Tag Archives: #ECB

Overkill

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The talk in the market is still
‘Bout German high court overkill
While pundits debate
The bond program’s fate
The euro is heading downhill

Amid ongoing dreadful economic data, the top story continues to be the German Constitutional Court’s ruling on (rebuke of?) the ECB’s Public Sector Purchase Program, better known as QE. The issue that drew the court’s attention was whether the ECB’s actions to help support the Eurozone overall are eroding the sovereignty of its member states. Consider, if any of the bonds that are bought by the central banks default, it is the individual nations that will need to pay the cost out of their respective budgets. That means that the unelected officials at the ECB are making potential claims on sovereign nations’ finances, a place more rightly accorded to national legislatures. This is a serious issue, and a very valid point. (The same point has been made about Fed programs). However, despite the magnitude of the issues raised, the court gave the ECB just three months to respond, and if they are not satisfied with that response, they will bar the Bundesbank from participating in any further QE programs. And that, my friends, would be the end. The end of the euro, the end of the Eurozone, and quite possibly the end of the EU.

Remember, unlike the Fed, which actually executes its monetary policy decisions directly in the market, the ECB relies on each member nation’s central bank to enter the market and purchase the appropriate assets. So, the ECB’s balance sheet is really just a compilation of the balance sheets of all the national central banks. If the Bundesbank is prevented from implementing ECB policy on this score, given Germany’s status as the largest nation, and thus largest buyer in the program, the effectiveness of any further ECB programs would immediately be called into question, as would the legitimacy of the entire institution. This is the very definition of an existential threat to the single currency, and one that the market is now starting to consider more carefully. It is clearly the driving force behind the euro’s further decline this morning, down another 0.5% which makes 1.5% thus far in May. In fact, while we saw broad dollar weakness in April, as equity markets rallied and risk was embraced, the euro has now ceded all of those gains. And I assure you, if there is any doubt that the ECB will be able to answer the questions posed by the court, the euro will decline much further.

The euro is not the only instrument under pressure from this ruling, the entire European government bond market is falling today. Now, granted, the declines are not that sharp, but they are universal, with every member of the Eurozone seeing bond prices fall and yields tick higher. This certainly makes sense overall, as the ECB has been the buyer of (first and) last resort in government bond markets, and the idea that they may be prevented from acting in the future is a serious concern. Simply consider how much more debt all Eurozone nations are going to need to issue in order to pay for their fiscal programs. Across the entire Eurozone, forecasts now point to in excess of €1 trillion of new bonds this year, already larger than the ECB’s PEPP. And if there is a second wave of the virus, forcing a reclosing of economies with a longer period of lockdown, that number is only going to increase further. Without the ECB to absorb the bulk of that debt, yields in Eurozone debt will have much further to climb. The point is that this issue, which was initially seen as minor and technical, may actually be far more important than anything else. And while the odds are still with the ECB to continue with business as usual, the probability of a disruption is clearly non-zero.

Away from the technicalities of the German Constitutional Court, there is far less of interest in the markets overall. Equity markets are mixed, with gainers and losers in both the Asian session as well as Europe. US futures, at this time, are pointing higher, with all three indices looking toward 1% gains at the open. And the dollar is broadly, though not universally, higher.

Aside from the euro’s decline, we have also seen weakness in the pound (-0.4%) after the Construction PMI (the least impactful of the PMI measures) collapsed to a reading of 8.2, from last month’s dreadful 39.2. This merely reinforces what type of hit the UK economy is going to take. On the plus side, the yen is higher by 0.3%, seemingly on the back of position adjustments as given the other risk signals, I would not characterize today as a risk-off session.

In the EMG space, there are far more losers than gainers today, led by the Turkish lira (-1.0%) and the Russian ruble (-0.8%). The lira is under pressure after new economic projections point to a larger economic contraction this year of as much as 3.4%. This currency weakness is despite the central bank’s boosting of FX swaps in an effort to prevent a further decline. Meanwhile, despite oil’s ongoing rebound (WTI +3.6%) the ruble seems to be reacting to recent gains and feeling some technical selling pressure. Elsewhere in the space, we have seen losses on the order of 0.3%-0.5% across most APAC and CE4 currencies. The one exception to the rule is KRW, which rallied 0.6% overnight as expectations grow that South Korea is going to be able to reopen the bulk of its economy soon. One other positive there is that demand for USD loans (via Fed swap lines) has diminished so much the BOK is stopping the auctions for now. That is a clear indication that financial stress in the nation has fallen.

On the data front, this morning brings the ADP Employment number (exp -21.0M), which will be the latest hint regarding Friday’s payroll data. Clearly, a month of huge Initial Claims data will have taken its toll. Yesterday’s Fed speakers didn’t tell us very much new, but merely highlighted the fact that each member has their own view of how things may evolve and none of them are confident in those views. Uncertainty remains the word of the day.

For now, the narratives of the past several weeks don’t seem to have quite the strength that they did, and I would say that the focus is on the process of economies reopening. While that is very good news, the concern lies after they have reopened, and the carnage becomes clearer. Just how many jobs have been permanently erased because of the changes that are coming to our world in the wake of Covid-19? It is that feature, as well as the nature of economic activity afterwards, that will drive the long-term outcome, and as of now, no clear path is in sight. The opportunity for further market dislocations remains quite high, and hedgers need to maintain their programs, especially during these times.

Good luck and stay safe
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To Aid and Abet

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The treaties that built the EU
Explain what each nation should do
The German high court
Ruled that to comport
A challenge was in their purview

But politics trumps all the laws
And so Lagarde won’t even pause
In buying up debt
To aid and abet
The PIGS for a much greater cause

Arguably, the biggest story overnight was just not that big. The German Constitutional Court (GCC) ruled that the Bundesbank was wrong not to challenge the implementation of the first QE program in 2015 on the basis that the Asset Purchase Program (APP) was a form of monetary support explicitly prohibited. Back when the euro first came into existence, Germany’s biggest fear was that the ECB would finance profligate governments and that the Germans would ultimately have to pay the bill. In fact, this remains their biggest fear. While technically, QE is not actually debt monetization, that is only true if central banks allow their balance sheets to shrink back to pre-QE sizes. However, what we have learned since the GFC in 2008-09 is that central bank balance sheets are permanently larger, thus those emergency purchases of government debt now form an integral part of the ECB structure. In other words, that debt has effectively been monetized. The essence of this ruling is that the German government should have challenged QE from the start, as it is an explicit breach of the rules preventing the ECB from financing governments.

The funny thing is, while the court ruled in this manner, it is not clear to me what the outcome will be. At this point, it is very clear that the ECB is not going to be changing their programs, either APP or PEPP, and so no remedy is obvious. Arguably, the biggest risk in the ruling is that the GCC will have issued a binding opinion that will essentially be ignored, thus diminishing the power of their future rulings. Undoubtedly, there will be some comments within the three-month timeline laid out by the GCC, but there will be no effective changes to ECB policy. In other words, like every other central bank, the ECB has found themselves officially above the law.

