Market movers today
Today is another day monitoring the coronavirus situation and how policymakers respond as well as reacting to another big day in terms of central bank and government action (see more below).
Note that the ordinary Fed meeting has been cancelled so no announcement tonight, according to the Fed’s website. That does not mean the Fed cannot do anything, as it has taken several steps in the past few days, including the announcements yesterday that it will start buying commercial papers through the CPFF, offer liquidity to primary deals through the PDCF and the New York Fed will offer overnight repos for up to USD500bn each day. The Fed is also reviewing to ease bank leverage and accounting rules to support credit. One big facility the Fed has still not implemented is the Term Auction Facility, which is another programme to provide markets with liquidity.
Today’s data releases should likely be disregarded, although we get flash HICP inflation data for February out of Europe.
Selected market news
Bloomberg yesterday evening quoted German chancellor Angela Merkel for saying that Germany is willing to consider a joint EU funding programme in order to mitigate the fiscal consequences of the current situation, with the BTP-bund spread having widened to levels last seen under the Lega/Five Star coalition. Germany was not willing to consider a joint funding scheme in either 2008, during the financial crisis, or in 2012 during the sovereign debt crisis.
On the back of the slightly disappointing Eurogroup meeting on Monday this is a potentially hugely important step forward for the funding outlook for the hardest hit EU member states and will be seen as credit positive from a market perspective. The initial proposal is said to have come from Italy’s PM Giuseppe Conte in a conference call held on Tuesday between the 27 EU heads of government with France’s president Emmanuel Macron also seemingly on board. There are a range of opportunities for actual implementation depending on whether this is a Eurozone project only or also backed by non-EUR bonds, but issuance could take place through either ESM or EIB, and timelines could be short given that both institutions to some extent already have the tools in place to handle a joint programme.
The US treasury curve steepened markedly during the last session with 2s10s up more than 20bp following a Federal Government proposal presented by Treasury Secretary Steve Mnuchin on Tuesday evening. The proposal includes a fiscal stimulus package worth USD1.2tn (nearly 6% of US GDP), which has the potential to lead to a significant increase in treasury issuance. From a macro view, we find it very interesting and positive that the Trump administration seems to have thrown away the idea of tax cuts and now focuses on providing direct money support to American businesses, which are two things that will get support from the Democrats.
Scandi markets
In Sweden, the extended QE will start today with SEK2.5bn worth of purchases in SGBs according to the Riksbank. The first covered bond purchases will take place on 25 March.
Yesterday the Norwegian Labour and Welfare Administration (NAV) published unscheduled labour market statistics amid the recent escalation in the COVID-19 crisis. The figures showed a shocking weekly rise in the number of unemployed of 84K sending the registered unemployment rate soaring to 5.3% (nsa). Behind the figures were 45K applications for temporary unemployment benefits, but even taking this into account the figures were clearly much worse than expected by Norges Bank, see chart here. All in all this release supports the notion that the hit to the Norwegian economy will be substantial and that Norges Bank is set to provide more easing soon (our view on Norges Bank here).
Fixed income markets
The fiscal and monetary policy response from the US was taken to a new level as the Trump administration is expected to launch a USD1.2tn fiscal package to support the US economy. On top of this the Federal Reserve announced more liquidity measures as support to US companies struggling for liquidity as they will buy commercial paper from cash-strapped companies. This led to a significant jump in the long-dated US treasury and a significant bearish steepening of the Treasury curve. Furthermore, the mortgage OAS-spread tightened as this is seen as more measures to stabilise the mortgage market.
Hence, we expect a rise in core-EU yields this morning. However, the main news story from the EU was the suggestion from the German Chancellor Merkel about joint funding of the issuance in order to contain the negative impact of the coronavirus. This is the first time that we see an initiative for risk sharing among the EU countries and thus should have a significant impact on Italy and the other periphery as the cost of the coronavirus could be funded jointly rather than each country fund their own fiscal stimulus. Hence, we expect to see a narrowing of the BTPS-Bund spread from the morning.
In Denmark we are also seeing some stabilisation in the mortgage spreads after a few very volatile days. Today, we have Danish government bond auction in the 2Y and 10Y benchmarks. We expect that the demand will be mainly in the 10Y benchmark. See more here.
FX markets
NOK remains in the hands of the oil price which is easiest reflected in the highest 1M NOK-oil correlation on record. Yesterday’s continuation of negative oil news sent Brent crude below USD 30/bbl which in turn sent EUR/NOK above the 11.50 mark. To make matters worse for the battered NOK, there are now hard evidence that the Norwegian economy will be heavy hit (see scandi section) increasing the pressure on Norges Bank to cut rates further. In sum, there’s little evidence that the NOK bottom is imminent.
Continued significant gyrations in the Scandies. For the SEK it was ‘sniffing the big figures day’ yesterday with USD/SEK testing the 10.00 and EUR/SEK the 11.00 handle. At the same time implied vols have surged with 1M EUR/SEK now at 12%, up from the 5% levels where it traded just a few days ago. As we wrote in our Riksbank comment (see here) these threshold spot levels will be taken out should the sour risk sentiment continue. In our view the bold package from the Riksbank, focused on credit supply and liquidity, was a welcome and was greeted in credit markets. For the SEK it was not a game changer though. Some interpret the decision not to cut rates this time as zero being the lower bound. We see it differently and stick to our April rate cut call, and also argue this should be a damper for the SEK. In the near term. The next big leg in the SEK crosses will be determined by stock markets though and general risk sentiment.
