Trading took off rather slowly today. European stock markets spiked higher after the opening bell, catching up with the US (Friday) and Asia, but couldn’t generate additional momentum afterwards. We remain very skeptical against stock markets’ performance in April, which seems out of line with the severity of the economic damage caused by current lockdowns and slow exit strategies. US Treasuries underperformed German Bunds ahead of tonight’s start of the US Treasury’s end-of-month refinancing operation. They hold a dual auction with both 2-yr and 5-yr Notes on offer. The US yield curve bear steepens with yields adding 0.4 bps (2-yr) to 2.7 bps (30-yr). The German yield curve bear steepens with yields up 2.9 bps (2-yr) to 1.2 bps (30-yr). 10-yr yield spread changes vs Germany narrow by 6/7 bps for Portugal/Spain and by 11/12 bps for Italy and Greece. The latter two countries escaped rating downgrades by S&P last Friday. The Italian BBB rating (negative outlook) was left intact as the ECB’s actions make Italian debt financeable, balancing deteriorating public finances. The outlook on the Greek rating (BB-) was revised from positive to stable. However, the country has very little outstanding marketable debt following the 2012 restructuring. The gentle positive risk sentiment (dollar negative) and rallying peripherals (euro positive) tilted the balance in favour of a higher EUR/USD (1.08 to 1.0850). EUR/GBP changes hands in the low 0.87 area.

The Japanese central bank this morning decided to remove the cap from its government bond buying programme and to raise the amount of corporate bond purchases. The move was flagged last week and didn’t deal losses to the Japanese yen. On the contrary, USD/JPY falls to first support in the 106.92 area on the back of dollar weakness. Other major central banks meet this week as well with the Fed on Wednesday and the ECB on Thursday. No policy action is expected for the Fed, but Minutes of the previous two, extraordinary meetings, showed that some governors were already exploiting the use of a new sort of policy guidance. This could for example keep policy rates near the zero lower bound until both inflation and unemployment hit predetermined levels. Other options include numeric targets for US yields across the curve. The current unlimited QE programme already serves as de facto curve control but other central banks went already further (eg BoJ). The ECB conjures on Thursday. The current pace of asset purchases (nearly €5bn/day) would imply that PEPP/APP targets will be reached before the end of the year. The ECB could be thinking about an extension in line with for example the US, which includes so called fallen angels (debt from corporates/sovereigns who haven been stripped from their investment grade rating during the coronacrisis). Last week the central bank already announced to make such debt eligible as collateral in its refinancing operations.

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News Headlines

The EU will reportedly offer banks capital relief through relaxed calculations of the leverage ratio that measures capital against the total amount of risk-weighted assets, to spur lending to businesses battered by the coronacrisis whilst avoiding having to make crippling loan loss provisions.

French jobless claims surged by a record 7.1% in March as the nationwide lockdown due to the corona outbreak is taking its toll on the country’s labour market. The number of short-term/temporary contracts rose sharply while the number of people getting jobs dropped significantly. Moreover, companies have put an astonishing 10.8mln people – more than half of private sector workers – on state-subsidized furloughs.

The EU reportedly considers allowing member states to provide state aid to companies through subordinated debt injections under favourable terms to weather the coronacrisis. Under the proposal, the amount of subordinated debt that may be granted at discounted interest rates to NFCs shouldn’t exceed 40% of the annual wage bill of the beneficiary company and 5% of the company’s total turnover in 2019.


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