Markets
During the weekend and this morning, several central banks (RBNZ, Bank of Korea, Bank of Japan,…) followed the Fed’s aggressive easing and tried to prevent a further tightening of monetary conditions. For now markets clearly don’t see clearly how this flood of liquidity will be channeled to corporates that are struggling to cope with a sharp decline in activity/cash flow. Evidence of this is multiple as several economic sectors are sharply scaling back activity/production and asking for financial support (bail-outs) from governments. Governments are preparing/announcing support packages. The IMF also indicated it received multiple calls from member countries for assistance. However the IMF indicated that there is still a lot of work to do to reach an adequate level of such (fiscal) support. For now, this is also the conclusion of equity markets. Investors are not convinced on the efficiency of the measures that are put in place. Most European equity indices are declining about 10%. US equity indices were halted limit down soon after the open. Financial authorities(ESMA) are taking measures to monitor short-selling. On the bond markets, the price moves are also far from straightforward. US yields are substantially lower compared to Friday. However, intraday, yields were tentatively upwardly oriented. Yields decline between 10 bps (2-y) and 15 bps (10-y), but are way off the -30 bps levels at the start of trading this morning. The German 2-y yield lost 2 bps, but yields of longer maturities are rising (+ 3.5 bps) and stay well off the correction lows reached last week. Current CB action is apparently not giving enough comfort to investors to take the liquidity and price risks of bonds with longer maturities. In the current context, intra-EMU credit spreads also continue to widen with the likes of Greece (+43 bp) and Italy (+18 bp) (10-y) underperforming. Credit risk remains under pressure globally.
The dollar lost modest ground in the wake of the Fed policy actions. The measures to support USD liquidity inside and outside the US eased the rush on the US currency. USD/JPY is trading in the 106 area (compared to 108+ late on Friday, with an intraday low today near 105.15). After an initial post-Fed up-tick, EUR/USD held a nervous, erratic, but after all relatively sideways trading pattern in the 1.11/12+ area. Smaller less liquid currencies were again hit harder, among which the Czech koruna, the Hungarian forint and the Polish zloty. Most other smaller currencies also stay in the defensive, but the damage for the countries with better eco fundamentals like the Swedish Krona was more modest. EUR/GBP extended its ascent north trading near 0.91. The new BOE governor, Bailey, said the BoE will take further action if needed. For now, the smaller liquidity continues to haunt the UK currency, too.
News Headlines
The IMF announced it stands ready to mobilize $1 tn lending capacity to help countries counter the coronacrisis. Managing director Kristalina Georgieva said the fund 40 ongoing loan arrangements with combined commitments of $200 bn that can quickly provide crisis financing and interest from about 20 additional countries for financing.
The coronacrisis is bringing the airline industry to a halt as lockdowns and new travel restrictions hit more major routes, industry body Centre for Aviation warns. Besides cancelling flights, the airline industry announced moves to slash capacity, freeze discretionary spending, reduce working hours and shed jobs, labelling the virus “the biggest crisis in aviation history”. The industry is desperately calling for government to step up emergency aid .
The New York Fed’s Empire State business conditions index plunged a record 34.4 points to -21.5 in March, while economists expected a reading of 3. The details point to a decline in new orders (-9.3) while the shipments index tumbled to -1.7. Meanwhile, optimism about the six-month outlook fell sharply amid the widespread coronacrisis, with the index for future business conditions down 22 points to 1.2, the lowest level since 2009.