While the actuality of the story may not have much impact on ECB activities, the FX market did respond by selling the euro. This morning it is lower by 0.5%, which takes its decline this month to 1.2% and earns it the crown, currently, of worst performing G10 currency. The thought process seems to be that there is nothing to stop the ECB in its efforts to debase the euro, so the path of least resistance remains lower.

Beyond the GCC story though, there is little new in the way of news. Equity markets have a better tone on the strength of oil’s continuing rebound, up nearly 10% this morning as I type, as production cuts begin to take hold, as well as, I would contend, the GCC ruling. In essence, despite numerous claims that central banks have overstepped their bounds, it is quite clear that nobody can stop them from buying up an ever larger group of financial assets and supporting markets. So, yesterday’s late day US rally led to a constructive tone overnight (Hang Seng +1.1%, Australia +1.6%, China and Japan are both closed for holidays) which has been extended through the European session (both DAX and CAC +1.8%, FTSE 100 +1.4%) with US futures pointing higher as well.

In the government bond market, Treasury yields are 3.5bps higher, but the real story seems to be in Europe. Bund yields have also rallied a bit, 2bps, but that can easily be attributed to the risk-on mentality that is permeating the market this morning. However, I would have expected Italian and Spanish yields to have fallen on the ruling. After all, they have become risk assets, not havens, and yet both have seen price declines of note with Italian yields higher by 10bps and Spanish (and Portuguese) higher by 5bps. Once again, we see the equity and bond markets looking at the same news in very different lights.

As to the FX market, it is a mixed picture this morning. While the Swiss franc is tracking the euro lower, also down by 0.5% this morning, we are seeing NOK (+0.4%) and CAD (+0.2%) seeming to benefit from the oil price rally. Aussie, too, is in better shape this morning, up 0.2% on the broad risk-on appetite and news that more countries are trying to reopen after their Covid inspired shutdowns.

The EMG space is similarly mixed with ZAR (+1.25%), RUB (+1.0%) and MXN (+0.6%) the leading gainers. While the ruble’s support is obviously oil, ZAR has benefitted from the overall risk appetite. This morning, the South African government issued ZAR 4.5 billion of bonds in three maturities and received bid-to-cover ratios of 6.8x on average. With yields there still so much higher than elsewhere (>8.0%), investors are willing to take the risk despite the recent credit rating downgrade. Finally, the peso is clearly benefitting from the oil price as well as the broad risk-on movement. The peso remains remarkably volatile these days, having gained and lost upwards of 5% several times in the past month, often seeing daily ranges of more than 3%. Today simply happens to be a plus day.

On the downside, the damage is far less severe with CE4 currencies all down around the same 0.5% as the euro. When there are no specific stories, those currencies tend to track the euro pretty tightly. As to the rest of APAC, there were very modest gains to be seen, but nothing of consequence.

On the data front, yesterday’s Factory Orders data was even worse than expected at -10.3% but did not have much impact. This morning brings the Trade Balance (exp -$44.2B) as well as ISM Non-Manufacturing (37.9). At this point, everybody knows that the data is going to look awful compared to historical releases, so it appears that bad numbers have lost their shock value. At least that is likely to be true until the payroll data later this week. The RBA left rates unchanged last night, as expected, although they have reduced the pace of QE according to their read of what is necessary to keep markets functioning well there. And finally, we will hear from three Fed speakers today, Evans, Bostic and Bullard, but again, it seems hard to believe they will say anything really new.

Overall, risk appetite has grown a bit overnight, but for the dollar, it is not clear to me that it has a short-term direction. Choppiness until the next key piece of news seems the most likely outcome. Let’s see how things behave come Friday.

Good luck and stay safe
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A Bit Out of Sorts

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The ECB stepped to the plate
Effectively cutting the rate
At which it will lend
To help countries spend
As well, to help prices inflate

But last night some earnings reports
Put traders a bit out of sorts
And too, from Down Under
It’s really no wonder
The data inspired some shorts

With many markets globally closed today for the May Day holiday, one would have expected fairly limited price action overall. One would have been wrong. In fact, despite the best efforts of the ECB yesterday to demonstrate further support for the European economies, it turns out that disappointing data has suddenly been recognized. This data story started last evening with key Tech earnings reports from two of the FAANG stocks, both disappointing on the profit side and calling into question the ability of even these companies to be able to withstand the remarkable demand shrinkage caused by Covid-19.

Then, though most of Asia was closed for the holiday, Australia (Manufacturing Index) and New Zealand (Consumer Confidence) both reported weaker than expected economic data. Suddenly, it seems that data was an important issue for markets, a change of recent heart. And there is one more thing to remember, the calendar turned the page. The calendar matters because, especially given the remarkable price action in April, there was a significant amount of month-end rebalancing in institutional portfolios. Remember, we saw a sharp rally in stocks, so it should be no surprise that they were sold off in order for portfolios to get back to desired asset allocations.

Taking it all together resulted in some serious equity market declines in the few markets open overnight, with the Nikkei (-2.85%) and Australia’s ASX 200 (-5.0%) putting in truly awful performances. Meanwhile, in Europe, only the FTSE 100 is trading today, and it is lower by 2.1%. US futures are following suit, currently down around 2.0% across the board.

So, what of the ECB’s actions? Well, they effectively cut interest rates by lowering the rate at which TLTRO funds are borrowed by 0.25%, to -0.25%. That means that Eurozone banks which lend new money to companies can earn to fund themselves. A pretty sweet deal if they charge a positive rate on the loans. In addition, they created yet another loan program, the PELTRO, which has even lower rates, as low as -1.0% funding costs for banks lending under this criterion. Of course, the problem remains that while many companies may borrow in order to try to get through the current ceasing of activity, future growth opportunities will simply be further hindered by the additional debt on corporate balance sheets. Two other things of note from the ECB are that they did not increase their QE programs as there remains considerable concern that the German Constitutional Court may rule next week that QE is illegal, essentially funding governments throughout the Eurozone, and that will call into question everything they have done. The second was the dire forecast from Madame Lagarde that Eurozone growth could see GDP shrink 12% in 2020, which if you consider yesterday’s Q1 data (-3.8% Q/Q) implies a modest rebound by year end.

Turning to the FX markets, it can be no surprise that both AUD (-1.0%) and NZD (-0.8%) are the worst performing currencies in the G10 space. Not only did both report lousy data, but both (AUD +17%, NZD +13%) have been rallying pretty steadily since their nadir on March 19. Thus, if the paradigm is changing back to the future is not as bright, I would look for both these currencies to give up much of last month’s rally. Meanwhile, the oil proxies, CAD (-0.6%) and NOK (-0.7%) are both suffering from oil’s modest declines this morning, with WTI ceding about 2.0% of its recent spectacular gains. After all, even ignoring the odd dip into negative territory two weeks ago, oil has rallied more than 200% since that fateful day, based on the June WTI contract. On the plus side, we see JPY (+0.35%) on what appears to be a modest risk-off trade, leading the way higher, with the rest of the bloc +/- 0.2% and lacking any new information.

