Macro Overnight Report
Head of Macroeconomic Research
Summary: Tensions remain elevated in financial markets, with the Australian stock market falling into bear market this month and high yield spreads soaring in risk-zone. Latest data confirm that the COVID-19 starts to have a deep negative impact on consumer confidence, which will increase the demand shock in many countries. A few minutes ago, in a surprising move, the BoE cut rates by 50bps to 0.25% and announced a credit facility for SMEs to respond to coronavirus uncertainty.
Emergency rate cut by the Bank of England: Less than ten minutes ago, the BoE released a statement announcing a reduction of the bank rate by 50bps to 0.25% due to coronavirus uncertainty. A new Term Funding scheme targeting SMEs and financed by the issuance of central bank reserves is also implemented. It could provide in excess of £100 billion in term funding. There is little doubt this is coordinated with fiscal easing in March budget today, which is expected to be big. The GBP is initially weaker following the emergency rate cut.
Tightening conditions in the United States are similar to that of 2011: Despite the recent Fed monetary policy tweak, financial conditions continue to deteriorate in the United States. The Federal Reserve is forced by markets into a dovish corner. Fed funds futures are pricing in 75bps in Fed Funds cuts by 18 March. Other options are on the table if necessary, including dropping rates to 0%, doing more QE and starting to buy other assets than USTs, such as US corporates or even US equity indexes. Due to the negative side-effects of negative rates, we don’t think that the Fed will resort to that option in the first place.
Tensions in the credit markets remain: Lately, we have repeatedly stated that investors must watch closely the latest developments in the credit markets. These are the weakest link in financial markets and the most obvious channel transmission through which the crisis could spread. High Yield spreads continue to increase, which will likely result in a wave of downgrades from BBB- to junk in the coming weeks. Until those spreads stabilize, financial markets are going to struggle. If investors need to monitor only one thing these days, it is bright clear that it is the credit markets.
More bad data this morning: There was not much data released in the Asian session. The most significant was the Australia Westpac consumer confidence index. It was a very bad print. The index hits a five-year low at 91.9 in March due to the COVID-19 outbreak and the associated rout in financial markets. This is the second lowest level since the GFC when the index bottomed out at 79. It tends to confirm that the coronavirus outbreak is primarily a demand shock and we should get ready for more negative data in coming months concerning consumption and household confidence in the most exposed countries.
Easing of capital requirements and regulation are coming in Europe: Over the past hours, many measures have been decided at national level in Europe to help households and SMEs, including suspension of payments on mortgages in Italy and similar discussions are currently going on in Germany. In order not to destabilize further the banking sector, which might be hit this week by another ECB interest rates cut, bank capital relief and temporary loosen regulation may be implemented anytime soon by the EU banking watchdog.
The airlines industry is going through its biggest decline on record: Many companies are on the verge of bankruptcy. The president of United Airlines indicated yesterday evening that the company expects revenues to fall as much as 70% in the next two months. Korean Air, which is one of the top-ranked international cargo airlines, is even more pessimistic. It has cut almost -80% of its international capacity due to the crisis compared with -18% during the 1997 financial crisis. The top management has warned the company may not survive if the COVID-19 outbreak is not contained quickly. A “Marshall Plan” for the airlines industry may come soon.
Latest Market Insights
Quarterly Outlook Q3 2022: The Runaway Train
- Central banks' attempts to kill inflation is a paradigm shift, which could end in a deep recession.
Tangible assets and profitable growth are the winnersWith US equities officially in a bear market, the big question is where and when is the bottom in the current drawdown?
Understanding the lack of investment appetite among oil majorsThe everything rally seen in recent quarters has become more uneven, as its strength is driven by commodities in short supply.
The pressure is on as the wind leaves the sailsWith cryptocurrencies in sharp decline, are we entering a crypto winter or is the bear market a healthy clean-up of the crypto space?
Why the Fed can never catch up and what turns the US dollar lower?Many other central banks are set to eventually outpace the Fed in hiking rates, taking their real interest rates to levels higher than the Fed will achieve.
Bank of Japan: Swimming against the tideThe Japanese economy has gone from the age of deflation to rapidly rising prices in no time, leaving the Bank of Japan in a pickle.
Green transformation detour and bear market hibernationWith the impending risk of global econonomic derailment, we share the five things investors need to consider in this new half year.
Crisis redux for the eurozone?Whether there's going to be a recession in Europe or not, the path towards a stable economy will be agonizing.
Technical Outlook: Gold, Oil and a remarkable multi-decade perspective on EquitiesThe Nasdaq bubble pattern, USDJPY resistance, crude oil uptrend losing steam and the technical outlook for USD.
China: the train of new development paradigm left the station two years agoChina is transiting to a new development paradigm, as they are hit by deteriorating terms of trade, a slower global economy and an uncertain future while continuing attempts to contain the pandemic.