Markets
Yesterday’s US fiscal stimulus boost was short-lived. Losses on European and US stock markets hover around 5%. Main European indices remain above Monday’s sell-off low. The US S&P 500 trades just north of the December 2018 low (2346). Stocks and bonds are again positively correlated. Investors dump all sorts of bonds, ranging from corporates over peripherals to US/German safe haven bonds. Other assets like gold (illiquid) and Brent crude (Saudi to keep higher production in coming months) remains under selling pressure as well. We’ve seen this rush to cash before this month and hold our view that risk premiums on bonds are permanently increasing. Huge fiscal stimulus across the globe comes with a cost (credit risk premium). The very long end of the curve is obviously taking the lead. The US 30-yr yield added up to 18 bps higher at one stage. Trading circumstances remain extremely volatile though and most of this move is reversed at this stage. The German yield curve bear steepens with yields rising 7.5 bps (2-yr) to 17 bps (30-yr) with investors also expecting an end to the Schwarze Null. From a technical point of view, the German 10-yr yield approached the January high (-0.15%). 10-yr yield spread changes vs Germany widened by 10 bps for Portugal/Spain/Italy and by 18 bps for Greece. The ECB released a brief statement to deny Austrian governor Holzmann’ suggestion that the ECB is out of play. The ECB stands ready to adjust all of its measures, as appropriate, should this be needed to safeguard liquidity conditions in the banking system and to ensure the smooth transmission of its monetary policy in all jurisdictions. Later in the session, intra-EMU spreads finally declined off the intraday highs on market rumours/headlines that EU officials are discussing the activation of an EU rescue fund that could open the path to ‘big’ ECB emergency bond buying.
King dollar continues to rule the FX market. The trade-weighted greenback surpassed the 2019 high to trade at the highest level since the spring of 2017. EUR/USD dips further below 1.09 despite the higher EU yields. USD/JPY changes hands around 108 coming from 107. Sterling is the biggest loser among major FX. Cable fell to 1.18 for the first time since 1985. Apart from dollar strength, sterling lost ground on comments by BoE Bailey who vowed to do what’s needed. He did short-circuit negative policy rates. The UK currency is obviously less liquid than USD or EUR as well. The additional fiscal boost from the UK government couldn’t change the fortune for sterling. EUR/GBP surges to 0.9225 area and is near the August 2019 high (0.9325). Less liquid currencies like the scandies (NOK/SEK), the Aussie and Kiwi dollars, CEE currencies and EM FX remain in sell-off mode. They record multiyear/all-time lows against EUR and/or USD. EUR/CHF is an exception to the rule. The pair continues sliding (1.0540), against the will of the SNB who’s preventing additional CHF strength.
News Headlines
The Reserve Bank of India is ready to intervene in both (corporate) bond and the currency markets, people familiar with the matter said. India saw its corporate bond spreads soar over the past weeks. The Indian rupiah crashed against the US dollar as investors seek liquid assets. USD/INR (at 74.27) is trading near the 2018 and all-time high.
The European Securities and Markets Authority (ESMA) is facing more and more calls to ban short selling in the whole region. Doing so would be an unprecedented step for the financial markets regulator. Several individual countries such as France, Italy, Spain and Belgium already introduced stricter short selling rules and/or bans.
Poland’s government announced $52 bln in fiscal aid, roughly 9% of the country’s GDP, to help both businesses and employees withstand the coronavirus fall-out. Czech PM Babis unveiled a $40 bln fiscal package, the equivalent of 18% of GDP, and includes a.o. interest-free credit lines. Both countries’ central banks slashed rates with 50 bps during emergency policy meetings earlier this week.
