Macro Overnight Report

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.