Market movers today
Today’s focus will be on digesting the central bank messages from the ECB and the Fed yesterday. The big question is if this will be the day that the Fed cuts rates.
Today, the US university of Michigan consumer confidence is the only data point worth highlighting, although markets will continue to trade on virus and Fed news.
Selected market news
If anyone had hoped that the ECB and ECB President Christine Lagarde would break the rising stress in financial markets, they were unfortunately wrong. At the ECB press briefing Lagarde said: ‘We are not here to close spreads, this is not the function or the mission of the ECB’. She also said that she did not intend to be ‘whatever it takes, number two’. These comments were certainly not what investors in periphery countries had been hoping for and 10Y BTP yields widened 60bp versus Germany and the Italian stock index FTSE MIB fell a whopping 17%. The ECB response evoked rare ECB criticism from EU leaders. French PM Macron being the most vocal saying that the measures were ‘not enough’ and calling for new measures.
There is now a growing risk that Europe will not only have to worry about the virus, but also have to deal with a new debt crisis. Lagarde tried to back-track in a television interview later in the day but the damage was done, overshadowing the package that the ECB delivered. The ECB added another EUR120bn to the QE programme and the TLTRO III programme was made more favourable with loans now as low as -0.75% (25bp below the depo rate introducing a dual rate system for part of the market). This should in particularly benefit Spain and Italy. The measures were targeted; but there was little general easing/rate cut for the market. Considering that 13bp of cuts were priced in the market this was a major disappointment. See our ECB review here.
If the current situation does not warrant a new ECB rate cut, it is hard to imagine what does. It is in this light Lagarde’s strong call for fiscal easing should be seen and Germany might be moving in the right direction. According to media the country is ready to scrap the ‘black zero’ on ‘exceptional circumstances’. The introduction of ‘kurzarbeit’ was just a first step. Other countries are also introducing measures to protect exposed sectors.
However, with the ECB maxed out Europe must look to the US for support. The Fed last night said that it will inject a record amount of USD 5 trillion of liquidity into the market to keep short-term financing rates stable. Importantly, the Fed also announced that it as a part of the reserve management will buy longer-dated bonds. It is basically a new QE programme and expectations for the introduction of an official QE programme being introduced next week are now growing. However, the Fed stepped short of a rate cut. It might come today as 100bp in rate cuts is now priced in over the next week.
Underlining the general virus concerns the extra liquidity only gave temporary relief for the market and US equity indices dropped 10% as the virus fears continued to dominate. The news that Trump dismissed the plan from House Democrats to fight the outbreak, New York declaring a state of emergency and that more countries including France, Denmark and Portugal will close schools also dented sentiment. After the market rout there are signs of stabiliSation in Asia this morning with US futures up 2.5% after the 10% drop yesterday.
