Risk aversion returned to markets following yesterday’s surge in especially US stock markets. Today’s countermove started right at the onset of European dealings and had several roots. A high-profile tech company published as one of Europe’s first awful Q1 earnings and refrained from guidance. It acted as a chill reminder of the impact of the coronavirus on companies. US earnings (mostly financials) later weighed on sentiment as well as profits plunged due to stark increases in loan loss provisions. US March data were a final blow to the already dark mood. Headline retail sales fell off a cliff, printing the biggest decline on record (-8.7% m/m). People hoarding in supermarkets (food, beverages +25%) failed to offset a steep drop in clothing (-50% m/m), gasoline (-17%) or durables (motor vehicles -25%, furniture -27%). Core measures were only slightly less dramatic because they exclude some of the aforementioned categories. Industrial production contracted by -5.4% m/m, the most since WW II. The NY empire manufacturing index visited uncharted territory by dropping a staggering 57 points to -78.2. European stocks lose over 3%. Declines in the US extend to 2%. The energy sector is underperforming amid a renewed sell-off in commodities, oil in particular, following the IEA’s warning that the demand slump could well trump output curbs of 10mln b/d. Investors sought shelter in core bonds, pushing US yields 2 bps (2-yr) to 11 bps (30-yr) lower. The German yield curve also bull flattens with yield changes varying from -3.7 bps (2-yr) to -11 bps (30-yr). Peripheral yields soared 23 bps in Greece and 27 bps in Italy.
The dollar dominated on currency markets. Acting as the current gauge of risk, the greenback outperformed against the Japanese yen. USD/JPY rose from the low 107 area to 107.6 at the time of writing despite horrible US data. EUR/USD stayed in the defensive already from the start, heading towards the 1.09 area before breaking below in the wake of the US figures. The pair is currently trading at 1.087, down from 1.098. The trade-weighted dollar is retesting resistance at 100. Oil sensitive currencies such as the Norwegian krone and Canadian loonie are obviously hit hard, especially against the US dollar. Sterling gave up some of its recent gains though moves are very limited compared to others. Brexit negotiators Frost (UK) and Barnier (EU) aim to agree on a schedule for talks in April and May. The EU said it wants to discuss an extension to the transition period which currently ends in December. PM Johnson’s spokesman said the UK’s position regarding that is unchanged however. EUR/GBP is floating in the 0.872/3 area, up from 0.87. The pound’s decline vs. the USD is more prominent: from 1.26 to 1.246.
Oil plunged after the International Energy Agency (IEA) predicted oil demand to fall a record 9.3 million b/d this year and storage exhausted by mid-year, wiping out a decade of consumption growth despite the historic OPEC+ deal. April will see the worst of it, with consumption diving as much as 29 million b/d to levels last seen in 1995.
The Bank of Italy called for the government to contemplate employing public funds to ease mergers of smaller banks at risk, warning the coronacrisis could tip some smaller lenders over the edge despite rescue measures and supervisory actions.
UK Finance – a trade body for the British banking sector – disclosed banks are dealing with a big backlog of more than 20 000 applications for the government’s emergency loan scheme. Many SMEs have been complaining about the slow take-up as they’re in immediate need of cash to survive, renewing concerns over the scale, speed and effectiveness of the bailout package.