Thursday, March 19, 2020

Capital Markets: "ECB's Bazooka Support Bonds but not the Euro"

From Marc to Market:
Overview: It is not just that the dollar soared while stocks and bonds continued to plunge. The dollar's strength is, in effect, a powerful short-covering rally. It was used to fund a great part of the global circuit of capital.

The circuit of capital is in reverse now, and the funding currency is being bought back. The dollar's strength is a function of the sell-off of other assets. Meanwhile, officials continue to announce more measures to combat the economic and financial fallout of the coronavirus.

The ECB announced a substantial increase in its efforts, and the markets have responded well. Although Asian Pacific equities saw some large declines (e.g., South Korea -8.4%, Taiwan -5.8%, Australian -3.4%) Europe equities are firmer (Dow Jones Stoxx 600 +1.4%). The Philippines ' market re-opened for the first time since Monday (after a unilateral shutdown) and tumbled more than 13%. US shares are trading with a firmer bias.

The more significant reaction to the ECB's moves is the dramatic rally in European bonds (around Italy -70 bp, Greece -170 bp, Spain and Portugal -45 bp, France -25 bp). The US 10-year yield is about four basis points lower at 1.15%. The US dollar continues to motor higher.
The Norwegian krone, dragged by the collapse of oil prices and illiquidity, has dropped around 6.5%. The Reserve Bank of Australia delivered an emergency 25 bp rate cut, and the Australian dollar is off almost 1%. The dollar is firmer against most of the major currencies. 
The Canadian dollar is the exception, and it is little changed. Indonesia and the Philippines cut rates too. While the rupiah is off 4.3%, the Philippine peso is a little firmer. Gold is pinned near its recent lows as it found new sales when poked above $1500. Oil is rebounding smartly (~+16%) after yesterday's 24% swoon.
Asia Pacific
Summary of policy actions in Asia-Pacific:

Japan--the BOJ offered to lend JPY2 trillion in an unscheduled auction. Tokyo is reportedly preparing a JPY30 trillion aid package, the third effort.
Australia--cut interest rates 25 bp to 25 bp, the effective floor and will target the three-year yield of 25 bp, as well. It will provide A$50 bln of funds for banks
Philippines--cut the borrowing and deposit rates by 50 bp to 3.25% and 2.75%, respectively. Local markets re-opened.
Indonesia--reduced the seven-day repo rate by 25 bp to 4.5%.

There are now more cases of the Covid-19 infection in Europe than in China. There were no more new cases reported in Wuhan today. The concern there is two-fold. New clusters of infection have been traced, according to reports, to people returning from overseas. There is also concern that as economic and social activity picks up, will there be a new flare-up?

The dollar reached new highs for the month against the Japanese yen near JPY109.55. Recall that on March 9, the dollar recorded a low around JPY101.20. At JPY108, the dollar has retraced (61.8%) of its losses. Since the high was made, the greenback has found support by JPY108.50, ahead of the option at JPY108.25 (for $1.2 bln) that expires today. The JPY110 offers psychological resistance. Before last weekend, the Australian dollar above $0.6200. Earlier today, it traded to almost $0.5500. It recovered later into the regional session to about $0.5800. A move above $0.5825 area could spur a move toward $0.5900. The US dollar's strength is no match for the Chinese yuan. The dollar rose about 0.75% today after a 0.6% advance yesterday. It is above CNY7.10 for the first time since mid-October.

The ECB held an emergency meeting as European bonds cratered.....