Markets
Markets showed a diffuse picture today. Asian indices mostly ended in positive territory despite a poor close on WS. European equities weren’t able to decouple from the late-session WS loss. Headlines on the development of the corona virus and on its economic impact also remain highly confusing. Some regions try to restart economic activity while others fear a new flaring up of the virus. Even an economic restart might prove to be a bumpy road as illustrated by a German carmaker, which indicated a production pauze due to a lack of demand. At the same time, trade tensions and potential protectionist measures between the US and China (but also elsewhere) complicate the global eco picture even further. In this context, a consistent directional trading pattern wasn’t evident. Investors also kept a close eye on the speech of Fed Chair Powell. He made an in extenso assessment of the deep economic impact of the coronavirus on the economy, with the risk of long-lasting rise in unemployment and the risk of a lack of liquidity potentially leading to corporate defaults. The Fed indicated that it is prepared to take additional policy measures , but Powell also pointed to an important role for fiscal policy as the Fed has no spending power. In a question on negative interest rates, the Fed Chair clearly indicated that he doesn’t see it as an appropriate tool for Fed policy. The Fed prefers to stay with tools like assets purchases and forward guidance which the Fed currently assesses doing their work. Short-term US yields rose slightly on Powell’s comments (2-y back up at 0.16%), but the moves remain modest. US yields vary between little changed (2-y) and -2 bp (30-y). German bunds slightly outperform, especially at longer maturities (30-y -3 bp). Despite recent political uncertainty on the role on the ECB’s Bond buying programs, auctions of Italian debt with maturities of 3, 7, 15 and 20-y met solid investors demand. Italy in total sold €9 bln across different maturities. US equites couldn’t hold on the gains indicated by the future contracts and show losses of up 0.8% (DJ).
The dollar was under modest pressure in the run-up to the speech of Fed’s Powell and as he painted quite a negative picture on the economic recovery. The USD decline halted after Powell indicated that negative policy rates are no appropriate policy tool, but the US rebound is limited and unconvincing. De trade-weighted dollar hovers in the 99.80 area. EUR/USD declined off the intraday top in the high 1.08 area, but still holds a daily gain (currently 1.0860 area). USD/JPY tries to regain the 107 level after testing below the big figure intraday. Sterling tried a cautious intraday rebound but the move has no strong less. EUR/GBP reversed most of this morning’s decline (0.8840 area). The ONS reported a monthly decline of March GDP of 5.8% resulting in a 2.0% contraction of the UK GDP in Q1. However, the biggest part of the economic downturn still as to come in Q2. EUR/GBP is still within reach of the first topside resistance in the 0.8860 area.
News Headlines
The European Commission pushed for a return to “unrestricted free movement” within Europe saying at least some of the summer tourist season could still be salvaged. The EC’s plans include requiring facemasks on airplanes and social distancing on trains. Earlier, Germany announced it aims to reopen its borders from June 15 while the Czech Republic aims at one week earlier..
The European securities watchdog (ESMA) said the pandemic poses significant risks to the CLO market as the creditworthiness of the underlying debt deteriorates rapidly. It also said it had some concerns about how credit rating agencies rate these CLOs and expects them to provide market participants with adequate and timely information on the sensitivity of CLO ratings to key economic variables.
