Market Sentiment Worsens Despite Aggressive Policy Responses Worldwide

  • The virus continues to take hold; China data came in much worse than expected
  • The dollar took an immediate hit from the Fed cut but has still held up relatively well
  • BOC delivered an emergency 50 bp cut to 0.75% late Friday
  • BOJ ramped up its asset purchases as it brought forward its meeting from Thursday to today
  • RBNZ delivered an emergency 75 bp cut to 0.25%; RBA said it’s prepared to purchase government bonds to support smooth functioning of that market
  • BOK followed up the Fed’s move with a 50 bp emergency rate cut to 0.75%

The dollar is mixed against the majors as markets digest the flurry of emergency measures taken globally.  Yen and Swissie are outperforming, while Kiwi and Nokkie are underperforming.  EM currencies are mostly weaker.  RON and PLN are outperforming, while RUB and ZAR are underperforming.  MSCI Asia Pacific was down 3.8% on the day, with the Nikkei falling 2.5%.  MSCI EM is down 4.7% so far today, with the Shanghai Composite falling 3.4%.  Euro Stoxx 600 is down 7.9% near midday, while US futures are pointing to a lower open after trading was halted for being limit down.  10-year UST yields are down 20 bp at 0.76%, while the 3-month to 10-year spread is down 12 bp to stand at +60 bp.  Commodity prices are mostly lower, with Brent oil down 8.2%, copper down 2.2%, and gold down 1.6%.

The virus continues to take hold. Europe is now reporting more daily cases than China did at its peak.  There has been a bit of good news from Italy as the pace of both new cases and deaths has declined, but it’s way too early to draw any conclusions. Spain is quickly catching up with nearly 8K confirmed cases (vs. 24.7K in Italy) and nearly 300 deaths (vs. 1,800 in Italy).  US numbers are also rising and likely to accelerate as more testing is rolled out.

China’s industrial production for January-February plunged -13.5% y/y.  Retail sales collapsed -20.5%, as did fixed asset investment at -24.5% y/y. It’s hard to make sense of the economic data given the magnitude and speed of the shock, but these numbers are quite dramatic.  It also suggests that most continue to underestimate the potential impact to the economies of Europe and the US, where the virus continues to spread.  No surprise then that market sentiment remains poor despite aggressive stimulus measures taken already.  We remain negative on risk assets until the global growth outlook becomes clearer, and that seems a long ways off still.

The dollar took an immediate hit from the Fed cut but has still held up relatively well.  DXY has still recovered nearly two thirds of its recent swoon and is now up 1.4% on the year, a relatively moderate move considering all the easing by the Fed.  We remain constructive on the dollar but acknowledge greater volatility ahead.  The euro continues to find support near $1.1050, but sterling remains heavy and is closing in on the October low near $1.22.  USD/JPY remains subject to swings in risk sentiment.



Markets are still digesting the Fed’s emergency rate cut Sunday evening.  The Fed Funds target range now stands a full 100 bp lower at 0-0.25%, which matches the crisis-era low.  QE was restarted, with the Fed planning to purchase $500 bln USTs and $200 bln of MBS.  This would take the Fed’s balance sheet up to $4.85 trln, which would be well above the post-crisis peak around $4.5 trln.  Other actions were announced, including allowing banks borrow from its discount window for up to 90 days and reducing reserve requirements to zero.  Mester was the lone dissent, favoring a smaller cut to 0.50-0.75% instead.

The major central banks also announced coordination action to ease dollar funding stresses.  The BOC, BOE, BOJ, ECB, SNB, and the Fed will work to enhance existing dollar swap lines.  Pricing will be reduced by 25 bp, and the foreign central banks will begin offering dollar swaps weekly in their jurisdictions with 84-day maturities.  As previously mentioned, we think that dollar funding is one area where policymakers in general, and the Fed in particular, will be able to deliver. Assuming that solvency risks are indeed very small, banks should have no problems accessing liquidity.

The FOMC meeting Wednesday has thus been rendered meaningless.  Chair Powell will hold his usual post-decision press conference but it is unlikely to deviate much from the one he gave Sunday evening after the emergency cut.  Powell said Sunday that the Fed would not release new macro forecasts until June, noting that the value of updated forecasts now seem limited.

The regional Fed manufacturing surveys for March start rolling out this week.  Empire survey comes out Monday and is expected at 4.9 vs. 12.9 in February.  Manufacturing had just begun to recover from the US-China trade war, but the outlook has gotten cloudier and the data is likely to turn down sharply in Q2.  How sharply is open to debate but China’s data for Q1 suggests it’s going to be much worse than what markets are expecting.  Today also sees January TIC data.

Bank of Canada delivered an emergency 50 bp cut to 0.75% late Friday.  The bank said it stands ready to do more, and comes after a 50 bp cut at its regularly scheduled meeting the previous week.  Similar to the UK and Australia, the central bank coordinated with the government as Ottawa announced several support measures too.  WIRP suggests that 25 bp of easing is fully priced in for the next scheduled BOC meeting April 15, with some chance seen of a 50 bp cut.  Either way, 50 bp of easing is fully priced in by June 3 and another 25 bp is nearly fully priced in by October 28.  Canada reports January existing home sales (0.5% m/m expected) today.



Spreads of peripheral to core European countries continue to widen, but not dramatically so. Italy’s 10-year spread over German bunds, for example, have risen to 254 bp, but still below last year’s highs. Portuguese (152 bps) and Spanish (131 bps) have also widened, but not too far from 2018 levels.



Bank of Japan ramped up its asset purchases as it brought forward its meeting from Thursday to today.  The bank will buy more assets, including ETFs and corporate bonds, and will offer a zero rate loan program to maintain financing for companies under stress.  Rates were kept steady, which supports our view that the bar is very high for going more negative.  Governor Kuroda said the bank stands ready to do more, including rate cuts if needed.  Japan reported January core machine orders.  They were expected to contract -1.1% y/y.

Reserve Bank of New Zealand delivered an emergency 75 bp cut to 0.25% early Monday local time.  The bank said rates will remain at that level for at least the next twelve months.  Because 0.25% is widely viewed as the lower bound, the bank said that it would turn to QE for the first time ever if further easing is required.  The upcoming March 25 RBNZ meeting has been canceled.  The government is expected to deliver details of a fiscal stimulus package soon.

Reserve Bank of Australia said it’s prepared to purchase government bonds to support smooth functioning of that market.  The bank said it will announce further policy steps Thursday to support the economy.  It seems that the RBA is setting the table for full-on QE, something is it has signaled willingness to do once the policy rate hits its perceived lower bound of 0.25%.  WIRP suggests 100% odds of a 25 bp cut to 0.25% at the April 7 meeting, with significant odds seen of a 50 bp cut then.

Bank of Korea followed up the Fed’s move with a 50 bp emergency rate cut to 0.75%. The bank will also reduce interest rates in its loan facility for small companies. In a bid to improve liquidity, the BOK will also start including bank bonds in its open market operations. As expected, the move was justified by concerns about the state of the global economy amid the virus shutdown. The won is down 5.6% so far this year while the Kospi is down 22%.

Philippine’s regulators have shortened the market trading hours to contain the fallout from the virus. The local stock exchange will now close at 1300 local time from today until April 14, while FX and fixed income markets will trade from 900 to 1400 local time “until further notice.” Several cities are under curfew with much of the commerce shut down.