Still Aren’t Buying

The market continues to fear
The virus, as it’s become clear
Whatever they try
Recession is nigh
And coming worldwide late this year

But Jay and his friends keep on trying
To help us all so they’re supplying
A hundred beep cut
Which might aid somewhat
Investors, though, still aren’t buying

It is getting hard to keep up with all the policy actions being undertaken by the world’s central banks and governments as every nation tries to address the Covid-19 outbreak. By now, I am sure you are all aware that the Fed, in an unprecedented Sunday night move, cut the Fed funds rate by 100bps, back to the zero bound. But here is what else they did:

• They committed to QE4, which involves purchasing $500 billion in Treasury coupon bonds as well as $200 billion in mortgage-backed securities.
• They cut the interest rate at the discount window to 0.25% and will allow borrowings there for up to 90 days (it had been an overnight facility prior to this).
• And perhaps the most interesting thing, they cut bank reserve requirements to 0.0%, essentially allowing infinite leverage for banks to encourage them to lend.
• Finally, they reinstituted USD swap lines with other major central banks around the world to help everyone else get access to USD liquidity.

The Bank of Japan, meanwhile, pulled their monthly meeting forward to last night so they could act in concert with the rest of the world. With interest rates already negative, they did not touch those, but doubled their target for ETF and corporate bond purchases to ¥12 trillion and they introduced a new zero-rate lending program to help businesses hit by the pandemic. Kuroda-san also made clear there was more they can do if necessary.

The PBOC in a somewhat lukewarm response offered 100 billion yuan of liquidity via the medium-term lending facility at an unchanged rate of 3.15%. Given they are one of the few central banks with room to cut rates, that was somewhat of a surprise. It was also surprising given just how incredibly awful the economic data releases were last night:

Retail Sales -20.5%
Industrial Production -13.5%
Fixed Asset Investment -24.5%
Unemployment Rate 6.2%

The RBNZ cut its base rate by 0.75%, taking it down to 0.25%, and promised to maintain that rate for at least 12 months. They also indicated they would be starting QE if they needed to do anything else. (And to think, New Zealand historically had been considered a ‘high-yielder’!)

The Bank of Korea cut its base rate by 0.50%, taking it to 0.75% in an unscheduled emergency meeting. Analysts are looking for another 50bps at their regular meeting on April 9.

The RBA offered further liquidity injections via repurchase agreements (repos) extending their tenor and indicated it “stands ready” to purchase government bonds (i.e. start QE) with further announcements due Wednesday.

In addition, we saw the Philippines, Hong Kong, Turkey and Sri Lanka act last night. This is clearly a global effort, but one that has not yet gained traction amid the investment community.

Speaking of the investment community, equity markets worldwide are getting crushed, with Asia falling sharply and Europe in even worse shape, as all markets are down at least 6%. Meanwhile, US equity futures are limit down at -5.0% after Friday’s remarkable late day short-covering rally. Again, the only constant here is that volatility is extremely elevated!

Treasury yields have fallen sharply again, down 20bps as I type, but were lower earlier. Interestingly, other than Treasuries, Bunds and Gilts, the rest of the government bond markets have lost their appeal to investors. Instead, we are seeing them sold off alongside equity markets with French yields higher by 4bps, Italian yields +16bps and Greek yields +26bps. In fact, pretty much every other country is seeing yields rise today. I think part of this is the fact that as equity markets decline and margin calls come in, investors must sell the only thing that has any liquidity, and that is government bonds. This behavior could go on for a while.

And lastly, turning to the dollar, it is a mixed picture this morning. The haven currencies, JPY (+1.6%) and CHF (+0.7%) are doing what they are supposed to. The euro, too, has rallied a bit, up 0.5% in what arguably is a response to the dramatically lower US interest rate picture. But NZD and NOK are both lower by 1.5%, the former on the back of its surprise central bank actions while the krone is suffering because oil has collapsed 5.6% this morning amid the ongoing oil war. CAD and AUD, the other G10 commodity currencies are also under pressure, down 0.8% and 0.5% respectively.

Turning to the EMG space, the bright spot is Central Europe, which has seen gains in PLN, RON and BGN. But otherwise, these currencies are under pressure again, some more extreme than others. RUB is the leading decliner, -2.9%, along with oil’s decline, and MXN is also getting hammered, -2.6%. ZAR (-2.4%) and CZK (-1.8%) are the next in line, but basically all APAC currencies have suffered by at least 0.5%, and one can only imagine what will happen to LATAM when it opens. It is not likely to be pretty.

We do see some data this week, but it is not clear how important it will be. Arguably, these will be the last data points prior to the onset of the epidemic.

Today Empire Manufacturing 4.9
Tuesday Retail Sales 0.2%
  -ex autos 0.1%
  IP 0.4%
  Capacity Utilization 77.1%
  JOLT’s Job Openings 6.401M
Wednesday Housing Starts 1502K
  Building Permits 1500K
Thursday Initial Claims 219K
  Philly Fed 10.0
  Leading Indicators 0.1%
Friday Existing Home Sales 5.50M

Source: Bloomberg

At this point, the Fed has canceled their meeting this week, having acted yesterday, which means that we will be able to hear from Fed speakers as they try to massage their message. But the essence of the problem is this is not a financially driven crisis, it is a global health crisis, and all the central banks can do is adjust monetary policy. Fiscal policy adjustments as well as government actions directed at ameliorating the impacts of Covid-19 are much harder, especially in large democratic nations, and so I fear that it will be a number of weeks before things even begin to return to a semblance of normal. Only then will we learn how effective all this monetary policy action will be. In the meantime, I see further declines in equity markets and continued volatility. In fact, the only positive catalyst I could see coming up is the announcement of successful testing of a vaccine for Covid-19, and its immediate production. Alas, nobody knows when that will come.

In the meantime, while bid-ask spreads will be wider, and based on what we have seen in the CDS markets, credit spreads are wider as well, the FX market is still operating, and hedgers should be able to get most everything they need done.

Good luck
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