Markets
A first important set of ‘timely’ eco data from the corona crisis kicked in today with the EMU PMI’s. The global EMU PMI printed at 31.4 from 51.6. Measures of member countries were more or less similar. The global indices signaled a unpreceded setback in activity with services hit the hardest. Even so, the data had only a limited, temporary impact on EMU/German yields. Markets were already well aware that activity hit a roadblock. The absolute number probably doesn’t bring that much new info. Markets are mainly trying to assess when and at what pace economic activity might resume. Market activity was again mainly driven by investors assessment of global liquidity conditions.
The impact of yesterday’s unprecedented measures taken by the Fed at least provided some comfort. The easing of global stress was mainly visible in the FX market. The trade-weighted USD slipped to the low 101 area from a top near 103 over the previous three trading sessions. The support of the Fed swap lines is probably also still working through into these markets.
Even today’s risk-on context, the yen remains a relative underperformer among the majors. USD/JPY rebounded intraday (currently 111.25 area). The euro outperformed the yen. We don’t draw firm economic conclusions. Germany developing its fiscal firepower to address the economic downturn domestically might give the euro some comfort..
Intra-EMU credit spreads also suggest that markets expect formal political backing of a lifeline for countries like Italy, supported by the new PEPP (or maybe even by OMT). EUR/USD is trading in the 1.0820 area. However, for now no really important resistance has been recouped.
Of late, yield seldom followed the usual risk-on/risk-off ‘logic’. Higher yields, especially at longer maturities, were often seen as a source of stress. This interpretation is a bit difficult today with stock markets gaining up to 6/7% . US yields rose between 3.5 bp (2-y) and 8 bp (30-y). We assume that markets are looking for some kind of equilibrium as investors try to assess at what levels the Fed will guide the yield curve in these times of unlimited bond purchases.
One can expect the Fed to use more of its power to guide the short maturities of the curve rather than longer ones. German yields followed a similar trading pattern rising between 2 bp (5-y) and 5 bp (30-y). Despite markets tensions, Spain sold € 10 bln 7-y government bonds via syndication (book + € 36 bln). Spain underperformed with the 10-y spread widening 7 bp. Spreads of most other countries showed a mixed picture, but change less than 3 bp (except Portugal).
In the current context of easing global markets stress/USD correction, sterling outperformed against the dollar and the euro even as the UK strengthened its ‘lockdown measures’. As was the case in EMU, the UK composite (37.1) and services PMI (35.7) took a steep dive, however with little direct impact on sterling trading. EUR/GBP lost about one big figure and is currently trading in the 0.92 area. However, in a broader perspective the pair, the 0.90/0.95 trading band dominates trading.
News Headlines
The Czech government confirmed the central bank’s intention to launch QE as the Ministry of Finance approved the needed legislation that allows the CB to buy a wider range of instruments (incl. the state’s sovereign bonds). The Hungarian central bank swam against the global central bank easing tide, leaving its overnight deposit rate unchanged at -0.05% and the base rate at 0.9%. Instead, the CB responded to the coronacrisis by pledging unlimited long-term liquidity through fixed-rate loans up to 5yrs and suspending banks’ reserve requirements.
The ECB is mulling the possibility of buying ETFs as part of its massive stimulus programme to combat the coronacrisis, governing council member Peter Kazimir disclosed but he further noted the central bank hasn’t yet made a decision on such purchases.
