Markets
Central banks all around the world went or are at least close at going all-in over the past few days/weeks. Focus shifted towards fiscal policy to cushion the effects of the coronavirus outbreak on the world economy. Related headlines were pouring in again today, from New-Zealand over France to the US (see below). It initially triggered investor optimism at the start of European dealings. However, the lack of a coordinated global/European response, as became yet again apparent after the G7 summit yesterday, caused (most) equity gains to fade throughout the trading day. US stocks opened +2% or higher but turned south immediately after, virtually pairing gains. The overall risk climate is still extremely fragile. We see evidence of lingering uncertainty in the ECB’s LTRO – bridging the period to the TLTRO in June – drawing almost €110 billion in bids. Core bonds failed to profit though. US yields advance 3 bps (2-yr) to 10 bps (30-yr). The German yield curve bear steepens, seeing its 2-yr yield rise 2 bps and 3 bps in the 10-y yield. Peripheral spreads widen dramatically in Greece (+67 bps) as the country grapples with the effects of the coronavirus on its economically important tourism sector. Italy (+12 bps) and Spain (+11 bps) come in next. Price action in both core and peripheral bonds suggest investors have started to assess the economic fundamentals, undoing some part of monetary policy compressing credit spreads artificially. That (perceived) increase of credit risk and accompanying potential financing problems also didn’t escape the US central bank. The Fed just announced it will probably reactivate its commercial funding facility, which was last used during the financial crisis.
On currency markets we notice the strong performance of the dollar. Moves in EUR/USD occurred in a one-way street south with the pair drifting from close to but below 1.12 to 1.10 in just a few hours. With USD/JPY also on the rise (from 105.8 to 107 at the time of writing) despite a moderate risk-off context, we reckon there is still significant dollar demand but insufficient supply. The aggressive spread widening (cf. Greece, Spain, Italy) might also weigh on the euro as a chill reminder to the 2011/2012 concerns surrounding the euro area stability. Sterling entered calmer waters after a violent sell-off over the past few days. EUR/GBP hovered near yesterday’s close at around 0.91.
News Headlines
The ZEW-index, which measures investors’ expectations of the German economy, collapsed to levels seen during the European debt crisis as the coronavirus pandemic put a halt to economy activity. The subseries on the outlook for the next 6 months plummeted from 8.7 to -49.5 while economists expected a drop to -30. Concerns about the possible impact of the coronavirus are mounting as a global recession appears all but inevitable. Equivalently, the assessment of the current situation also became increasingly gloomy (-43.1 from -15.7).
The Turkish central bank slashed its policy rate by 1 percentage point to 9.75% at an emergency meeting in an effort to combat the economic and financial fallout from the corona pandemic. The central bank also brought forward a series of liquidity enhancing measures to safeguard credit flow to the private sector and to ease lenders’ access to FX liquidity. The Polish central bank announced a 50 bps rate cut bringing it to a new all-time low of 1%.
US Treasury Secretary Mnuchin is pursuing a phase 3 stimulus package of $850 bn or more today aimed at buffering the economy against the fallout from the coronavirus, Politico reports. A big chunk of the package is said to stem from the White House’s request for a payroll tax cut and will also include aid to small businesses and airlines.