EMG currencies have been largely spared movement overnight as the APAC bloc was closed for the holiday although CNH has managed to fall 0.6% in the absence of a domestic market. The three main deliverable EMG currencies, MXN (-1.4%), ZAR (-1.4%) and TRY (-0.7%) have a decidedly risk-off tone to their price action, with the peso being truly impressive. Since Tuesday, we have seen MXN first rally 5.0% then decline 4.1% from its peak. Net it is stronger, but the current trend seems to point to further weakness. Again, if the risk appetite from April begins to wane further, these currencies have the opportunity to fall significantly.

On the data front, this morning brings Construction Spending (exp -3.5%) and ISM Manufacturing (36.0) with the Prices Paid (33.0) and New Orders (30.0) indices looking equally dire. Yesterday we learned that Personal Income fell sharply, and Personal Spending fell even more sharply, a record-breaking 7.5% decline. Initial Claims data was a touch weaker than the median forecast at 3.84M with Continuing Claims (which lag the Initial claims data by a week) not rising quite as much as expected, to ‘just’ 18.0M.

Ultimately, the history of Covid-19’s impact will be written as the most extraordinary destruction of demand in history. The US (and global) economy had evolved from a manufacturing base a century ago, to a service-based economy par excellence. Nobody considered what shelter-in-place and social distancing would do to that construct. It is becoming increasingly clear that the answer to that is those restrictions will cause extreme economic damage that is likely to take several years to recoup. Alas, we are not done with this disease, and the restrictions will continue to wreak havoc on the global economy, and asset values, for a while yet. We have not seen the last of risk-off, nor the last of the dollar’s strength.

Good luck, good weekend and stay safe
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Riven By Obstinacy

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Said Jay, in this challenging time
Our toolkit is truly sublime
It is our desire
More bonds to acquire
And alter the Fed’s paradigm

In contrast, the poor ECB
Is riven by obstinacy
Of Germans and Dutch
Who both won’t do much
To help save Spain or Italy

Is anybody else confused by the current market activity? Every day reveals yet another data point in the economic devastation wrought by government efforts to control the spread of Covid-19, and every day sees equity prices rally further as though the future is bright. In fairness, the future is bright, just not the immediate future. Equity markets have traditionally been described as looking forward between six months and one year. Based on anything I can see; it is going to take far more than one year to get global economies back to any semblance of what they were like prior to the spread of the virus. And yet, the S&P is only down 9% this year and less than 13% from its all-time highs set in mid-February. As has been said elsewhere, the economy is more than 13% screwed up!

Chairman Powell seems to have a pretty good understanding that this is going to be a long, slow road to recovery, especially given that we have not yet taken our first steps in that direction. This was evidenced by the following comment in the FOMC Statement, “The ongoing public health crisis will weigh heavily on economic activity, employment and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.” (My emphasis.) And yet, we continue to see equity investors scrambling to buy stocks amid a great wave of FOMO. History has shown that bear markets do not end in one month’s time and I see no reason to believe that this time will be different. I don’t envy Powell or the Fed the tasks they have ahead of them.

So, let’s look at some of the early data as to just how devastating the response to Covid-19 has been around the world. By now, you are all aware that US GDP fell at a 4.8% annualized rate in Q1, its sharpest decline since Q4 2008, the beginning of the GFC. But in truth, compared to the European data released this morning, that was a fantastic performance. French Q1 GDP fell 5.8%, which if annualized like the US reports the data, was -21.0%. Spanish Q1 GDP was -5.2% (-19.0% annualized), while Italy seemed to have the best performance of the lot, falling only 4.8% (-17% annualized) in Q1. German data is not released until the middle of May, but the Eurozone, as a whole, printed at -3.8% Q1 GDP. Meanwhile, German Unemployment spiked by 373K, far more than forecast and the highest print in the history of the series back to 1990. While these were the highlights (lowlights?), the story is uniformly awful throughout the continent.

With this in mind, the ECB meets today and is trying to determine what to do. Last month they created the PEPP, a €750 billion QE program, to support the Eurozone economy by keeping member interest rates in check. But that is not nearly large enough. After all, the Fed and BOJ are at unlimited QE while the BOE has explicitly agreed to monetize £200 billion of debt. In contrast, the ECB’s actions have been wholly unsatisfactory. Perhaps the best news for Madame Lagarde is the German employment report, as Herr Weidmann and Frau Merkel may finally recognize that the situation is really much worse than they expected and that more needs to be done to support the economy. Remember, too, that Germany has been the euro’s biggest beneficiary by virtue of the currency clearly being weaker than the Deutschemark would have been on its own and giving their export industries an important boost. (I am not the first to notice that the euro’s demise could well come from Germany, Austria and the Netherlands deciding to exit in order to shed all responsibility for the fiscal problems of the PIGS. But that is a discussion for another day.)

The consensus is that the ECB will not make any changes today, despite a desperate need to do more. One of the things holding them back is an expected ruling by the German Constitutional Court regarding the legality of the ECB’s QE programs. This has been a bone of contention since Signor Draghi rammed them through in 2012, and it is not something the Germans have ever forgiven. With debt mutualization off the table as the Teutonic trio won’t even consider it, QE is all they have left. Arguably, the ECB should increase the PEPP by €1 trillion or more in order to have a truly positive impact. But thus far, Madame Lagarde has not proven up to the task of forcing convincing her colleagues of the necessity of bold action. We shall see what today brings.

Leading up to the ECB announcement and the ensuing press briefing, Asian equity markets followed yesterday’s US rally higher, although early gains from Europe have faded since the release of the sobering GDP data. US futures have also given back early gains and remain marginally higher at best. Bond markets are generally edging higher, with yields across the board (save Italy) sliding a few bps, and oil prices continue their recent rebound, although despite some impressive percentage moves lately, WTI is trading only at $17.60/bbl, still miles from where it was at the beginning of March.

The dollar, in the meantime, remains under pressure overall with most G10 counterparts somewhat firmer this morning. The leaders are NOK (+0.45%) on the strength of oil’s rally, and SEK (+0.4%) which seems to simply be continuing its recent rebound from the dog days of March. Both Aussie and Kiwi are modestly softer this morning, but both of those have put in stellar performances the past few days, so this, too, looks like position adjustments.

In the EMG bloc, IDR was the overnight star, rallying 2.8% alongside a powerful equity rally there, as investors who had been quick to dump their holdings are back to hunting for yield and appreciation opportunities. As markets worldwide continue to demonstrate a willingness to look past the virus’s impact, there are many emerging markets that could well see strength in both their currencies and stock markets. The next best performers were MYR (+1.0%) and INR (+0.75%), both of which also responded to a more robust risk appetite. As LATAM has not yet opened, a quick look at yesterday’s price action shows BRL having continued its impressive rebound, higher by 3.0%, but strength too in CLP (+2.9%), COP (+1.2%) and MXN (2.5%).

