Markets
The ECB decided on a comprehensive package of monetary policy measures to counter the impact on economic activity from the COVID-19 virus. First, they decided to conduct additional long-term financing operations (LTRO’s) to provide immediate liquidity support. Second funding conditions of targeted long-term financing operations (TLTRO’s) will become more favourable. The lowest rate applicable on the loans can be 25 bps below the deposit rate over the period ending June 2021. The maximum amount of what can be borrowed will also be increased. Third, the ECB will conduct an additional €120bn of net asset purchases until the end of the year with a strong contribution to the private sector purchase programme (corporates). The ECB didn’t get lured into cutting its main policy rates even as short term money markets discounted additional rate cuts. Forward guidance still suggests that this could be an option if necessary though. Zooming in on the post-ECB market reaction, we witnessed a significant increase at the front end of the yield curve because of the non-action on the policy rate front. The euro interestingly failed to profit, but the very risk-off climate weighs in the balance. Overall, we think that the ECB’s measures illustrate that the central bank can no longer be a gamechanger for markets. The sell-off in peripheral bonds highlights for example that the additional bond purchases won’t do the trick (probably max €10bn/month on top of current €20bn/month). Lagarde saying that the ECB isn’t “here to close bond spreads” obviously did little to alter the outright dumping of Italian BTP’s and the likes. Even more striking is the lack of current coordination with fiscal policy. ECB Lagarde can call for it whatever she wants, the lack of inaction stands out. The additional sell-off on European stock markets, which were already down 6% is exemplary.
Numbers sometimes speak louder than words. European stock markets lose over 10% with the EuroStoxx 50 for example below the 2016 level (2673). US stock markets slide over 7%. Stock markets are in true panic mode with the world shifting to a global lockdown and investors fearing a severe recession. The US yield curve shifts 8 bps (2-yr) to 17 bps (10-yr) lower. Changes on the German yield curve are limited to minus 2 or 3 bps across the curve given the deep negative territory it is already in. Peripheral yield spreads changes vs Germany widen by up to 55 (Greece) or even 60 (!) bps (Italy). Core countries do not get spared either with Belgium (+15 bps) and France (+16 bps) also advancing. The dollar put in a stellar performance against all majors including the Japanese yen. USD/JPY initially dipped to the low 103 area but is now back at 105. EUR/USD plunges from the high 1.12 area to 1.1150. EUR/GBP rises to currently trade in the 0.8830 area.
News Headlines
Iran asked the International Monetary Fund for about $5 bn to help the country withstand the effects of the coronavirus. It is the first time since the sixties that Iran seeks aid from the fund, which reserved some $50 bn in financial aid. Iran is facing severe US sanctions but sees a way to receive the funds from the Washington-based institution via Europe.
Swedish CPI inflation recovered from a January plunge (-1.4% m/m) to 0.5% m/m. The Riksbank’s preferred gauge, CPIF, came in close at expectations at 0.5% m/m (1.0% y/y) but well below the central bank’s own forecast of 1.4%. Excluding energy, CPIF prices rose 0.8% m/m or 1.6% y/y. The Swedish krone loses territory (EUR/SEK at 1.09).
According to Bloomberg, the German government under Angela Merkel is ready to ditch its “Schwarze Null” budget policy to combat the economic fallout of the corona outbreak as recession looms. The government hasn’t decided yet on specific measures or amounts but still has plenty of room (€50 bn reserves) to manoeuvre before tapping new debt.
