The stomach-churning market rollercoaster continues, although this time Friday the 13th may prove lucky for crushed traders.
After collapsing to fresh cycle lows overnight, sliding below 2,400, or down a remarkable 1,000 points in just over three weeks, S&P futures have staged an even more amazing comeback and one day after a historic crash, the Emini is now trading limit up, stuck at 2,582 (or up 5%)...
... with the unhalted SPY (S&P 500 ETF) indicating buying pressure continues.
The underlying S&P500 sank 9.5% Thursday, leaving it 27% from a record set just three weeks ago and ending the longest bull run in history.
What sparked the reversal in sentiment? It is unclear but the buying started just after midnight Eastern time, amid speculation of BOJ intervention across various markets. A key catalyst hit just after 5am ET, when following failed interventions by the ECB and Fed, China’s central bank was the latest to come out with emergency measures when the PBOC announced a targeted RRR cut of 50bp-100bp for banks qualified in "inclusive finance" tests, effective March 16, which will release liquidity of RMB 400bn. An additional 100bp cut will be granted for qualified joint-stock commercial banks, unleashing liquidity of RMB 150bn to the market. This, as Goldman notes, was expected after Premier Li’s comments at the State Council meeting on the need to implement target RRR cuts to lower financing costs for small and individual businesses.
Still, there will likely be some buyer remorse disappointment, as the total of RMB 550bn liquidity injected is less than previous RRR cuts (e.g., RMB 800bn effective January 6). But the pattern of the PBOC cutting RRR after Premier Li's comments remained in line with historical precedents. Furthermore, as we highlighted yesterday, the PBOC statement also mentioned the central bank would avoid "flood-like" stimulus, consistent with the article discussing monetary policy in the official newspaper People's Daily on Monday.
Additionally, in Goldman's view, the PBOC has been cautious in targeted easing and doing just enough in recent weeks. This is reflected in the February money and credit data where short-term loans to companies jumped on PBOC relending programs while medium and long-term loans lagged. Given the deteriorating ex-China growth and external demand, the PBOC will need to do more to support the economy, although how much will be done remains to be seen. With the targeted cut today, the PBOC is highly unlikely to announce any broad RRR cut by the end of Q1, in our view.
Whether its positive impact sustains or not remains to be seen, but the RRR cut comes after an out-of-meeting cut from Norway and liquidity measures from the Riksbank, while other Asian central banks including those of Korea, India and Japan, moved to soothe markets, with the Bank of Japan on Friday followed an earlier move from the Federal Reserve to inject liquidity, and later offered to buy $1.9 billion of bonds in an unscheduled operation.
Also overnight, House Speaker Nancy Pelosi said she’s near an agreement with the Trump administration on a bill to mitigate impact from the virus. Fifty million jobs may be lost in the tourism industry globally, the World Travel and Tourism Council estimated. China’s Central Bank said it would pump in $79 billion to bolster the economy.
“It seems that the more severe things become in the short term, the more extreme will be the fiscal and monetary policy response,” Mark Dowding, CIO at BlueBay Asset Management, wrote to investors. “It is very conceivable that the full boost from such measures will only really kick in just as activity rebounds, with pent up demand leading to a turbo-charged recovery in the second half of the year in the wake of an economic contraction in the context of the first half.”
There was indeed more: one day after European stocks plunged the most on record, they have staged a just as historic rebound, with the Stoxx 600 surging 7.3%, or the most since Nov 2008, after the German Finance Minister Scholz said "we will use all means to tackle the coronavirus; will provide tax relief to Co's including deferrals, tax aid will cost billions. Will, without limit, undertake credit programs" while Germany's Economy Minister Altmaier said around 500 billion Euros are available.
The surge in Europe was led by the basic resources sector, (SXPP) which surged the most since April 2009, as equity markets bounced after the historic rout. Large cap miners led the rally: Anglo American +13%, BHP +9.9%, Rio Tinto +9%, while base metals climb in London, with copper and aluminum both gaining 2%. At the same time, the Stoxx 600 Travel & Leisure Index reversed early morning gains to drop for the 16th session of 17, missing out on a wider European market rebound, as more countries and cities take measures to prevent the spread of the coronavirus, including event cancellations and pushing so-called social distancing.