We get more US data this morning, led by Initial Claims (exp 3.5M), Continuing Claims (19.476M), Personal Income (-1.5%), Personal Spending (-5.0%) and Core PCE (1.6%) all at 8:30. Then, at 9:45 Chicago PMI (37.7) is due to print. As can be seen, there is no sign that things are doing anything but descending yet. I think Chairman Powell is correct, and there is still a long way to go before things get better. While holding risk seems comfortable today, look for this to turn around in the next few weeks.

Good luck and stay safe
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Infinite Buying

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Is infinite buying
Kuroda-san’s new mantra
If so, will it help?

An interesting lesson was learned, for those paying attention, yesterday after a headline hit the tape about the BOJ. The headline, BOJ Considering Unlimited JGB Purchases, had an immediate impact on the yen’s value, driving it lower by 0.7% in minutes. After all, logic dictates that a central bank that will buy all the government debt available will drive rates, no matter where they are, even lower, and that the currency would suffer on the back of the news. But, as is often the case, upon further reflection, the market realized that there was much less here than met the eye, and the yen recouped all those losses by early afternoon. In fact, over the past two sessions, the yen is essentially unchanged overall.

But why, you may ask, would that headline have been misleading. The key is to recognize that the BOJ’s current policy describes their QQE (Qualitative and Quantitative Easing) as targeting ¥80 trillion per year, equivalent in today’s market to approximately $740 billion. But they haven’t come close to achieving that target since 2017, actually only purchasing about ¥15 trillion last year. That’s a pretty big miss, but a year after they created that target, they began Yield-Curve Control (YCC), which states that 10-year JGB’s will be kept at around a 0.0% yield, +/-0.2%. Now, given that the BOJ already owns nearly 50% of all JGB’s outstanding, there is very little actual trading ongoing in the JGB market, so it doesn’t really move very much. The point is, the BOJ doesn’t need to buy many JGB’s to keep yields around 0.0%. However, they have been concerned over the optics of reducing that ¥80 trillion target, as reducing it might seem a signal that the BOJ was tightening policy. But now, in the wake of the Fed’s announcement that they will be executing unlimited QE, the BOJ has the perfect answer. They can get rid of a target that no longer means anything, while seeming to expand their program. At the same time, when pressed, they will point to their successful YCC and claim they are purchasing everything necessary to keep rates low. And in fairness, they will be right.

Next week it’s the central bank three
Who meet and they’ll try to agree
On proper next steps
(Increasing the PEPP?)
And printing cash like it was free

This was merely a prelude to what the next several days are going to hold, anticipation of the next central bank actions as the three major central banks, BOJ, Fed and ECB, all meet next week. At this point, we have already seen all the excitement regarding the BOJ, and as to the Fed, while they may well announce more details on their efforts to get funds flowing to SME’s, they are already at unlimited QE (and they are active, buying $75 billion/day) and so it seems unlikely that there will be anything else new to be learned.

The ECB, however, is the place where all the action is going to be. Remember, Madame Lagarde was a little slow off the mark, when back in March she stated that the ECB’s job was not to worry about spreads in the government bond market. Granted, within two weeks, after the market crushed Italian BTP’s and called into question Italy’s ability to fund its Covid-19 response, she realized that was, in fact, her only role. And so subsequently we got a €750 billion PEPP program that included Greek debt for the first time. But clearly, based on the recent PMI data, as well as things like this morning’s Ifo Expectations Survey (69.4 vs. exp 75.0), more is needed. So, speculation is now rampant that PEPP will be increased by €250 billion, and that the Capital Key will be explicitly scrapped. The latter is important because that is the driver of which nation’s debt they purchase and is based on the relative size of each economy. But the main problem is Italy, and so you can be sure that the ECB is going to wind up with a lot more Italian debt than would be allowed under the old rules.

Turning back to this week, though, we still have a whole day to traverse before the weekend arrives. Overall, markets are beginning to quiet down, with actual volatility a bit softer than we had seen recently. For example, though equity markets in Europe are lower, the declines are between 0.7% (FTSE 100) and 1.1% (Spain’s IBEX), with the CAC and DAX in between. If you recall, we were seeing daily movement on the order of 2%-5% not that long ago. The same was true overnight, with the Nikkei (-0.9%), Hang Seng (-0.6%) and Shanghai (-1.1%) all softer but by less dramatic amounts. As to US futures, while they were negative earlier, they are actually currently higher by about 0.5%, although we have a long way to go before the opening.

Bond markets are uninspiring, with Treasuries basically unchanged. European markets are a bit firmer (yields lower) across the board as investors try to anticipate the mooted increase in PEPP. And JGB’s are yielding -0.026%, right where the BOJ wants them.

The dollar this morning is now ever so slightly softer, with CAD actually the leading gainer up 0.2%, while the rest of the G10 is +/-0.1%. The Ifo data was the only release of note, although we have seen oil prices rebound slightly, currently higher by about 1.0% helping both CAD and NOK. In the EMG bloc, the story is a bit more mixed, although gainers have had a better day than losers. By that I mean, CZK (+1.35%), HUF (+1.1%) and RUB (+1.0%) have seen stronger gains than the worst performers (INR and KRW both -0.5%). As always, there are idiosyncratic drivers, with CZK seeming to benefit from word that lockdowns are about to ease, while HUF is gaining on the imminent beginning of QE purchases by the central bank. As to RUB, the combination of oil’s continuing rally off its worst levels earlier this week, and the Bank of Russia’s 50bp rate cut, to 5.50%, has investors looking for better times ahead. Ironically, that stronger oil seems to be weighing on the rupee, while the won fell as foreign equity selling dominated the market narrative.

Yesterday’s Claims data was pretty much as expected, granted that was 4.4M, still horrific, but the market absorbed the news easily. This morning brings Durable Goods (exp -12.0%, -6.5% ex transport) and then at 10:00 Michigan Sentiment (68.0). Not surprisingly, expectations are for some of the worst readings in history, but the way the market has been behaving, I think the risk is actually for a less negative data print and a sharp risk rally. Eventually, unless there really is a V-shaped recovery, I do see risk being shed, but it doesn’t seem like today is the day to get started.

Good luck, good weekend and stay safe
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A Huge Threat

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In Europe officials now fret
‘bout dealing with Italy’s debt
If it gets downgraded
It could be blockaded
From PEPP, which would be a huge threat

At home, both the Senate and House
Agreed that it’s time to espouse
More spending is needed
And so, they proceeded
To spend half a trill, thereabouts

While oil prices are still getting press (and still under pressure), the return to positive prices has quickly turned that story into one about supply and demand, and the knock-on economic impacts of lower oil prices, rather than the extraordinary commentary on the meaning of negative prices for a commodity. In other words, it’s just not so exciting any more. Instead, today has seen markets turn their collective attention back toward government and central bank activities with investors trying to determine the next place to take advantage of all the ongoing financial largesse.

