Rates: German 10-yr yield tests -0.15 resistance
Peripheral bonds rallied yesterday after the ECB’s additional €750bn QE announcement, but ended off their best intraday levels. The German 10-yr yield tested -0.15% resistance as the German government is slowly moving in the direction of loosening fiscal rules. Will we get a G7 weekend response to ease short term market nerves?
Currencies: USD rally taking a breather going into the weekend
Yesterday, the dollar ascent continued unabatedly. Even so, some individual CBs of smaller countries indicated they are ready to intervene to address decline of their currency. This morning, the dollar is coming off yesterday’s peak levels. Maybe markets are turning a more cautious on the USD as they ponder the chance of coordinated action e.g. during the weekend.
The Sunrise Headlines
- US stocks took a late tumble on Friday as more and more regions moved to enforce sweeping social distancing measures. The Dow Jones underperformed (-4.55%). Asian markets tumble, led by a plunge from Indian stocks (-10.6%).
- The Trump’s administration’s massive nearly $2tn rescue package faltered in Senate as Democrats demanded more funding for state and local efforts and hospitals, while Republicans urged quick action to prop up financial markets.
- The Belgian government reached an agreement with banks to grant deferment of payments on some corporate and mortgage loans. The government is also mobilizing a €50 bn package to guarantee new bank loans.
- EU institutions are studying a range of options to tackle the economic fallout from the coronavirus, from special credit lines to “coronabonds” which could be issued by an existing EU institution or mechanism, EU chief Gentiloni disclosed.
- The German government is to spend as much as €350bn this year to cushion the economic fallout of the corona pandemic. The government will also establish a €500bn bailout fund that will take stakes in stricken companies.
- India moved to lock down large parts of the country as it seeks to control the spread of the coronavirus. In the US, the state of Ohio announced a broad lockdown, joining New York, California, Illinois, Connecticut and New Jersey.
- Today’s economic calendar contains only secondary, outdated data. The US Financial Stability Oversight Council (FSOC) will meet today to discuss the impact of the coronavirus on market developments. Belgium taps the bond market
Currencies: USD Rally Taking A Breather Going Into The Weekend
Dollar doesn’t profit even as risk-off dominates
Stress on global markets eased temporary on Friday. Investors maybe were awaiting policy steps that could be taken at multiple levels during the weekend. However, the decline on US equity markets after a more constructive open only illustrated that investors still lacked clear view on what the next step in this crisis will be. In the FX markets, the dollar held close to the peak levels against most majors set earlier last week. At the same time there was no big leap higher. Maybe, the more intensive use of FX swap lines providing USD liquidity helped to ease stress on global FX markets. EUR/USD closed the week at 1.0688. USD/JPY ended the week just below the 111 big figure.
This morning, global markets are still in disarray. Losses on Chinese markets are more moderated compared to the likes of South Korea or Australia. India is a major under performer. The Indian rupee is again in free-fall. Other regional/smaller currencies stay in the defensive , but the likes of the Aussie dollar or the Korean won are still trading better than last week’s lows. This also applies to the yen and the euro as they even regain modest ground against the dollar this morning. EUR/USD is trading in the mid 1.07 area. USD/JPY dropped below 110.
Headlines on crisis management will continue dominate global markets and FX trading. For now, there is no reason to expect investor preference for the most liquid assets to stop anytime soon. Still the slight under performance of the dollar this morning is a bit puzzling. The US Congress not being able to pass a big stimulus package maybe weighs on the dollar. The focus on the devastating impact on the US economy and developments in the US a bit lagging to what happened in Asia and Europe might also complicate investors’ assessment on the relative performance of US assets/the dollar. USD trading, as is trading in several other markets, might become some kind of more erratic/indecisive. Even so, we see no compelling reason for markets to give up their preference for USD liquidity at this stage of the crisis. The EUR/USD 1.0775 area might mark first technical resistance.
Sterling staged a technical rebound/short squeeze at the end of last week. EUR/GBP closed the week at 0.9207. This morning, the UK currency is holding up relative well. For now, sterling apparently reached some kind of ST equilibrium against the euro. Maybe there is room for a more neutral trading pattern as markets await/look forward to a more coordinated policy response in EMU, which is currently still not in place yet.
EUR/USD holding north of 1.07 this morning. Preference for USD liquidity to remain in place?