Earlier in the session, Asian stocks fell, led by industrials and utilities, after falling in the last session. Most markets in the region were down, with Japan's Topix Index dropping 5% and South Korea's Kospi Index falling 3.4%, while Australia's S&P/ASX 200 gained 4.4%. Trading volume for MSCI Asia Pacific Index members was 33% above the monthly average for this time of the day. The Topix declined 5%, with Dream Incubator and Danto falling the most. The Shanghai Composite Index retreated 1.2%, with Fujian Furi Electronics and Nanjing Canatal posting the biggest slides.
"The nature of the beast that we have been living with over past two weeks is the inevitable relief bounce, which in turn gets sold," said Michael Purves, Tallbacken Capital Advisors LLC chief executive officer. "But one of the positive seems to be simply returning to some sort of central-bank policy sort of working."
So perhaps it is now time for a sustained second bounce... just like in 1929?
Despite Friday's rebound, global stocks are heading for their worst week since 2008 as investors price in a severely weaker economic outlook due to the coronavirus pandemic. They’re doubting the efficacy of policy responses as cases continue to grow across the world and restrictions on people and businesses crush sentiment.
Investors have been looking to the Fed to fill the stimulus vacuum by supporting the economy and keeping markets functioning. It unleashed a trillion and a half dollars on Thursday, but failed to halt the stock market rout. The Trump administration hasn’t offered a fiscal stimulus package that was able to calm investor nerves.
Meanwhile, yields are surging, with bonds and stocks are completely decoupled in terms of their correlation regime - after bonds puked their guts out overnight, they are now rallying alongside the equity gains...
After dropping as low as 0.31% at the start of the week, the 10Y TSY rose as high as 0.96% overnight, above where the 30Y Treasury was trading on Monday.
European bonds also declined across the board with Germany initially leading on comments from ECB’s Weidman that the country should not be dogmatic about its black zero policy. Curves steepen aggressively in low liquidity as stocks across the region bounce. Italian curves the exception, flattening as ECB’s Visco says that purchases can be concentrated on some ECB jurisdictions. German 2s10s snapped wider about 10bps amid speculation that stocks could gap higher due to a short-selling ban, pressuring core bonds.
The spreading coronavirus and oil-price shock have ushered in the most volatile period in markets since the financial crisis, with investors reacting to increasingly negative news. A number of economists are now warning a downturn could be at hand: a Bloomberg Economics model places the odds of a recession happening over the next year at 52%, the highest since 2009. The wild swings have triggered trading halts during the cash session twice times this week. On multiple occasions, futures also reached the 5% bound on gains or losses stipulated by the Chicago Mercantile Exchange.
“There’s no good news and it’s weighing on the market’s psyche,” said Tom Essaye, a former Merrill Lynch trader who founded “The Sevens Report” newsletter. “Everybody is waiting for good news, for the government to act, to come out with a big impressive plan - and we just keep waiting. And the longer we wait, the more people are doubting it so it’s adding to the volatility."
Volatility has been rampant, with the S&P 500 seeing average daily swings of 5.7% over the past five sessions. The index hasn’t seen two back-to-back up days in a month. Measures of share turbulence have also spiked this week, with the Cboe Volatility Index closing above 40 for the fifth straight session.
In FX, commodity currencies including the Australian dollar rallied while haven currency the Japanese yen tumbled
Expected data include the University of Michigan Consumer Sentiment Index. Jabil is reporting earnings.
Central Bank Action
- Norges Bank emergency rate cut to 1.0% from 1.50%; decision was unanimous. Ministry of Finance has, at the Norges Bank's recommendation, elected to cut the countercyclical capital buffer to 1.0% from 2.5%. (Newswires) A decision which resulted in the NOK, which has been under significant pressure recently, strengthening somewhat as the measures are designed to provide support to the financial system. Are scheduled to meet on March 19th . Subsequently, Governor Olsen reiterated they are prepared to cut further if necessary.
