Markets
The Saudi response to the oil production cut dispute with Russia sent markets in tail spin. It’s not what recession-sensitive investors where looking for right now. The exogenous supply shock to oil pushed prices down as low as $31/barrel (currently $36/barrel). The S&P subsector energy loses over 16% today with fear of second round effects and repercussions for companies in the sector. Losses on US main equity indices exceed 5% at the time of writing with Europe down 6%. Main indices are heading to 2018 sell-off lows. Market participants ran for cover, hiding in safe havens. US Treasuries continue outperforming German Bunds. The US economy via the shale sector is much more at risk from lower energy prices than e.g. Europe. The US yield curve bull flattens with yields down 16 bps (2-yr) to 32 bps (30-yr). Short term money market rates discount a 75 bps rate cut at the March 18 Fed meeting. We stressed before that the current flattening hints both at recession fears and at expectations of fresh asset purchases once the Fed hits the effective (zero) lower bound. Changes on the German yield curve were larger than they were last week. German yields lost 15 bps (2-yr) to 22 bps (30-yr). Obviously Europe had to respond to the draconic measures taken by the Italian government over the weekend. Italian assets are today’s (European) underperformers. The Italian/German 10-yr yield spread widens by 44 bps and exceeds 200 bps for the first time since Summer (22 bps). Other semi-core and peripheral spreads rise by respectively up to 10 bps and up to 20 bps (Greece + 62bps). Markets currently discount another 15 bps deposit rate cut by the ECB, but we’ve argued before that the central bank won’t be lured into doing so given that costs outweigh benefits. Liquidity-enhancing measures, stronger forward guidance or even slightly increasing the monthly number of asset purchases are distinct possibilities, but we fear they won’t be able to revamp market sentiment.
The story on FX markets remains the same. Dollar crosses are stuck in sell-on-uptick patterns. Main drivers remain the (permanent) huge loss of interest rate support and the expected recession and underperformance of the US economy. EUR/USD trading is extremely volatile between roughly 1.1375 and 1.1475. EUR/GBP mirrored this choppy trading in EUR/USD (currently 0.8710). USD/JPY lost out on key 104.54 support, trading in the 102.25-area which is the lowest level since 2016. Next support kicks in around 99.02. The trade-weighted dollar fell below 95 for the first time since 2018.
News Headlines
Trading in main US stock markets indices was temporarily halted immediately after the open today as the S&P declined 7%, triggering a pause in trading activity. The breaker was activated for the first time since end 2008. The move occurred as volatility spiked across most markets, including FX markets which are unsettled after a long period of historically low volatility.
The IMF urged authorities across the globe to implement targeted fiscal, monetary and financial market measures to support households and businesses that are impacted by the coronavirus. Monetary policy measures could include providing liquidity to banks and financial institutions, particularly those that are providing credit to SMEs which are less prepared to withstand a disruption. Other monetary measures such as policy rate cuts or asset purchases can lift confidence and support financial markets if there is a marked risk of a sizeable tightening of financial conditions.
The cost to insure against the default risk of high-yield corporate bonds soared sharply, both in the US and in the EMU as investors are pondering whether the turmoil in the oil markets will spread to the broader high yield market outside the energy sector.
