"Trump Dump as Market Turns to ECB"

From Marc to Market:

Overview: After the Bank of England and the UK Treasury announced both monetary and fiscal support, the focus turns to the ECB, but the proximity of the US Congressional recess (next week) without strong fiscal measures being in place sucked the oxygen away from other issues.

President Trump's national address in the Asian session failed to reassure investors. Trump's remarks had to be clarified on at least three counts. The travel ban from Europe did not include trade. It applied to foreigners who traveled to Europe within the past two weeks, and insurance companies agreed to waive copayment for tests, not for the treatment of the coronavirus.

Equities continued their headlong plunge. The Nikkei dropped more than 4%, and Australia fell more than 7% despite the announcement of a fiscal support package. Thailand crashed by nearly 12%. European bourses are off 5%-6%, and the Dow Jones Stoxx 600 is 6.6%, which brings this week's loss to about 15.2%. US shares are pointing to a limited down opening for the S&P 500 (first circuit breaker is 7% below yesterday's close). Yields in the Asia Pacific region rose as are peripheral yields, but core yields are falling, and the US 10-year yield is around 12 bp lower below 75 bp. The German 2-year yield beyond minus 100 bp. The dollar is mostly firmer against the major currencies. The Japanese yen and Swiss franc are the main exceptions. The euro and the Canadian dollar are little changed. The Scandis and the Antipodeans are joined by sterling as the poorest performers. Emerging market currencies are under pressure, led by the Mexican peso (~-2.5%) and the Russian rouble (~-2.2%). The JP Morgan Emerging Market Currency Index is off about 0.3% to take this week's loss to more than 3%. Gold is about 0.5% stronger after finding support near its 20-day moving average (~$1631), and oil did not like the US travel ban or jump in US EIA inventory estimate (7.6 mln barrels). Light sweet crude for April delivery is off about 5% near $31.

Asia Pacific
Australia announced fiscal support of roughly 1.2% of GDP over the next two years. It includes A$17.6 bln(~$11.4 bln) of tax breaks and spending increases and A$750 payment to lower-income and welfare recipients' household. In addition, there is another A$6.7 bln earmarked to help support the cash flow to small and medium-sized businesses. New Zealand is expected to announce its fiscal package next week.

Foreign investors stepped up their purchases of Japanese bonds last week, according to the weekly MOF data. The JPY1.1 trillion of purchases was the most in more than a month. The logic is not the negative yield but the long dollar hedge. By hedging out the yen, an investor could secure an overall yield that was about 50 bp more than US Treasuries....

While market psychology is focused on US fiscal response, perhaps as a shorthand for US leadership domestically and internationally in this moment of crisis, it is the ECB's turn to reveal its hand. It meets after Italy, the most stricken outside of China, forces all businesses but grocery stores and pharmacies to shut. Mortgage and small loan forbearance are being worked out after fatalities jumped by a third yesterday.While zero interest rates are widely criticized by economists and investors, the ECB, including the executive board member from Germany, Schnabel, has offered robust defenses. There is some concern about an effective floor beyond the zero-bound. But the tipping point is not clear, and the Swiss target is -0.75% (LIBOR). Sure, the ECB can cut rates, boost is asset purchases, and offering more generous long-term loans, all of which favor debtor countries. It can modify the tiering system, which is a bone to the creditors. Some observers suggest that to surprise the market, a 20 bp cut in rates and a more than doubling of the asset purchases may be required. However, what is needed is fiscal policy, and Lagarde, like her predecessor Draghi, has been hammering for fiscal stimulus even before the outbreak of Covid-19. The hammer has gotten bigger.... 

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