- PBoC are to cut RRR for some banks by 50-100bps under inclusive finance scheme and an additional 100bps for joint-stock banks from March 16th, will unleash CNY 550bln, reports state. Will implement prudent monetary policy and be more flexible & are to keep liquidity reasonably sufficient and not open the credit floodgate.
- BoJ announces that as of next week, the Bank will provide ample liquidity using market operations with long maturities. Carried out unscheduled outright purchases of JGBs today; note, they also purchased JPY 101.4bln of ETF’s today. Will continue to carry out further outright purchases of JGBs as needed, taking into account market conditions are to increase the number of issues of JGSs offered. Could increase purchases of commercial paper & corporate bonds at their meeting next week, according to sources
- Riksbank says they are prepared to take further measures and to supply necessary liquidity even between meetings; to take up to SEK 500bln to safeguard credit supply. Additionally, Sweden have lowered their counter-cyclical capital buffer to 0% from 2.5%; corresponds to circa SEK 45bln. Subsequently, Governor Ingves says can undertake currency intervention and rate cuts if we think this is a suitable measure are ready to take further measures if this is needed; all measures in the toolbox are available, can give liquidity support to banks, and can purchases bonds.
- ECB's Lane says governing council retains the option of future cuts in the policy rate if warranted, temporary fluctuations in the distribution of purchase flows both across asset classes and across countries in response to the "flight to safety".
- CBR says the RUB drop, due to coronavirus and lower oil prices, does pose a significant upside risk for inflation; will accelerate towards the 4% target faster than was expected.
- S&P 500 futures up 2.9% to 2,539.50
- STOXX Europe 600 up 1.5% to 299.24
- MXAP down 1.9% to 137.19
- MXAPJ down 0.05% to 456.84
- Nikkei down 6.1% to 17,431.05
- Topix down 5% to 1,261.70
- Hang Seng Index down 1.1% to 24,032.91
- Shanghai Composite down 1.2% to 2,887.43
- Sensex up 4.3% to 34,187.97
- Australia S&P/ASX 200 up 4.4% to 5,539.30
- Kospi down 3.4% to 1,771.44
- German 10Y yield rose 9.1 bps to -0.65%
- Euro up 0.04% to $1.1189
- Italian 10Y yield rose 57.9 bps to 1.586%
- Spanish 10Y yield rose 7.6 bps to 0.59%
- Brent futures up 3.6% to $34.41/bbl
- Gold spot up 0.5% to $1,583.29
- U.S. Dollar Index little changed at 97.47
Top Overnight News from Bloomberg
- Canadian Prime Minister Justin Trudeau will remain in isolation for 14 days after his wife tested positive for coronavirus
- The RBA pumped A$8.8 billion through its repo operations to help counter spillovers
- Asian central banks also moved aggressively to counter the market carnage Friday. The Bank of Korea is considering a special meeting to tackle wild swings in the foreign-exchange market, and Japan offered to provide as much as 2.2 trillion yen ($20.8 billion) of liquidity in three different operations
- Norway’s central bank delivered an emergency half- percentage point cut to its main interest rate as policy makers pump stimulus into the economy a week ahead of a scheduled meeting
- French President Emmanuel Macron and Italian Prime Minister Giuseppe Conte took a rare swipe at the European Central Bank after its bid to tackle the fallout from the coronavirus failed to calm jittery markets
- The ECB pledged to smooth the transmission of its monetary policy, signaling it’s ready to rein in widening bond spreads, and stressed it can further reduce interest rates if needed
Asian equity markets initially crashed overnight as the global turmoil persisted amid further coronavirus-related disruptions and following the near-double-digit losses on Wall St where stocks had their worst day since the Black Monday of 1987. Investor sentiment took a hit from all angles including the lack of solid stimulus efforts so far from US and its ban on travel from the EU, while some countries, businesses and sporting events also announced shutdown measures. ASX 200 (+4.4%) was in panic mode at the open and was dragged lower by heavy losses in financials and the commodity-related sectors with gold miners the worst performers as the precious metal proved to be no hiding place for the ongoing bloodbath, although the index then rebounded as stock markets and US futures recovered from lows with some also attributing it to the RBA injecting AUD 8.8bln of funds through repos during the early morning chaos. Nikkei 225 (-6.1%) saw losses of over 1500 points and briefly slipped below the 17k level for the first time since 2016, before momentarily retracing the majority of the declines. Elsewhere, Hang Seng (-3.2%) and Shanghai Comp. (-1.2%) conformed to the overnight disarray amid further PBoC liquidity inaction and as China’s industry ministry suggested the global coronavirus epidemic places uncertainty on China's work resumption, while stock markets in South Korea, India, Indonesia and Philippines all triggered circuit breakers earlier in the session but then recouped most the losses in which India briefly retraced the full 10% slump. Finally, 10yr JGBs failed to benefit from the wide-spread risk aversion and off-schedule BoJ announcement to buy a total of JPY 700bln of JGBs, as prices extended on the prior day’s selling to test the 153.00 level where support eventually held.