Starting in Europe, this evening the ECB will be having a video conference to discuss its next steps. Topic number one is what to do about Italian, and to a lesser extent, the rest of Southern Europe’s debt. Remember, the ECB is precluded from financing government spending by its charter, and the Teutonic trio watch that issue like hawks. So, news from Rome this morning that highlighted PM Conte’s promise to double the stimulus spending to €55 billion in order to better support the economy is at odds with that promise.

The problem is, that much spending will take the budget deficit above 10% of GDP and drive the debt/GDP ratio above 155%. While the latter will still simply be the third highest ratio in the world (Japan and Greece have nothing to fear yet), both the budget and debt numbers are far higher than currently allowed under the Stability and Growth Pact as defined by the EU. (For good order’s sake, the EU demands its members to maintain budget deficits below 3% of GDP and a debt/GDP ratio of 60% or lower).

A potentially larger problem is that Italy’s sovereign debt is currently rated at BBB with a negative outlook, just two notches above junk. Italian interest rates have been rising as BTP’s are no longer seen as a haven, but rather a pure risk trade. Combining all this together puts the ECB in a very tough position. If Italian debt is downgraded to junk, the ECB charter would preclude it from purchasing Italian debt. But if that were the case, you could pretty much bank on a collapse in the Italian bond market, followed by a collapse in the Italian economy, and a very real risk that Italy exits the euro, likely collapsing that as well. Clearly, the ECB wants to prevent that sequence of events. Thus, to successfully sail between the Scylla of financing government spending and the Charybdis of a euro collapse, the ECB is very likely to revise their collateral rules such that sub-investment grade debt is acceptable to purchase. And they will be buying the long-dated bonds which they will hold to maturity, thus effectively funding Italy but being able to technically tell the Germans they are not. It is an unenviable position for Madame Lagarde, but the alternatives are worse. Once again, if you wonder about the euro’s long-term viability, these are the questions that need to be answered.

However, despite the latest drama on the rates side, the market seems to be focusing on the positive stories today, namely the decisions by a number of European governments to gradually reduce the ongoing covid-inspired restrictions on their citizens. Throughout Europe, small shops are gradually being allowed to reopen and there have been discussions of schools reopening as well. The infection data appears to have stabilized overall, with many countries reporting a downtick in the number of new infections. Governments worldwide have the unenviable task of balancing the risk of further damage to their economies vs. the risk of another increase in the spread of the disease. At this time, it seems clear that there is a broad-based move toward getting on with life. And that’s a good thing!

In the meantime, this morning, the House is set to approve the Senate bill to extend further stimulus in the US, this time with a $480 billion price tag. The bulk of this will go to extending the Paycheck Protection Program, but there are various other goodies to support farms and hospitals. As well, the discussion about reopening the US economy continues apace, with the latest updates seeming to show that about half the states, mostly in the Midwest and mountain states, are going to be returning to a more normal footing, as they have been the least impacted. Even parts of western New York are now being considered for a removal of restrictions, given the demographic there is far closer to Wyoming than Manhattan.

Put it all together, and the bulls get to define the narrative today, with a better future ahead and more government spending to support things. It should be no surprise that equity markets are modestly higher this morning, with European bourses up by 1% or so, and US futures higher by a similar amount. Treasuries have seen some supply, with the yield on the 10-year rising 2bps, and the dollar is softer vs. almost all other currencies.

In the G10 bloc, only NOK is weaker today, and by just 0.1% as oil prices continue to slide, but even CAD, also closely linked to oil, is higher today, up 0.5%. Aussie is the biggest winner today, higher by 1.0% after a short-covering spree emerged in the wake of better than expected Retail Sales data. But the dollar’s weakness is broad-based today.

EMG currencies are also faring well today with ZAR (+1.15%) leading the way on the back of a $26 billion stimulus package, and RUB (+0.75%) following up as traders begin to believe the currency markets have oversold the ruble. MXN (+0.55%) is gaining on the same thesis, and, in fact, most of the space is higher due to this more positive feeling in the markets. The one outlier here is KRW (-0.2%) which is coming under pressure as a second wave of Covid infections makes its way through the country.

On the data front this morning, there is nothing of note to be released in the US. Yesterday saw Existing Home Sales fall slightly less than expected, to 5.27M, but just slightly. All eyes are on tomorrow’s claims data, as well as the PMI’s. The only data from Europe showed that UK inflation remains quiescent (and is likely to fall further) while Italian industry continues to shrink with Industrial Orders -2.6% in February, ahead of the worst of the outbreak.

Risk has a better tone this morning, but I fear it has the ability to be a fleeting break. Markets have shown they still like new stimulus, but at some point, questioning the ability to pay for it all is going to overwhelm the short-term benefits of receiving it. Today doesn’t seem like that day, but I assure you it is getting closer.

Good luck and stay safe
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Set For a Rout

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In case you still had any doubt
That growth has encountered a drought
The readings this morning
Gave adequate warning
That markets are set for a rout

You may all remember the Chinese PMI data from last month (although granted, that seems like a year ago) when the official statistic printed at 35.7, the lowest in the history of the series. Well, it was the rest of the world’s turn this month to see those shockingly low numbers as IHS Markit released the results of their surveys for March. Remember, they ask a simple question; ‘are things better, the same or worse than last month?’ Given the increasing spread of Covid-19 and the rolling shut-downs across most of Europe and the US in March, it can be no surprise that this morning’s data was awful, albeit not as awful as China’s was in February. In fact, the range of outcomes in the Eurozone was from Italy’s record low of 40.3 to the Netherlands actually printing at 50.5, still technically in expansion phase. The Eurozone overall index was at 44.5, just a touch above the lows reached during the European bond crisis in 2012. You remember that, when Signor Draghi promised to do “whatever it takes” to save the euro. The difference this time is that was a self-inflicted wound, this problem is beyond the ECB’s control.

The current situation highlights one of the fundamental problems with the construction of the Eurozone, a lack of common fiscal policy. While this has been mentioned many times before, it is truly coming home to roost now. In essence, with no common fiscal policy, each of the 19 countries share a currency, but make up their own budgets. Now there are rules about the allowed levels of budget deficits as well as debt/GDP ratios, but the reality is that no country has really changed their ways since the Union’s inception. And that means that Germany, Austria and the Netherlands remain far more frugal than Italy, Spain, Portugal and Greece. And the people of Germany are just not interested in paying for the excesses of Italian or Spanish activities, as long as they have a choice.

