Markets
Financial markets remain in (US) recession mode as the virus outbreak outside China intensifies. US stocks got battered in yesterday’s full‐blown risk averse trading session, losing up to 3.5%. European indices lost up to 2%. Core bonds profited with US Treasuries again outperforming German Bunds. The German yield curve bull flattened with yields losing 1.4 bps (2‐yr) to 4.6 bps (30‐yr). Peripheral yield spreads vs Germany widened by up to 12 bps. The US yield curve bull flattened with yields down 9.6 bps (2‐yr) to 16.1 bps (30‐yr). The US 2‐yr yield fell below 0.5% for the first time since 2015 and the US 30‐yr yield set a fresh record low south of 1.5%. Another 50 bps Fed rate cut for March was already discounted, but an additional 25 bps in April is now baked in the cake as well. The fact that the US yield curve now starts bull flattening instead of steepening might suggest two things. The first one obviously that markets take into account a US recession. The second one being that once policy rates hit the zero effective lower bound, we might eventually get a restart of asset purchases or some sort of operation twist (selling ST Treasuries from portfolio and buying LT Treasuries). Washington Fed Brainard, in charge of the Fed’s ongoing internal audit, proposes a mechanical approach in case of hitting the lower bound with policy rates. In particular, she sees advantages to an approach that caps interest rates on Treasury securities at the short‐to‐medium range of the maturity spectrum—yield curve caps—in tandem with forward guidance that conditions lift off from the ELB on employment and inflation outcomes. Both would reinforce each other. In addition, once the targeted outcome is achieved, and the caps expire, any securities that were acquired under the program would roll off organically, unwinding the policy smoothly and predictably. Brainard expects that effective security purchases would eventually be smaller under such a YCC system than compared with an outright buying programme.
The greenback is bleeding on FX markets. The trade‐weighted dollar is close to testing the December low (96.39). EUR/USD tested 1.1239 resistance. Next week’s ECB meeting might keep the euro in check, but the odds are shrinking. The ECB can never copy the magnitude of the Fed’s stimulus potential and risks triggering euro strength both in case of non‐action and in case of limited, targeted, easing measures (ECB maxed out). Next intermediate resistance kicks in at 1.1412. Yesterday’s risk‐off move was obviously most visible in USD/JPY. The pair dived below 106 for the first time since September last year. The (in)visible hand of the SNB is also failing to keep the Swiss franc from returning to 1.06. Sterling trading was choppy around 0.8650. Today’s eco calendar contains US February payrolls. They’ll be ignored like other US eco data this week. Risk sentiment remains key and Asian dealings suggests that we might be getting more of the same…
News Headlines
The Italian government pledged to double its fiscal stimulus package to EUR 7.5bn to contain the economic fallout of the coronavirus outbreak as the number of cases continues to soar. The spending spree would deepen this year’s deficit to 2.5% of GDP from an earlier 2.22% commitment. Italy is granted fiscal leeway from the EU that disclosed it is loosening budget strings for countries to battle the epidemic.
Several Fed speakers (Williams, Kashkari & Kaplan) voiced support for the central banks 50 bps emergency cut and stressed the Fed continues to closely gauge the impact of the coronavirus on the US economic outlook and will further cut rates if necessary. Williams and Kaplan also disclosed the Fed will make sure there enough liquidity in the money market, probably pushing back plans to scale back repo operations and bill purchases in the 2nd quarter.
Elisabeth Warren dropped out of the US presidential race after finding no path to the Democratic nomination. The nomination now comes down to a two‐man battle between Joe Biden and Bernie Sanders. Warren said she wants to take some time to reflect and wouldn’t endorse another candidate right away.