Top Asian News
- Singapore’s Elections Near With Release of Boundaries Report
- Hong Kong Stocks Enter Their Second Bear Market in Two Years
- Japan’s Top Brass Look to Calm Markets as BOJ Pumps Cash
- RBI to Use India Reserves Amid Rout as Modi Mulls Spending
European equities attempt to claw back some lost ground [EuroStoxx 50 +6.1%] having closed Thursday’s session with double-digit losses across major bourses. Gains are relatively broad-based, albeit Italy’s FTSE MIB outperforms regional peers after reports that the Italian market regulator will introduce a temporary ban on short-selling on some stocks today – applying to 85 stocks. Furthermore, press reported that the country could spend up to EUR 16bln on the first stimulus move vs. prior UR 12bln– scheduled to be unveil later today. Sectors are all in the green, albeit off highs, with Energy outperforming amid the rebound in the complex, whilst Consumer Discretionary pulled back from its earlier outperformance as the Travel & Leisure sector dipped back into negative territory. Individual movers largely reflect a consolidation of yesterday, although notorious copper miners BHP (+12.0%) and Rio Tinto (+11.0%) taking advantage of the price action in the red metal. Similarly, BP (+8.2%), Shell (+8.6%) and Total (+8.8%) benefit from the upside seen in the energy markets. Elsewhere, Wirecard (+15.0%) rose as much as 30% at the open after the results by KPMG’s special audit so far noted that there is no need for the Co. to alter their financial statement, although Wirecard results have been delayed to April 30th as the investigation continues.
Top European News
- VW CEO Sees China Sales Improving as Uncertainty Grows in Europe
- After Record Sell-Offs, Italy and Spain Ban Short Selling
- Norges Bank Slashes Key Rate by Half Point to Fight Crisis
- Europe Stock Rebound Fizzles in Worst Week Since 2008 Crisis
In FX, a double dose of good fortune for the hitherto unlucky Norwegian Krona via a rebound in crude prices and additional stimulus as the Norges Bank followed the Fed and BoE with a ½ point ease in the depo rate in advance of its scheduled March policy meeting next week. Eur/Nok reversed further from fresh all time highs above 11.4500 in response to sub-11.2000, as the Bank also shaved 150 bp off the counter-cyclical buffer for banks before rolling out new F-loans at the lower 1% benchmark rate. Conversely, Eur/Sek remains elevated within a 10.7740-9410 range following relatively limited anti-nCoV policy measures from the Riksbank in the form of a fresh credit line and pledge to provide more funding and QE if required, though Sweden’s FSA did slash the CCB to zero from 2.5%. Moreover, in subsequent pressers Norges Bank and Riksbank Governors both underlined that lower benchmark rates are an option if economic conditions worsen, and for the latter that could be warranted given another spike in jobless rates. Not to be completely outdone, the PBoC preannounced lower RRRs ranging from 50-100 bp, and as much as -200% for joint stock banks all to be rolled out from Monday, helping the Yuan recover from under 7.0000 and risk sentiment overall.
