Markets

Corona related uncertainty (or should we already call it panic) continued driving global trading. It is still almost impossible to asses both the geographical spreading of the virus as well as the impact on the economy on a macro and a micro/corporate level. This lack of visibility is causing investors to consider some kind of worst case outcome, triggering rather ‘indiscriminatory, forced selling’ of risky assets. On the interest rate markets, uncertainty for the unknown of corona is causing an emergence call to the central bankers, with the Fed seen having most power to mitigate potential negative impact. The fact that the US, seen as a stronghold of the global economy, is also at risk of being hit, only reinforces expectations for Fed action. Markets are bringing forward rate cut bets. The March Fed meeting is coming on the radar and might prove the right time to act if the damage for markets and the economy deepens. Eco data are seen as not capturing the last developments and aren’t able to ease the process. In this respect, EC confidence data and US durable orders were stronger than expected, but didn’t help stop the bleeding. The US yield curve bull steepens with yields declining another 9 bp (2-y) to 7bp (30-y). The market now discounts more than 50% chance of a March cut and 3 cuts toward the turn of the year. The German yield curve declines 4-5 bp across the curve, the belly (5/10-y) slightly outperforming. The sharp decline in core yields this time doesn’t help peripheral bonds anymore. Intra-EMU spreads rewiden, with Portuguese and Italian spreads rising 13 bp and Greece rising 11bp. However also countries with a better credit profile like Ireland (+8 bp) or Belgium (+3 bp) are hit by the widening trend.

In the FX market, the dollar losing interest rate support at an accelerating pace continues weighing on the US currency even as there is ever growing evidence that Europe and Japan will also be affected by the economic fall-out of corona. EUR/USD regained intermediate resistance near 1.0950, currently trading in the 1.0975 area. The decline in USD/JPY develops rather orderly given the intense risk-off. The pair is drifting below the 110 handle. Smaller, less liquid currencies (NOK, CAD ….) mostly are losing ground against their reference currencies. Rumours on SNB interventions for now cap further Swiss franc gains. EUR/CHF is holding rather stable in the 1.0620/45 area.

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Today, the UK published its negotiation mandate, shaping the guidelines for the talks it will start with the EU to put in place a new institution framework governing the post-Brexit relationship. As expected, the UK stressed that it wants to regain maximal political and economic independence. This call contrasts with the EU asking a level playing field as a condition for UK companies to maintain easy access to the EU market. The split between the UK and the EU shouldn’t have come as a surprise. However, the UK also put forward a tight timetable. The UK will in June evaluate whether the negotiations have progressed enough to reach a deal meeting the needs of the UK by September. If not, the UK says it will prepare leave the EU regulatory framework. The prospect of tough negotiations and the risk of a new deadline on a potential hard Brexit, hammered sterling. EUR/GBP jumped from the 0.8440 area this morning to the trade north of 0.85 at the moment of writing. Cable dropped from the 1.2940 area to 1.2865 currently.

News Headlines

Japan urged/ordered all schools to close from Monday until the end of the spring break on April 8. The unprecedented move that will affect some 13 million pupils and their parents (finding childcare) is aimed at reducing social contact thus trying to halt the spread of the coronavirus.

Norway’s sovereign wealth fund made almost a 20% return on investment in 2019 as the stock market rallied. It’s the world’s biggest wealth fund second best performance and caused it to swell $180 billion last year to $1.1 trillion. The fund is now worth three times Norway’s annual GDP.

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