Markets:
A brief recap of today? Stocks down, core bond yields down and the dollar down. More of the same actually. Markets fear that the (handling) of the coronavirus outbreak will trigger (amongst others) a recession in the US. European stock markets lose 3.5% with the Euro Stoxx 50 testing key support around 3239. US indices open nearly 3% weaker. The US yield curve bull flattens with yields dropping 16 bps (2-yr) to 28 bps (30-yr). It’s the second straight session of US curve flattening. After discounting a Fed policy rate at the effective/zero lower bound by June, investors are already looking further ahead. The huge decline at the (very) long end represents both a high recession probability and a return by the Fed to the bond markets (whether it being by outright purchases, an operation twist or yield curve caps). US Treasuries continue outperforming German Bunds given the huge difference in policy options on both sides of the Atlantic. Even as another deposit rate cut is discounted, we don’t think the ECB will be lured into it. Benefits simply don’t outweigh the costs. Liquidity-enhancing ECB measures will be labelled as necessary, but insufficient. The German yield curve bull flattens as well with yields falling 1.8 bps (2-yr) to 9.8 bps (30-yr). 10-yr yield spread changes vs Germany widen by up to 9 bps with Greece (+18 bps) underperforming.
Falling dollar yields and growing downside risks to US economic growth hurt the dollar. EUR/USD moved past 1.1239 resistance and conquered the 1.13 handle. Interestingly: a stellar payrolls report (see headlines) couldn’t change the tide. Markets label February data as outdated and fear what will be coming in March and April. It’s a worrying sign for the greenback. USD/JPY was the proponent of dollar losses sending the pair towards 105. Losing 104.56 would be of huge technical significance. The trade-weighted dollar tested the June 2019 low at 95.84. EUR/GBP tracked the move higher in EUR/USD. The pair changes again hands above the 0.87 barrier. The UK’s Budget Office confirmed that a major review of UK infrastructure spending will no longer be published together with next week’s Budget. It suggests that any emergency spending will be ringfenced to help containing the COVID-19 virus outbreak and that other fiscal measures will be delayed.
News Headlines:
Russia is throwing cold water over OPEC’s call for additional output cuts of 1.5mln b/d until the end of the year. The country is in favour of maintaining current output levels and is not on board with the deal that would see core OPEC members curb output by an additional 1mln b/d and non-OPEC allies by 500K b/d. Russia prefers to delay the decision for additional cuts to June. Brent crude tumbled to $47 after the report.
EU trade commissioner Phil Hogan sees the glass half full when it comes to reaching a mini trade deal with the US in the coming weeks. Despite some difficult issues left to overcome, Hogan said both sides are making efforts to find common ground on solutions.
The US labour market remained on a solid footing and smashed expectations in February. The US economy added 273K jobs, far beyond the 225K forecast as companies continued to hire despite corona jitters. Moreover, January’s print was upwardly revised to 273K from 225K. The unemployment rate fell back to 3.5%, matching its lowest level in more than 50 years.
The Canadian economy added 30.3K jobs in February, better than the anticipated 11K pick-up, fueled by gains in the services industry while construction and agriculture reported losses and hiring in the manufacturing industry slowed. The unemployment rate nudged up 5.6% from 5.5% in January, in line with expectations.