- AUD/NZD/CAD - Although their US counterpart remains elevated in its own right (DXY pivoting 97.500), the Aussie, Kiwi and Loonie are all benefiting from a broad revival in risk appetite and especially the former after the RBA supplemented fiscal support with a hefty liquidity boost that helped the ASX turn a whopping loss into a 4%+ gain by the close. Aud/Usd has reclaimed 0.6300+ status and Nzd/Usd is close behind circa 0.6150, while the Loonie is also drawing impetus from the aforementioned bounce in oil to test resistance at 1.3800 vs lows near 1.3950.
- GBP/CHF/EUR/JPY - The Pound has recouped some losses with Cable back up to 1.2600 from close to 1.2500 at one stage and Eur/Gbp reversing through 0.8900, but Sterling is lagging amidst ongoing COVID-19 and Brexit uncertainty. Similarly, the Franc is cautious awaiting the SNB straddling 0.9450 and hovering just above 1.0550 against the Euro that has regrouped after yesterday’s post-ECB slide in advance of the EU revealing its financial package to fight the pandemic. In stark contrast, the Yen is sharply underperforming on safe-haven unwinding as Usd/Jpy rallies to 106.50+ in wake of yet more speculation about the BoJ expanding its already ultra-accommodative policy with more JGB and other security purchases, ETF buying etc.
- EM - No real surprise to see the Rouble revel in Brent’s resurrection alongside WTI and other commodities that have been crushed this week, but the Lira seems reluctant to get too carried away due to persistent jitters about relations with Russia on the Syrian front.
In commodities, a day of consolidate/reprieve for commodities following the prior session’s hefty sell-off after prices fell almost 9%, which was induced by materialising virus woes coupled with inept measures from the US to stem the impact of the virus. WTI and Brent front-month contacts have nursed a bulk of yesterday’s losses with the former residing just under USD 33.0/bbl at the time of writing, having momentarily breached the level to the upside in earlier trade. Meanwhile, Brent May’20 tested, but failed to breach resistance at USD 35/bbl. Elsewhere, spot gold also attempts a recovery after yesterday’s flee to cash saw the yellow metal trade in close proximity to USD 1550/oz, although prices have waned off today’s current high of ~1594/oz. Copper prices meanwhile rebounds with a vengeance amid Aussie stimulus measures overnight coupled with a turnaround in sentiment and cautious comments from miner Vale on potential suspended operations due to coronavirus, having more than recouped the prior session’s downside to trade comfortably above USD 2.50/lb vs. a low of USD 2.41/lb.
US Event Calendar
- 8:30am: Import Price Index MoM, est. -1.0%, prior 0.0%; Import Price Index YoY, est. -1.5%, prior 0.3%
- 8:30am: Export Price Index MoM, est. -0.4%, prior 0.7%; Export Price Index YoY, est. -0.6%, prior 0.5%
- 8:30am: Import Price Index ex Petroleum MoM, est. 0.1%, prior 0.2%
- 9:45am: Bloomberg March United States Economic Survey
- 10am: U. of Mich. Sentiment, est. 95, prior 101; Current Conditions, est. 112.8, prior 114.8; Expectations, est. 88.1, prior 92.1
- 10am: U. of Mich. 1 Yr Inflation, est. 2.4%, prior 2.4%; U. of Mich. 5-10 Yr Inflation, prior 2.3%
DB's Jim Reid concludes the overnight wrap
I’m nervous about using the phrase “global policy error” about where we are at the moment as I struggle with the argument that previously overvalued markets should be propped up. 3 weeks ago US equities were in the foothills of a valuation bubble, credit spreads were generally around cyclical tights and not pricing in any of the growing risks and bond yields were close to what were then all time multi-century lows. Clearly no-one could have predicted the virus, but markets were well overdue a correction. However, over the last decade policy makers have decided that their policy of choice is extreme monetary policy and QE. This has super charged virtually all broad asset classes to extreme valuations and has forced investors into taking more and more risk and has pushed them into more and more illiquid assets to meet their return targets or to make sure they weren’t underperforming their peers. Governments have turned a blind eye to this as extreme monetary policy has allowed them to generally be inactive in fiscal policy.
