Markets
Investors started off European dealings surprisingly well given the poor performance during Asian trading hours. Some point to the unexpected rate cut, both in timing and magnitude, by the Bank of England as the reason for cautious optimism. What we do know for sure is that the risk on momentum soon petered out in a similar way we’ve seen yesterday. EMU stock gains amounted to 3% before drifting back south again. US stocks opened outright negative, with losses up to 3% as markets still await concrete signs from president Trump’s promised economic response. US yields tumble some 9 basis points across the curve. German Chancellor Merkel also pledged action and said she’ll do “whatever is necessary” to counter the corona virus crisis. She will discuss the economic fallout with business leaders this Friday. Her Draghi-like message failed to inspire markets like it did in 2012 though. The German yield curve bear steepens marginally with yield changes varying from +1.4 bps (2-yr) to +3 bps (30-yr). Italy on the other hand made its intentions more tangible by announcing a €25 bn stimulus package, including a.o. help for temporarily laid off workers. Peripheral spreads vs. the German 10y yield narrow with Italy and Greece (both -12 bps) outperforming. The EMU/US spread that had been driving EUR/USD lately, didn’t really fulfill that task today. Despite the opposite moves in core bond yields, gains in EUR/USD remain limited. The couple is trading in the low 1.13 area. We assume the looming ECB meeting (tomorrow) is weighing on the euro. USD/JPY shows no clear direction. An attempt to erase early losses failed. The pair is currently changing hands in the 104.7 area.
The Bank of England unexpectedly cut rates by 50 bps this morning during an emergency policy meeting. It also trimmed the countercyclical capital buffer for banks to 0% and announced liquidity enhancing measures for SME’s, being the most vulnerable to the implications from the corona virus, in particular. The timing of the BoE was probably deliberate as the UK government was also due to present the budget a few hours later. Minister of Finance Sunak unveiled £30 bn short term spending to support jobs, workers, the National Health Service and businesses next to a record £600 bn pound for infrastructure (roads, railways, housing …) and R&D for the coming years. Sunak also provided new growth projections. With just 1.1% in 2020, growth is expected to be the lowest since the financial crisis. And current forecasts don’t even include the (full) impact from Covid-19 … Markets reacted quite neutral to the budget. EUR/GBP is trading virtually unchanged vs. yesterday’s close at 0.876 but had a wild intraday ride in the wake of the BoE’s surprise cut. Cable shook off early losses and rose to 1.294 (from 1.29 this morning).
News Headlines
Nikkei reports that the Japanese government is preparing an emergency package to help cushioning the blow of the corona virus by April. Some measures under considerations are cash handouts for families with children and support for companies with supply chains reliant on China.
People familiar with a conference call of EU leaders cite ECB president Lagarde as warning that without coordinated action in Europa, we will see a scenario that will remind many of us of the 2008 Great Financial Crisis. But with the right response, the shock will likely prove temporary.
US CPI inflation was higher than expected in February. The headline reading printed at 0.1% M/M and 2.3% Y/Y despite falling energy prices while core inflation rose by 0.2% M/M and 2.4% Y/Y. Food inflation increased at the fastest pace in a year. Next inflation outcome will be interesting one given the complex of crashing oil prices, weakening services demand, but increased demand for eg food, goods or medical supplies.
