Markets

While the rise in coronavirus cases in China and some European countries seems to be slowing by the day, the amount of deaths is still increasing in many areas, including the US. It creates a difficult setting in which investors find themselves often in a straddle.

Today’s initial risk mood was rather gloomy following a mixed Asian session. The Eurogroup failed to reach consensus on a fiscal tool to fight the coronavirus and will continue discussions tomorrow. That obviously didn’t help European assets either, especially given the shock the economy probably has suffered and will have to suffer, according to estimations by several French and German institutes.

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The French central bank expects its economy to collapse by -6% in the previous quarter, the most since WW II. In Germany, the semi-annual publication by five renowned economic bureaus (including the Ifo Institute) projected a 10% contraction for Q2 and -4.2% for the whole year, adding there are material downside risks.

Stocks shed somewhere around 2% before cutting losses in half going into US dealings. The 38.2% February-March retracement proves a hard cap for the time being. Core bond yields traded similarly though the upleg occurred already at the very start of European hours. The US yield curve bear steepens with yield changes varying from +1.4 bps (2-yr) to +4.1 bps (10-yr). German yields currently close to unchanged after erasing earlier losses of about 3-5 bps. Spreads vs. Germany’s 10y yield are mixed. Greece (-4 bps) outperforms while Italy (+6 bps) is lagging the periphery.

The risk-off climate had a corresponding impact on FX markets as well with the dollar being the main beneficiary. EUR/USD briefly dipped below 1.085 coming from the 1.09 area but managed to pare most of the losses as the mood gradually turned for the better. The currency pair is currently changing hands near the technically important level of 1.0879. USD/JPY tried a shy attempt to regain 109 but that test fails for now as the couple is trading just below. The trade-weighted dollar (DXY) had to give in some of its intraday gains and is currently struggling to stay above 100. EUR/GBP had a tentative downward bias which accelerated around noon in lockstep with sentiment improving. The couple is currently again exploring areas close to but below 0.88. Cable went from 1.23 to 1.238.

News Headlines

The Polish central bank (NBP) cut another 50 bps from its policy rates for the second time in three weeks, taking the reference rate down to 0.50% in a bid to shield the economy from the fallout from the corona pandemic. The NBP’s Lombard rate is now at 1%, the deposit rate at 0%, the rediscount rate at 0.55% and the discount rate at 0.60%.

The ECB urges eurozone finance ministers to unleash their fiscal bazooka’s as the bloc may need fiscal measures worth up to €1.5 trillion to combat the coronacrisis and the EU Commission predicts the bloc’s economy to shrink by 10% this year, Reuters reported citing officials.

The German government sharpened curbs on foreign (outside the EU) takeovers to protect its domestic firms from unwanted mergers as the government vowed to “stand by our companies” in the face of investors who might now hope to profit from vulnerabilities in some key industries.

Hong Kong unveiled a HK$137.5 billion ($17.7 billion) stimulus package to offset the impact of coronavirus, which has taken a heavy toll on the city. Under the bill, the government will roll out a HK$80 billion job security programme to subsidize 50% of wages for affected workers for 6 months.

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