Markets
Damage control at the ECB. A day after president Lagarde’s unfortunate comment (“The ECB is not here to close bond spreads”) which triggered an additional sell-off on European (peripheral) markets, her colleagues came to the rescue. French governor Villeroy kicked of this (early) morning saying that the ECB will use all of the available flexibility in the package to “combat fragmentation [within the EU]”. Italian governor Visco later said that the ECB could frontload and skew purchases towards countries hit the most (i.e. his own country). That comment was later echoed by governing council member De Cos from Spain. Perhaps that has put more focus on the actual message, being the stimulus package, rather than on the messenger because risky assets are being well bid today. There are also other factors at play though. First, a technical rebound after the most violent (European) sell-off on record isn’t that surprising. We’ve seen that happen already a few times over the past few weeks. The Fed’s massive liquidity bazooka announced yesterday to ease tensions on (US money) markets and the Chinese PBOC, Swedish Riksbank and the Norwegian Norges Bank providing more monetary stimulus (see below) are others. Lastly, additional headlines from European officials suggesting fiscal support popped up. Germany’s finance minister Scholz said his country will spend billions in tax relief and liquidity provision (without limits) to help battered companies. On a broader level, the EC announced readiness to trigger the emergency clause that will suspend deficit limits (Dombrovskis) and to authorize “wide-ranging state aid steps” (Von der Leyen). European stocks are in burst mode, surging initially more than 7% before trimming gains to 4-5% going into US dealings as optimism dented gradually. Italian and Spanish stocks are outperforming, in part due to the short-selling ban. US equities opened almost 7% in the plus but gains retraced to 4% at the time of writing. Core bonds take a strong hit. US yields advance 5 bps (2-yr) to 15 bps (10yr). The German yield curve bear steepens with yield changes varying from 1 bps (2-yr) to 20 bps (30-yr). Peripheral spreads erase some of yesterday’s steep increase with Italy (-12 bps) outperforming. Despite risk-on and further signs of European leaders moving in the direction of fiscal stimulus, EUR/USD fell towards the low 1.11 area (from close to but below 1.12). This adds to our case of investors looking for the most liquid assets during current times of distress. USD/JPY advances to 106.78, up from 105 this morning.
The minutes of the Bank of England’s emergency meeting on Wednesday revealed there was a “strong case” for a large rate cut. Policymakers are worried that the coronavirus would affect both supply and demand in the UK. They also see options left for more stimulus if needed, such as more rate cuts, QE or enlarging the newly SME funding program. Sterling was little affected though. The British pound showed no clear direction with EUR/GBP being whipsawed around opening levels of 0.89.
News Headlines
The Chinese central bank (PBOC) will be cutting the required reserve ratio for some banks from March 16 onwards to inject more funds into the corona-hit economy. The reserve ratio will be cut by 0.5% to 1% for joint-banks. To qualify for a discount, banks have to pass a review that assesses their lending activity to small businesses in the past year.
The Swedish central bank (Riksbank) stepped up efforts to shield the economy from the economic fallout of the corona pandemic. It announced it will lend up to SEK 500 bn to companies via banks to safeguard credit supply to the real economy. Governor Ingves said the Riksbank is ready to act more thoroughly whenever needed and also hinted it considers widening the scope of its bond buying programme. The Norwegian central bank (Norges Bank) followed suit and delivered an emergency 50 bps cut to its policy rate to 1%. The Norges Bank signaled additional rate cuts to shore up its oil and trade reliant economy. The Norwegian krone strengthened to EUR/NOK 11.1 from the high 11.3 area this morning.
