Markets

After a first, meaningful risk rebound markets apparently found some kind of short-term equilibrium today. ‘Monetary’ liquidity as provided in an ample way by the Fed and a long series of other central bankers across the globe easing helped equities to leave the recent correction low behind and slowed the run on the dollar.

Overnight, markets of risky assets also enjoyed the backing of the ‘fiscal liquidity’ as announced by the US government. These engagements were a ‘conditio-sine-qua-non’ to halt investors panic. However, for now investors, and probably also most other economic agents, don’t really see the concrete roadmap on how this support will pass through to the real economy. This leaves bond markets and currency markets at the mercy of mostly order driven, technical trade.

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After a risk-on rise in US Treasury yields yesterday , interest rates across the US yield curve today decline about 2-4 basis points. Investors are still pondering the combined impact of massive expected bond issuance together with central bank action to establish a yield curve that meets its MT objective for adequate transmission of the CB’s monetary policy and that is in line with the CB’s policy guidance.

Contrary to US yields, core European/German yields again rose 1-3 bp. The German fiscal authorities also already engaged in a big fiscal effort with important consequences for its long term credit quality. Markets are also looking at the financial structure of the EU rescue package for countries like Italy (and maybe others).

The way this package is structured and the involvement of the ECB also will affect the relative credit quality between core and non-core EMU countries. Markets obviously are awaiting these details. However, recent stabilization in  intra-EMU credit spreads suggests that markets expect some kind of systemic support for the likes of Italy. ECB head Christine Lagarde, according to sources, advocated the one-off joint issuance of corona bonds, but is unclear whether this is acceptable for Germany.

Trading in the major currency cross rates, including EUR/USD, was also mainly order driven and technical in nature. EUR/USD stayed away from Monday’s low near 1.0640 and yesterday’s late session ‘corrective dip’ near 1.0750. At the same time, the pair clearly lacks any momentum to try a sustained break toward 1.09 or higher. In line with global constructive risk assessment sterling initially gained further ground, both against the euro and the dollar. However, the move petered out later in the session. EUR/GBP is currently again trading north of 0.92, even marginally higher compared to yesterday’s closing level. The 0.90 area probably will be a tough support for EUR/GBP.

Among the smaller currencies, the Norwegian krone remains a relative outperformer, even as the oil prices continues to struggle. Investors apparently suspect/fear potential action from the CB to stabilize the krone.

News Headlines

Europe’s top banking lobby is seeking to find common ground among EU banks on whether to scrap dividends, Bloomberg reported. Banking and securities watchdogs increasingly urge lenders to refrain from share buybacks and think twice before paying dividends and bonuses to conserve capital, worried that banks could misuse funds meant to bolster the economy against the corona outbreak. Besides, EU banks have been granted flexibility to avoid a jump in provisioning for temporary non-payment of loans during the coronacrisis.

The NBB’s Belgian business confidence indicator collapsed 8.2 points to -10.9, the steepest drop on record as the coronavirus put economic activity to a standstill and shattered confidence. Declines are observed across all sectors, but the service industry is paying the highest toll (3.2 to -22). Even more than the assessment of the current situation, the outlook for activity, demand and employment in particular is very gloomy.

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