So in doing so policy makers (central banks and governments) have massively financialised the global economy – arguably even more so than it was during the GFC even if the banks are now much safer. The net result is that when financial markets issue a massive cry for help policy makers have to respond to ensure the feedback loop into the economy isn’t exacerbated. I’m not sure I’d heard of the phrase “financial conditions” in the first half of my career. So when Christine Lagarde said yesterday that “We are not here to close spreads, there are other tools and other actors to deal with these issues”, the problem is that this is exactly what they’ve been trying to do for much of the last decade so they can’t reverse course now without major problems. From a communications point of view it wasn’t “whatever it takes”.
Overall though, DB thought that the ECB package yesterday almost ticked all the boxes they could (see here for a full write up from Mark Wall) but that it didn’t give enough confidence on support for Italy. As you’ll see from the note most of the issues were with communication and as he says this can (and will likely) be corrected. Maybe as early as today. The economics team in fact believe that this was the effective precursor to a coordinated European fiscal response as early as next week including a 1% of GDP easing from Germany. A big and significant call.
To show the impact of the confused message yesterday, before the ECB announcement the Stoxx 600 was c.-6.25% but by the time the market closed it was -11.48% - the worst day on record including through every day of the GFC and October 1987. At that point the S&P 500 futures were down -7.83% (post another circuit breaker closure after the open). It took the NY Fed’s immediate $1.5 trillion repo announcement ($5tn to end April) just after Europe closed to rally markets back momentarily. The ECB must have looked at the initial market reaction to this with envy as within 20 minutes the S&P was back to ‘only’ being -2.97% down. It eventually closed -9.51% however and back close to the lows as Dr. Anthony Fauci, a top US health official from the National Institute of Infection Disease said that the country was “failing” when it came to testing. This was only compounded by New York City’s mayor restricting gatherings of 500 people or more and major sports leagues in the US all either suspending the rest of the season or pushing back the start of them.
Overnight markets have been on another wild ride. After being -3% down a couple of hours ago, S&P futures are up +2.8% as we type. Elsewhere the Nikkei (-4.11%), Hang Seng (-1.52%), Shanghai Comp (-1.56%) and Kospi (-2.58%) all erasing much heavier earlier declines likely on the back of liquidity measures undertaken by various central banks.
On that the BoJ, BoC, RBA and Reserve Bank of India have all injected cash into markets overnight.
On the fiscal side, Indonesia announced a fiscal package. The US House Speaker Nancy Pelosi also said overnight that she hopes to announce today whether she has an agreement with the Trump administration on a fiscal plan. So one to watch.
In terms of records for yesterday, the S&P 500 had its 5th worst day out of 23,519 since daily data starts in 1927. Just for reference, all the weaker days were in 1929 and 1987. We live in truly remarkable times! The week to date move of -16.54% is as it stands the second worst week ever (with October 2008 having the worst). Needless to say the index is now in a “bear market” having closed down -26.74% from the highs. The NASDAQ tumbled -9.43%, the DOW -9.99% and the VIX jumped 21.57pts to 75.47 (finishing at the highs of the day). The all-time high was 80.86 during the financial crisis. We’re not far off those levels now.
HY credit spreads were +81bps and +86bps wider in the US and Europe. CDX IG and HY were also 23bps and 93bps wider respectively while iTraxx Main and Xover were 16bps and 75bps wider. It didn’t stop there. To give full context to the meltdown in Europe there were some other remarkable equity falls. The DAX (-12.24%) had its worst day since 1989 (-12.81%) and the FTSE MIB (-16.92) the worst ever. In commodities Gas Oil was down -7.41%, Brent -7.18% and Gold -3.60%. The Yen traded flat and Swiss Franc weakened initially before rallying +0.56%.
