetisation, or direct underwriting of government debt, as Japan joins other countries in deploying unprecedented spending to combat the widening fallout of the health crisis.

Meanwhile, on Wednesday, the focus will shift to the U.S. Federal Reserve’s monetary policy meeting. In recent months, the Fed has slashed rates to near zero, restarted bond purchases and rolled out an unprecedented range of programs to keep credit flowing and shore up business and household confidence, bulging its balance sheet to a record $6.42 trillion.

While the meeting is expected to be less dramatic than the emergency one in March, investors expect to get more details on the Fed’s special lending programs, its asset-purchase program and the forward guidance on the target range for the federal funds rate, analysts said.

Graphic - Fed balance sheet bulks up in COVID-19 fight: here

3/TESTING TIMES AHEAD

China’s top banks are set to show the scars of a historical contraction in the world’s second-largest economy in coming days when reporting quarterly results. The signals are pointing towards tough times lenders face in the coming quarters: loan defaults, repayment delays and bad loans all rose in the first quarter as the new coronavirus outbreak triggered unprecedented economic challenges.

And the pace of accumulation of soured debt is expected to continue. The banking sector’s non-performing loan (NPL) ratio climbed in the first quarter to 2.04% — highest since the global financial crisis. Brokerage Jefferies expects a 2.3%-5.6% net NPL formation ratio in 2020-2021 for its covered banks.

That might not spell major trouble for the well-capitalized big-four banks, but the focus will shift on the hit to the large number of systematically important provincial banks already reeling from thin capital buffers and fast running out of options to replenish balance sheets.

China this week decided to lower the bad loan provision requirement for these provincial banks temporarily to free up capital for lending to struggling smaller and medium enterprises, but that may end up creating more challenges in the medium to long term.

Graphic - China's industrial profits under pressure: here

4/EUROPE’S BANKS

Shareholders in European banks have had their share of nasty surprises since the coronavirus pandemic knocked global markets off record highs and quashed the value of the sector by over 45% in less than a month.

Lenders, which governments have ordered to freeze dividends and move to the front line of the worst economic crisis in living memory, have emerged as the unequivocal top stock market losers of the crash, faring even worse than travel and leisure stocks.

Now investors are bracing themselves to find out in the coming days just how many billions have European banks set aside for loan losses and the overall cost of the coronavirus crisis.

Over the past 30 days, analysts have revised their expectations for loan-loss provisions in 2020 by Europe’s most important banks upward by almost 130%, according to a Reuters analysis of Refinitiv data.

With the additional stress of the oil price crash in mind, investors are waiting for Deutsche Bank, Barclays, HSBC, UBS and Santander to unveil their impairment.

Graphic - Banks hit hard: here

5/T(OIL) AND TROUBLE

Surely oil markets can’t have another week like the one just gone. Sub-zero WTI and Brent prices swinging 25% a day is not good for anybody’s stress levels, but might there be a silver lining?

It could offer a springboard for recovery when coronavirus lockdowns finally end. Cheap oil lowers energy, transport and manufacturing costs, puts money in consumers’ pockets and saves oil-importing countries cash, too, which can then be spent on more useful things.

So next week’s test will be whether markets can settle a bit. The price gyrations and the fact oil storage facilities are nearly full have spooked traders and caused many to pull back temporarily.

The volume of futures contracts still open for delivery in June has fallen by the equivalent of 217 million barrels, more than a third, since Monday. In fact, the number of open contracts is falling across the next four months - decreasing open interest for June is not being fully offset by increased interest in the July, August and September contracts.

Graphic - Oil storing up problems: here

Reporting by Dhara Ranasinghe, Julien Ponthus and Mare Jones in London, Sumeet Chatterjee in Hong Kong and Saqib Ahmed in New York; compiled by Karin Strohecker; editing by Larry King

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