What a week it has been in financial markets and unfortunately not in a good way . Stocks are significantly down and we have officially entered a bear market (stocks more than 20% down from the last peak), government bond yields reached new lows, credit bond yields rose further, the oil price collapsed on the back of lower demand and a possible oil price war between Saudi Arabia and Russia and there were big currency swings.
Also this week, data releases were irrelevant for investors and all eyes were on policymakers. The ECB decided to keep its policy rates unchanged, in line with our expectation but against market pricing. Instead, the ECB focused on ‘targeted measures’ and went hard on liquidity. The ECB will conduct LTRO on a weekly basis and ease the TLTRO III conditions. The package underwhelmed the market, with spread widening between peripheral and core bonds. For more details see Flash ECB Research: Targeted response but no general easing , 12 March. Despite risk sentiment deteriorating further this week, the Federal Reserve has so far refrained from making another emergency cut although it decided to inject a lot more liquidity into the markets on Thursday. Bank of England made a 50bp emergency cut this week.
Politicians in Europe are also doing something to slow the spreading of the virus , including closing schools, recommending people to work from home and making emergency packages for companies, in particular small and medium enterprises, to avoid a liquidity crisis. Economic research shows that economic policy is more effectual when it is fast and forceful and we think policymakers should take a ‘rather safe than sorry’ approach and do more. Unfortunately, risk is they will continue to move only slowly.
Just like this week, we can ignore most of the data releases next week, as they are from before the spreading of the coronavirus in Europe and the US. The data releases are outdated, as the economy is another place now than in January and February. That said, there are a few that might turn out to be interesting. In the US, we get a couple of regional PMIs and Bloomberg’s weekly consumer confidence indicator on Thursday. The German ZEW expectations on Tuesday are also of interest.
We are still much more interested in what the policymakers will do next week, not least the central banks. The Fed is set to announce its decision on Wednesday and it is more likely that it disappoints than surprises positively. Investors are already pricing in the Fed will cut the target range by 100bp all the way down to 0.00-0.25% and expectations of an outright QE programme are rising. Risk is that the Fed delivers less, which will cause a negative market reaction, just like the ECB. On Thursday, Bank of Japan meets. It has already scaled up asset buying. We could see an increase in the signalled annual pace of ETF-pick-ups and further activation of already existing loan-programmes. A rate cut will likely do more harm than good. In Scandi, Riksbanken’s Jansson speaks. For more details please see the next page. We are also very interested in any fiscal and emergency measures politicians can agree on, not least in the US, where politicians are having trouble reaching a bipartisan agreement.