In bond markets it was the moves in Europe and specifically BTPs which were the most talked about. At one stage 10yrs traded up +72bps at 1.889%. They closed up 59bps after Lagarde walked back on the communication issue from the press conference on CNBC by saying that the ECB can deviate from capital keys if needed. However the move was still the biggest move ever (eclipsing 2011 remarkably) while the spread to Bunds widened to 250bps and to the most since last June. Elsewhere European Banks were down -16.57% yesterday, the second largest drop on record with the biggest being the Brexit day move (-18.02%). The index has now dropped -45.24% from the February highs. 10 year Bund yields were down -6bps early in the session before finishing flat (+0.2bps) even with the largest equity down moves seen in decades or even ever. Treasuries rallied just -6.5bps to finish at 0.804%. The muted bond moves worried some as it hinted at asset deleveraging rather than just a switch into defensives.
Every sector in the S&P 500 was down at least -6.5%, with Pharma & Biotech firms the relative “best performer” along with healthcare equipment and household goods. The worst performers were consumer apparel goods and semiconductors, both down over -12%. In Europe in the Stoxx 600, autos, insurance and banks were among the worst performers, all over -14% lower, while even the best performing sector – food and beverages – was down 8.79%
As a rough state of play for the latest virus disruption news we have the following highlights. In France all schools will close next week and Macron called the virus the epidemic of the century. In the US, every major sports league has suspended activities and both Disney theme parks will be closed through the end of the month – just highlighting how much businesses are being affected. The UK’s chief scientific advisor said he believed the peak of the viral outbreak may be 10-14 weeks away and moved from containment to delay, with PM Boris Johnson describing Covid-19 as the “the worst public health crisis of a generation.” The Philippines has also placed 12 million people in the Manila area on lockdown overnight and has largely suspended government work for a month. Australia has also advised against large gatherings (500 people or more) overnight as their cases jumped 24% to 156 with the Melbourne F1 Grand Prix also cancelled this weekend. Belgium also ordered the closure of all bars and restaurants and other leisure venues overnight. Canadian PM Justin Trudeau’s wife Sophie became another high profile victim of the virus as her tests returned positive. On the brighter side, China said that it only had 8 new cases over the last 24 hours.
We released the results of our latest monthly market sentiment survey yesterday. In terms of how worried people are about contracting covid-19, this has shot up since we did a flash virus survey 9 days before. However, there hasn't been a huge change in when people think that the Western World will be mostly back to normal. May and June are still the most popular answers. As such, in the turmoil, people did see this large sell-off as a buying opportunity. HY seems to be the exception though. All the data/graphs across many markets and variables are included in the link here.
In other news our Fed call has changed and we now expect 100bps of cuts at the next meeting, bringing the fed funds rate directly to the zero bound. They also don’t rule out an early emergency cut given the volatility. It wouldn't surprise any of us if this happens at any moment. The team note that if the Fed cuts rates to zero by this meeting as they expect, Chair Powell’s press conference should focus on the next policy steps should the outlook deteriorate further. They expect that the Fed will first use forward guidance to signal their intent to keep rates on hold until downside risks to the outlook subside and inflation is sustainably at 2%, a move in the direction of average inflation targeting. See the note here
Tidying the rest of the new up, as discussed above the NY Fed said mid-US session that it would offer $1.5 trillion of repo and Treasury purchases in order to address the lack of liquidity that has been hampering markets in recent days. This is not yet a return to QE in terms of buying long-term assets, rather the Fed will be buying short-term Treasury bills with maturities less than 1 year. The Fed bought an additional $500 billion, three-month offering on Thursday and will offer $1 trillion in short-term funding on Friday. The facility will offer $5tn of liquidity out to the end of April.
In other news, we will get a host of Chinese data over the lock down period of January and February on Monday. This includes retail sales, investment and industrial output and will likely reveal the extent of damage caused to the Chinese economy.
The day ahead includes final February CPI revisions in Germany and France as well as the preliminary March University of Michigan consumer sentiment survey and February import price index data in the US. Finally watch out for any weekend policy moves. We’re starting to be back to weekend’s being the new weekday!