This is where the ECB can make a big difference, and perhaps why Madame Lagarde, as a politician not banker, turns out to have been an inspired choice for the President’s role. Prior to the current crisis, the ECB made every effort to emulate the Bundesbank, and was adamant about preventing the monetization of national debt. But in the current situation, with Covid-19 not seeming to respect the German’s inherent frugality, every nation is rolling out massive spending packages. And the ECB has pledged to buy up as much of the issued debt as they deem necessary, regardless of previous rules about capital keys and funding. Thus, ironically, this may be what ultimately completes the integration of Europe. Either that or initiates the disintegration of the euro. Right now, it’s not clear, although the euro’s inability to rally, despite a clear reduction in USD funding pressures, perhaps indicates a modestly greater likelihood of the latter rather than the former. In the end, national responses to Covid-19 continue to truly hinder economic activity and there seems to be no immediate end in sight.

With that as our preamble, a look at markets as the new quarter dawns shows that things have not gotten any better than Q1, at least not in the equity markets. After a quarter where the S&P 500 fell 20.0%, and European indices all fell between 25% and 30%, this morning sees equity markets under continued pressure. Asia mostly suffered (Nikkei -4.5%, Hang Seng -2.2%) although Australian stocks had a powerful rally (+3.6%) on the strength of an RBA announcement of A$3 billion of QE (it’s first foray there). Europe, meanwhile, has seen no benefits with every market down at least 1.75% (Italy) with the CAC (-4.0%) and DAX (-3.6%) the worst performers on the Continent. Not to be left out, the FTSE 100 has fallen 3.8% despite UK PMI data printing at a better than expected 47.8. But this is a risk-off session, so a modestly better than expected data print is not enough to turn the tide.

Bond markets are true to form this morning with Treasury yields down nearly 7bps, Bund yields down 3bps and Gilt yields lower by 6bps, while both Italian (+5bps) and Greek (+9bps) yields are rising. Bond investors have clearly taken to pricing the latter two akin to equities rather than the more traditional haven idea behind government bonds. And a quick spin through the two most followed commodities shows gold rising 0.8% while oil is split between a 3.5% decline in Brent despite a 0.5% rally in WTI.

And finally, in the FX world, the dollar continues to be the biggest winner, although we have an outlier in Norway, where the krone is up by 0.8% this morning, despite the weakness in Brent crude and the very weak PMI data. Quite frankly, looking at the chart, it appears that the Norgesbank has been in once again supporting the currency, which despite today’s gains, has fallen by nearly 9% in the past month. Otherwise, in the G10 space, CAD is the worst performer, down 1.4%, followed closely by AUD (-1.0%) as commodity prices generally remain under pressure. In fact, despite its 0.25% decline vs. the dollar, the pound is actually having a pretty good session.

In EMG markets, it is HUF (-2.5%) and MXN (-2.1%) which are the leading decliners with the former suffering on projected additional stimulus reducing the rate structure there, while the peso continues to suffer from weak oil prices and the US slowdown. But really, the entire space is lower as well, with APAC and EMEA currencies all down on the day and LATAM set to slide on the opening.

On the data front this morning, we see ADP Employment (exp -150K), which will be a very interesting harbinger of Friday’s payroll data, as well as ISM Manufacturing (48.0) and Prices Paid (44.5). We already saw the big hit in Initial Claims last week, and tomorrow’s is set to grow more, so today is where we start to see just how big the impact on the US economy Covid-19 is going to have. I fear, things will get much worse before they turn, and an annualized decline of as much as 10% in Q1 GDP is possible in my view. But despite that, there is no indication that the dollar is going to be sold in any substantial fashion in the near term. Too many people and institutions need dollars, and even with all the Fed’s largesse, the demand has not been sated.

Volatility will remain with us for a while yet, so keep that in mind as you look for hedging opportunities. Remember, volatility can work in your favor as well, especially if you leave orders.

Good luck and stay safe
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Outrageous

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The ECB’s fin’lly decided
That limits were badly misguided
So, starting today
All bonds are in play
To purchase, Lagarde has confided

As well, in the Senate, at last
The stimulus bill has been passed
Amidst all its pages
The Fed got outrageous
New powers, and hawks were aghast

Recent price action in risk assets demonstrated the classic, ‘buy the rumor, sell the news’ concept as equity market activity in the past two sessions had been strongly positive on the back of the anticipated passage of a huge stimulus bill in the US. And last night, the Senate finally got over their procedural bickering and hurdles and did just that. As such, it should be no great surprise that risk assets are under pressure today, with only much less positive news on the horizon. Instead, we can now look forward to death tolls and bickering about government responses to the quickly evolving crisis. If that’s not a reason to sell stocks, I don’t know what is!

But taking a break from descriptions of market activity, I think it is worthwhile to discuss two other features of the total government response to this crisis. And remember, once government powers are enacted, it is extremely difficult to remove them.

The first is from the US stimulus bill, where there is a $500 billion portion of the bill that is earmarked for support of the business community. $75 billion is to go to shore up airlines and the aerospace infrastructure, but the other $425 billion is added to the Treasury’s reserve fund which they can use to backstop, at a 10:1 leverage ratio, Fed lending. In other words, all of the programs about which we have been hearing, including the CP backstop, the primary dealer backstop, and discussion of purchases of municipal and corporate bonds as well as even equities, will now have the funding in place to the tune of $4.25 trillion. This means that we can expect the Fed balance sheet to balloon toward at least $9 trillion before long, perhaps as quickly as the end of the year. Interestingly, just last year we consistently heard from mainstream economists as well as Chairman Powell and Secretary Mnuchin, how Modern Monetary Theory (MMT) was a crock and a mistake to consider. And yet, here we are at a point where it is now the best option available and about to effectively be enshrined in law. It seems this crisis will indeed be quite transformational with the death of the Austrian School of economics complete, and the new math of MMT at the forefront of the dismal science.

Meanwhile, Madame Lagarde could not tolerate for Europe to be left behind in this monetary expansion and so the ECB scrapped their own eligibility rules regarding purchases of assets to help support the Eurozone member economies. This means that the capital key, the guideline the ECB used to make sure they didn’t favor one nation over another, but rather executed their previous QE on a proportional basis relative to the size of each economy, is dead. This morning the ECB announced that they can buy whatever they please and they will do so in size, at least €750 billion, for the rest of this year and beyond if they deem it necessary. This goes hand in hand with the recent German repudiation of their fiscal prudence, as no measure is deemed unreasonable in an effort to fight Covid-19. In addition to this, the OMT program (Outright Monetary Transactions) which was created by Signor Draghi in the wake of the Eurozone bond crisis in 2012 but never utilized, may have a new lease on life. The problem had been that in order for a country (Italy) to avail themselves of the ECB hoovering up their debt, the country needed to sign up for specific programs aimed at addressing underlying structural problems in said country. But it seems that wrinkle is about to be ironed out as well, and that OMT will finally be utilized, most likely for Italian bonds.

While neither the Fed nor ECB will be purchasing bonds in the primary market, you can be sure that is not even remotely a hindrance. In fact, buying through the secondary market ensures that the bank intermediaries make a profit as well, another little considered, but important benefit of these programs.

