Macro Overnight Report

Macro

Christopher Dembik

Head of Macro Analysis

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.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

Saxo Capital Markets HK is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo Capital Markets HK Limited holds a Type 1 Regulated Activity (Dealing in securities); Type 2 Regulated Activity (Dealing in Futures Contract) and Type 3 Regulated Activity (Leveraged foreign exchange trading) licenses (CE No. AVD061). Registered address: Rooms 2001-02, 20/F York House, The Landmark, 15 Queen's Road Central, Hong Kong

By clicking on certain links on this site, you are aware and agree to leave the website of Saxo Capital Markets, proceed on to the linked site managed by Saxo Group and where you will be subject to the terms of that linked site.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

Please note that the information on this site and any product and services we offer are not targeted at investors residing in the United States and Japan, and are not intended for distribution to, or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation. Please click here to view our full disclaimer.