[Good Morning Stock Market] Despite 'Unlimited Quantitative Easing' Declaration... US Stock Market Fails to Respond

Despite 'Unlimited Dollar Injection,' Dow Index Closes Down Over 3%
Worst Economic Recession Since World War II May Occur
Strong Dollar Phenomenon Continues, Rising Debt Burden Concerns in Emerging Markets

[Asia Economy Reporter Minji Lee] In response to the economic downturn caused by the spread of the novel coronavirus infection (COVID-19), major central banks including the U.S. Federal Reserve (Fed) have launched unlimited quantitative easing, but the effect was not as strong as expected. Although the dollar's strength slightly eased and West Texas Intermediate (WTI) crude oil rose about 3% compared to the previous day, concerns grew that the global economy could fall into the worst recession since World War II, leading U.S. and European stock markets to close down across the board.

[Image source=AP Yonhap News]

◆ Kwanghyun Kim, Researcher at Yuanta Securities = The U.S. economy has come to a halt due to COVID-19. As a consumption-driven economy, the U.S. is experiencing a shake in its economic foundation due to reduced consumption caused by forced business closures. The U.S. GDP forecasts from global investment banks (IBs) have already been significantly lowered. Goldman Sachs projected that the U.S. GDP will decrease by 0% year-over-year in Q1, -6% in Q2, and -4% in Q3.

The Fed announced an unlimited quantitative easing measure the day before. It is unusual to launch unlimited dollar supply less than three weeks after an emergency interest rate cut, indicating how serious the current situation is.

First, the Fed decided to purchase mortgage-backed securities (MBS) to prevent a chain of defaults. Additionally, it plans to provide liquidity to the corporate bond market by creating a liquidity supply plan for the issuance market and directly purchasing in the secondary market. Furthermore, through the Term Asset-Backed Securities Loan Facility (TALF), loans can be secured using AAA-rated asset-backed securities (ABS) backed by student loans, auto loans, and other assets as collateral. This is expected to defend against a chain of financial institution failures and facilitate loans to individuals and small businesses.

Such strong actions by the Fed suggest that other countries' central banks have more room to respond. It will be important to watch whether central banks worldwide can cooperate with the Fed to implement strong policies.

◆ Jaeseon Lee, Researcher at Hana Financial Investment = The strong dollar phenomenon continues due to the spread of COVID-19. Currently, the dollar index has surpassed 103 points, rising about 3% since March. Based on the nominal effective exchange rate considering global trade volume, the dollar's value is at its highest level in 34 years since the Plaza Accord.

During this period, the Morgan Stanley Capital International (MSCI) Emerging Markets (EM) currency index fell by 3%. If the dollar's strength continues, concerns over emerging markets' debt burdens will inevitably increase. According to the Bank for International Settlements (BIS), global dollar-denominated debt amounts to $12 trillion (15,000 trillion KRW), with emerging markets' dollar-denominated debt estimated to have more than doubled over the past decade to $3.78 trillion.

Asian emerging countries have increased their foreign exchange reserves more than sevenfold from $360 billion in 2007 to $2.5 trillion after the foreign exchange crisis, and except for Turkey and Argentina, no country has a short-term external debt ratio exceeding 100% of foreign exchange reserves. However, given unstable external conditions, conservative investment is necessary for countries vulnerable to external factors.

In particular, Indonesia is in the weakest position regarding commodity prices and debt repayment risk. Its foreign exchange reserves are only $150 billion, and its external debt ratio is high. Russia and Brazil have high foreign exchange reserves and low debt repayment risks, but commodity prices could trigger currency volatility. Meanwhile, India is showing a reduction in its current account deficit, has the fourth-largest foreign exchange reserves among emerging markets, and is judged to have a low debt repayment risk.

This content was produced with the assistance of AI translation services.