The upshot is that when this crisis passes, and it will do so at some point, governments and central banks will have even more impact and control on all decisions made, whether business or personal. Remember what we learned from Milton Friedman, “nothing is so permanent as a temporary government program.”

Now back to market behavior today. It is certainly fair to describe the session as a risk-off day, with equity markets have been under pressure since the beginning of trading. Asia was lower (Nikkei -4.5%, Hang Seng -0.75%), Europe has been declining (DAX -2.3%, CAC -1.8%, FTSE 100 -2.1%) and US futures are lower (SPU’s -1.4%, Dow -1.0%). Meanwhile, Treasury yields have fallen 6bps, and European government bonds are all rallying on the back of the ECB announcement. After all, the only price insensitive buyer has just said they are coming back in SIZE. Commodity prices are soft, with WTI falling 2%, and agriculturals softer across the board although the price of gold continues to be a star, as it is little changed this morning but that means it is holding onto its recent 11% gain.

And finally, in the FX markets, while G10 currencies are all looking robust vs. the dollar, led by the yen’s 1.2% gain and Norway’s continued benefit from recent intervention helping it to rally a further 0.75%, EMG currencies are more mixed. ZAR is the worst of the day, down 0.9% as an impending lockdown in the country to fight Covid-19, is combining with its looming credit rating cut to junk by Moody’s to discourage buying of the currency. We’ve also seen weakness in an eclectic mix of EMG currencies with HUF (-0.35%), KRW (-0.25%) and MXN (-0.2%) all softer this morning. In fairness, the peso had a gangbusters rally yesterday, jumping nearly 3.5%, so a little weakness is hardly concerning. On the plus side, APAC currencies are the leaders with MYR, IDR and INR all firmer by 1.2% on the strength of their own stimulus (India’s $22.6 billiion package) or optimism over the impact of the US stimulus.

Perhaps the biggest thing on the docket this morning is Initial Claims (exp 1.64M) which would be a record number. But so you understand how uncertain this forecast is, the range of forecasts is from 360K to 4.40M, so nobody really has any idea how bad it will be. My fear is we will be worse than the median, but perhaps not as high as the 4.4M guess. And really, that’s the only data that matters. The rest of it is backward looking and will not inform any views of the near future.

We have seen two consecutive days of a risk rally, the first two consecutive equity rallies in more than a month, but I expect that there are many more down days in our future. The dollar’s weakness in the past two sessions is temporary in my view, so if you have short term receivables to hedge, now is a good time. One other thing to remember is that bid-ask spreads continue to be much wider than we are used to, so do not be shocked when you begin your month-end balance sheet activity today.

Good luck and stay safe
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Has Panic Subsided?

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This morning a look at the screen
Shows everything coming up green
Has panic subsided?
Or is it misguided
To think that a bottom’s been seen?

It certainly feels less frightening in markets this morning as assets of all nature, equity, commodity and fixed income, are rallying nicely and the panic buying of dollars seems to have ended for the time being. Of course, this is an interesting outcome if one reads the news, given that virus stories have not only continued apace, but the statistics and government responses are getting more draconian. Arguably, the biggest story is that the entire state of California, with its population of 40 million, has been put on lockdown, with stay-at-home restrictions imposed by the Governor. By itself, California is, famously, the fifth largest economy in the world, just ahead of the UK, so the idea that economic activity there is going to come screeching to a halt cannot be seen as a positive. At least not in the short term. In addition, virus related deaths in Italy have now surpassed those from China, and further personal restrictions are being contemplated by PM Conte in order to get a handle on the situation. Thus, the fact remains that Italy is in dire straits from an economic perspective, again at least in the short term. Yet the FTSE MIB (the main Italian stock market index) is higher by 3.8% as I type this morning.

This all begs the question, why are markets reversing course from what has been several hellacious weeks of price declines? Let’s consider a few possible reasons:

It could be that the combination of expanded central bank and government activity around the world has finally achieved a point where investors believe that apocalyptic scenarios overstate the case.

While this is possible, it seems a bit far-fetched to believe that in the course of 36 hours, investors have suddenly decided to accept all the actions, and there have been many, have done the job.

A recap of the major actions shows:
• ECB creates €750 billion PEPP as additional QE measures
• Fed extends USD swap lines to 9 additional central banks to allow USD liquidity to reach all G10 nations and several more developed EMG nations like South Korea
• Fed creates money market fund liquidity backstop to insure that CP issuance by US corporates is able to continue and companies are able to fund operations
• BOJ added ¥5.3 trillion in liquidity to markets while snapping up ¥201 billion of new ETF’s
• RBA cut rates by 0.25%, added new liquidity to markets and started a QE program to control the 3-year AGB at a rate of 0.25%

There is no question that this is an impressive list of actions put into place in very short order which demonstrates just how seriously governments are taking the Covid-19 outbreak. And this doesn’t include any of the fiscal stimulus packages which either have been enacted or are on the cusp of being so. In fact, a total of 31 central banks around the world have cut rates, added liquidity or started QE programs in the past week in order to stem the tide. (I have to add that the Danish central bank actually raised its base rate by 0.15%, to -0.60%, yesterday morning in a truly shocking move. Apparently there was growing concern that with the ongoing problems in Italy, investors were flocking to DKK from EUR and driving that cross, which the central bank uses as its monetary benchmark, strongly in favor of the krona. In this instance, strongly represents a 3.5 basis point move, which has since been reversed.) And perhaps the market is telling us, they’ve done enough. But I doubt it.

Remember, the problem is not financial at its heart, it is a medical issue and efforts to contain the virus remain only partially effective thus far. The medical news, however, continues to get worse, at least in Europe and the US, as the caseload continues to increase rapidly, as well as the death toll, and governments are imposing stricter and stricter regulations on the population. So along with California’s action, New York has mandated that no more than 25% of a company’s workforce is allowed to work at the office (at SMBC we are below 15%), while New Jersey has closed all personal service businesses, like hair salons, exercise facilities and tattoo parlors. And these are just the most recent ones that I have seen because of where I live and work. I know there are countless measures throughout the US and Europe. And all of those measures inflict significant pain on the economy.

Yesterday’s Initial Claims number jumped to 281K, significantly higher than model forecasts, but just a fraction of what we are likely to see going forward as small service businesses like restaurants and hair salons and so many others are forced to close for now and cannot afford to continue paying their staff. Hence I’ve seen estimates that we could see those numbers jump as high as 2 million! So while it is not an economic or financial condition at its heart, it is certainly having that impact.

