Friday, March 13, 2020

Capital Markets: "No Rest for the Weary"

A massive reversal in equity futures markets in the last six hours.
I wish it hadn't happened, only bad things can come of moves such as the down 600+ to up 1100 we saw in DJIA futures.
Plus, I'm starting to get tired. Happy Friday the 13th.

From Marc to Market:
Overview: The ECB boosted this year's asset purchases, lightened capital requirement rules, liberalized collateral requirements, suspended the annual stress tests, and provided for long-term loans at a rate as much as 25 bp below the negative 50 bp deposit rate. The market was nonplused. Later in the day, the Federal Reserve announced $2 trillion in new repo operations over starting yesterday and continuing through early next week. It also indicated that its purchases would not be limited to bills anymore, but would match the maturity distribution of the outstanding Treasury debt.

The market reacted positively for a brief moment, and US equities recorded new lows into the close, leaving the Dow Industrials off 10%, and the S&P 500 was down 9.5%. However, as we have argued, the focus is on the US fiscal response, and it appears that a prospect for a deal is helping stabilize the capital markets today. It was not sufficient to hold back equity losses in most large Asia Pacific markets, including Japan, China, Hong Kong, Taiwan, and South Korea. However, Australian and Indian markets rose over 4%, and European bourses, led by utilities and materials, are 3-4% higher, as are US stocks.

Bond yields have jumped, 17-19 bp in Australia and New Zealand, and 7-15 bp higher in Europe. The US 10-year benchmark yield is up around 7 bp to 0.88%. The dollar is paring this week's gains and is heavier against most of the major currencies today but the euro and yen. For the week, the Norwegian krone is posting the largest decline (~-7.5%), followed by the Australian dollar (~-5,0%).

The yen and Swiss franc were the strongest, losing 1.0% and 0.75%, respectively this week. Emerging market currencies are mixed. While Asian currencies moved lower, the liquid, accessible currencies, like the South African rand, Turkish lira, and Mexican peso, are trading higher. With today's 0.6% gain, the JP Morgan Emerging Market Currency Index is off 3.5% this week. Gold initially extended yesterday's almost $59 fall to test a one-month low near $1550 today and is recovering. For the week, it is off about $88 an ounce, which is about what it gained last week. Oil too is steadying as it found support near $30 a barrel. WTI for April delivery is still off almost 21% this week to bring its three-week slide to around 45%.

Asia Pacific
The equity crash is one powerful optic of the disruption in the capital markets. This disruption was also evident in the scramble for dollars as bank-to-bank lending dried up. The cross-currency basis swap is price expressed relative to LIBOR how shifting liquidity from one currency to another. Yen holders were willing to give up yen for dollars as 60 bp lower than LIBOR because they were is such need of dollars. It reached about -90 bp earlier today. This is the biggest discount in more than two years, and it finished last week near a 40 bp discount. In early and mid-January, the discount sometimes was smaller than -10 bp. ....
*****
America
The Fed is going to flood the market with liquidity. As the stock market was imploding yesterday, the Federal Reserve offered a $500 bln three-month repo and promised another one tomorrow and another on Monday. On Monday, it will provide $500 bln in a one-month repo operation as well. Several more are planned for April too. A drawback of the operation is that it is removed from direct lending. The repo funds have to be taken up by the banks and then re-lent. Yesterday, the Fed had provided around $200 bln in term and overnight repos, so by the time it offered $500 bln 3-month repo, the market was nearly satiated and took less than $80 bln. Over the next month, the Fed could inject as much as $5 trillion into the banking system....

....MUCH MORE