Monday, March 16, 2020

Capital Markets: "Monday Blues: Fed Moves Bigly and Stocks Slump"

From Marc to Market:
Overview: The Federal Reserve and central banks in the Asia Pacific region acted forcefully, but were unable to ease the consternation of investors. The Reserve Bank of New Zealand cut key rates by 75 bp. The Bank of Japan appears to have doubled its ETF purchase target to JPY12 trillion, and the Reserve Bank of Australia is preparing for new measures that will be announced Thursday.

The Fed returned to the zero-bound, resumes long-term asset purchases, and took other measures to boost funding for banks. The price of accessing the dollar-swap lines the Fed keeps with several major central banks was halved to 25 bp over overnight index swaps from 50 bp. All the action and the 9%+ rally the US before failed to stem the tide. Most Asia-Pacific bourses were down 3%-6%, and Australia bled more than 9% after losing almost 11% last week, led by energy, industrials, financials, and real estate. The Dow Jones Stoxx 600 crashed nearly 18.5% last week and is nearly 8% in late morning turnover, led by industrials, consumer discretionary, and financials. The S&P 500 is limited down in electronic trading.

Benchmark yields are mixed. Australian, and especially New Zealand yields fell, though the yield on Japan's 10-year yield firmed slightly. In Europe, periphery bonds are under pressure, where the yield is up around 13 bp. France is seeing its premium rise against Germany too. The US 10-year yield is slipping below 77 bp. Last week it fell to almost 55 bp. The dollar is mixed. The dollar-bloc currencies and the Norwegian krone are lower. The Bank of Canada and Norway's Norges Bank cut rates by 50 bp before the weekend. The yen and Swiss franc are up more than 1.75% and nearly 1%, respectively. Most emerging market currencies are lower, led by more than 2% losses in Russia, Mexico, and South Africa. Gold's early gains have dissipated and is extending last week's near-record decline. It appears poised to possibly break below $1500. May WTI is off by 6% to approach $30 again.

Asia Pacific
The BOJ's doubling of its ETF target was the largest measure that Governor Kuroda announced, but he also indicated the purchases of corporate bonds will be increased too
. A new zero-rate loan facility was also unveiled. As officials consider other steps, it should consider suspending the sales tax increase that went into effect last October. Abe had indicated at the time that only a Lehman-like event would persuade him to delay that tax increase, which had developed a political lift of its own outside of the fiscal goals.

The Reserve Bank of New Zealand announced a dramatic 75 bp rate cut before the markets opened to bring the cash rate to 0.25%. Once the news wires indicated that an announcement was pending, the Kiwi was marked down to about $0.5945 from last week's settlement of about $0.6135. The other dollar-bloc currencies fell, but not nearly as much, and recall that the Bank of Canada surprised the market with a 50 bp cut before the weekend. The RBNZ also suspended for at least a year new capital requirements on banks, which would have tied up around NZ$47 bln. The central bank was clear that if additional monetary moves are necessary, it envisions asset purchases rather than negative rates. The government will announce new fiscal measures tomorrow. Separately, Australia, which cut rates on March 3, indicated it would make extra liquidity available in its funding markets.

Chinese data was horrific. The economic figures in February were considerably worse than expected and point to a dramatic contraction underway. Bloomberg economists estimate the economy may have contracted by 20% year-over-year in the January-February period. February industrial output fell 13.5%. Retail sales were off 20%, and fixed asset investment plunged by 24.5%. Unemployment, which was at 5.2% at the end of 2019, jumped to 6.2% in February....