A second thought, one which I think has more substance to it is that during the past three weeks we have seen a substantial amount of position liquidation by highly leveraged fund managers who were forced to sell assets (or cover shorts) at ANY price due to margin calls. The only way to get market movements of 5%-10% or more is to have market participants be price insensitive. In other words, sales (short covers) were mandated, not by choice. However, once those positions are closed, and the evidence is that most have been so, markets revert to price discovery in the normal fashion, with buyers and sellers putting their money to work based on views of the asset. So while there is still significant trepidation by investors, my gut tells me that we have seen the worst of the financial market activity and volatility. It will still be quite a while before things truly settle down, and there is every chance that as the economic data comes over the next weeks and months and shows just how badly things were impacted, we will see sharp market downdrafts. So I am not calling a bottom per se, but think that going forward it will be less dramatic than we have seen during the first three weeks of March.

A quick recap of this morning’s markets shows equity markets around the world higher, with many substantially so (CAC +5.1%, DAX +4.2%, Hang Seng +5.0%); government bond markets also rallying nicely with yields almost everywhere falling (Treasuries -14bps, Gilts -14bps, Bunds -9bps); commodity prices rallying virtually across the board (WTI +2.4%,Copper +1.7%, Gold +2.3%); and finally, the dollar selling off virtually universally, with some of the worst recent performers regaining the most. So KRW (+3.0%), AUD (+2.6%) and GBP (+2.3%) are all unwinding some of the excess movement we saw in the past weeks. If I am correct and the worst has passed, I expect the dollar will cede more of its recent gains. However, given my timeline of May, I expect it will be another month before we see that in any material way. So, if you are a payables hedger, these are likely to be some of the best opportunities you are going to see for quite a while. Don’t miss out!

Good luck, good weekend and please all stay safe and socially distant
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All the PIGS in Her Fief

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Said Madame Lagarde, ‘Well I guess
Things really are in quite a mess’
And so up we’ll step
To introduce PEPP
As we try to deal with the stress

The market’s response was relief
That Europe’s new central bank chief
Has realized at last
The time is long past
To help all the PIGS in her fief

Another day, another bunch of new programs! First, though, a quick observation about the overall situation right now. There is no panic in the streets (after all the streets are mostly empty due to shelter-in-home and self-quarantining) but there is panic in… Washington DC, London, Bonn, Frankfurt, Paris, Madrid, etc. And that panic emanates from the fact that all those elected politicians are facing the biggest crisis of all…they might not get reelected because of Covid-19. I believe it is the belated realization that their jobs are on the line that has seen a significant acceleration in the number of new programs being proposed and introduced around the world.

Central banks, which had borne the brunt of the heavy lifting, are starting to get help from fiscal policy actions, but those central banks are still on the front lines. To wit, in an unprecedented intermeeting action, last night the ECB unveiled a new QE program called the Pandemic Emergency Purchase Program (PEPP) which will authorize the purchase of €750 billion of public and private assets for the rest of the year, or longer if deemed necessary. This time they are including Greek government bonds, which the ongoing QE program would not touch due to the credit rating, they are ignoring the capital key, which means they can purchase far more Italian debt than Italy’s share of the Eurozone economy would dictate, and they are expanding the corporate purchases to non-financial CP. And the market liked what they heard with European government bonds rallying sharply pushing 10-year benchmark yields down by 47bps in Portugal, 71bps in Italy, 167bps in Greece and 45bps in Spain. Equity markets in Europe have stopped collapsing, but we still see pressure in Germany and the UK, while the PIGS are all higher. One other thing about Germany was the release of the IFO Expectations Index which fell to 82.0, its lowest point since the financial crisis in 2008. Certainly short-term prospects seem dire there.

And what about the euro you may ask? Well, it continues to slide, down 1.0% this morning, but is actually about middle of the pack in the G10. If you want to see real carnage, look no further than Norway, where the krone has fallen another 2.75% as I type, but that is only after it had been lower by nearly 7.5% at 6:00 this morning, which forced a response from the Norgesbank that they would be intervening if things got worse. Looking over price action during the past month, when oil prices collapsed from $53.78 to as low as $20.06 (currently $22.88), which has been a 57% decline, the worst performing currencies have been; MXN (-23.8%), RUB (-21.2%), NOK (-19.7%) and COP (-17.3%). Two caveats on this list are Norway was down much further earlier this morning, and Colombia hasn’t opened yet today, so has room for a further decline. The only positive I can take from this is that the correlation between the currencies of oil producers and the price of oil remains intact. At least we know what to expect!

But there was plenty of other activity as well. For instance, the RBA cut rates again, by 25bps, taking their base rate to a historic low of 0.25%. In addition they have implemented their first QE plan where they are targeting the yield on 3-year AGB’s at 0.25%. The problem is that the 10-year bond got hammered on the news with yields there jumping 23bps overnight, taking the move since Monday to 57bps. Look for the RBA to do more, and probably soon. And the Aussie dog dollar? Down a further 1% this morning, which takes the decline in the past month to 14.3% and it is now trading at levels not seen since 2003.

And let’s not forget South Korea, which is stepping into the market to buy KRW 1.5 trillion (~$1.1 billion) of government bonds, as it prepares both bond and stock stabilization funds to help support markets there. In other words, the government is going to be buying equities to stop the slide. The KRW response? -3.2%!

Japan would not be left out of this parade, buying a new record ¥201.6 billion of ETF’s last night while injecting ¥5.3 trillion yen in new liquidity to the money markets. Unfortunately, the Nikkei continued its decline, although fell only 1.0%, arguably an improvement over recent performance. The yen has no haven characteristics this morning, falling 1.50%, which is actually now the worst performing currency as NOK continues to rebound as I type on the back of Norgesbank activity.

Finally, I would be remiss if I didn’t mention that the Fed has unveiled yet another program, this time to backstop money market funds, a key part of the US financial plumbing system, and one that when it broke in 2008 after Lehman’s bankruptcy, resulted in financial markets seizing up entirely. The fund is there to make liquidity available to funds to meet increased redemptions without having to sell their holdings. Instead, they will pledge them as collateral and receive cash from the Fed.

This note is too short to go through every action taken, but we continue to see other central bank rate cuts and we continue to see fiscal packages starting to get enacted. In fact, President Trump signed into law the latest yesterday, to support paid sick leave and increased unemployment benefits, and now Congress turns to the MOAS (mother of all stimuli) packages which may include helicopter money as well as bailouts of airlines and hospitality businesses that have been decimated by the virus response. Mooted price tag…$1.3 trillion, but my bet is it winds up larger than that.

Meanwhile, the dollar remains the single place to be. It has rallied against everything yet again as holding cash is seen as the only response to the current situation. And the cash everyone wants to hold is green. Foreign borrowers are scrambling and struggling as their local currencies collapse and swap spreads blow out. And domestic borrowers are wondering how they are going to repay or roll over their debt given the absolute collapse in economic activity.

For now, this is likely to continue to be the situation, as there is no obvious end in site. However, the growing sense of urgency in those national capitals leads me to believe that we are going to start to see much bigger fiscal packages and a newfound belief that printing money and giving it out is a better solution than allowing economic activity to seize up completely. As I said last week, the MMT proponents have won the day. It has just not yet been made explicit.

Good luck and stay safe
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