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[PODCAST] EU Open Rundown 16th March 2020

  • FOMC cut the Fed Funds Rate 100bps to 0.00%-0.25% and launched a USD 700bln QE program
  • Bank of Canada cut its key overnight interest rate by 50bps to 0.75% from 1.25% and stands ready to adjust monetary policy further if required
  • RBNZ lowered the OCR by 75bps to 0.25% in an emergency meeting and stated that the OCR is to remain at 0.25% for at least a year
  • BoJ held an emergency monetary policy meeting in which it kept short-term rates at -0.10% and maintained long-term yield target at 0%, but raised purchases of ETFs and J-REITs
  • US President Trump declared a national emergency over the coronavirus which opens up access to USD 50bln for states and localities to fight against the coronavirus
  • Asian equity markets weakened and US equity futures hit limit down as coronavirus fears and disruptions continued to spook investor sentiment despite central bank support
  • DXY briefly dropped below 98.00 after the Fed rate cut, before being granted some reprieve
  • Looking ahead, highlights include US NY Fed Manufacturing, Eurogroup meeting

 

CENTRAL BANKS 

FOMC cut the Fed Funds Rate 100bps to 0.00%-0.25% via 9-1 vote (Mester dissented preferring a 50bps cut) and the Fed launched USD 700bln QE program in which it will increase Treasury purchases by at least USD 500bln and raise MBS purchases by USD 200bln. Fed expects target interest rates will remain in this range until economy has weathered recent events and is on track to meet inflation and employment targets, while it is reducing requirement ratio to 0% effective March 26th. (Newswires)

Fed Chair Powell said the coronavirus is having a profound effect on US and globally, while he added that weakness abroad will weigh on US exports for a while and that financial conditions in US tightened markedly. Powell also stated that today's actions will help the US economy as well as promote a more vigorous return to normal, and that the emergency FOMC meeting was in lieu of meeting on March 17th-18th. Furthermore, Powell the Fed doesn't see negative rates as appropriate policy response in the US and he is willing to be patient in assessing when to raise rates back from near-zero, while he suggested the Fed has plenty of policy space and that fiscal policy should also play a major role. (Newswires)

Bank of Canada cut key overnight interest rate by 50bps to 0.75% from 1.25% and stands ready to adjust monetary policy further if required to support economic growth and keep inflation on target. BoC said it is a proactive measure taken in light of the negative shocks to Canada's economy arising from the COVID-19 pandemic and recent sharp drop in oil prices, while it added that it has taken measures to ensure banks have sufficient liquidity and have a variety of other tools in the tool kit to address the crisis. In other news, Canada's Chief Financial Superintendent said they are lowering the domestic stability buffer requirement for major banks to 1.25% from 2.50% of risk-weighted assets to add an additional CAD 300bln in lending capacity. (Newswires)

RBA said it is to conduct 1-month and 3-month operations until further notice, while it will conduct 6-month operations or longer at least weekly. Furthermore, the RBA later said it added AUD 5.9bln to banking system through market repo operations, while it is ready to purchase Australia government bonds and will announce further policy steps on Thursday. (Newswires)

RBNZ lowered the OCR by 75bps to 0.25% in an emergency meeting and stated that the OCR is to remain at 0.25% for at least a year, while it delayed higher capital requirements for banks and stated that if more stimulus is required, the preference is large scale government bond purchases instead of another rate cut. There were also comments from RBNZ Assistant Governor Hawkesby that the rate cut and other measures announced give bank sufficient time to reassess the situation and that stopping at 0.25% signals RBNZ are not looking to go to zero or negative rates, while RBNZ Chief Economist Young Ha said bond purchase program is to be ready for May if needed. (Newswires)

BoJ held an emergency monetary policy meeting in which it kept short-term rates at -0.10% and maintained long-term yield target at 0%, but raised purchases of ETFs to JPY 12tln from JPY 6tln and increased purchases of J-REITS to JPY 180bln from JPY 90bln, while it set aside JPY 2tln for more buying of commercial paper and corporate bonds. Furthermore, the decision on QQE with yield curve control was made by 7-2 vote with Kataoka and Harada the dissenters again, while the central bank stated it is ready to ease further without hesitation as needed with a close eye on coronavirus.

HKMA lowered its base rate by 64bps to 0.86% and announced that the countercyclical buffer is to be lowered to 1% from 2% with immediate effect. (Newswires)

 

CORONAVIRUS UPDATE

US President Trump declared a national emergency over the coronavirus which opens up access to USD 50bln for states and localities to fight against the coronavirus, while he announced to ‘waive' interest payments on all federal government loans including student loans. Furthermore, Trump also stated the UK will be added to the travel ban list in the future as cases grow, while he stated that market will be thrilled by the Fed rate cut and suggested to take it easy on panic grocery buying as grocery stores will work 24 hours around the clock to keep stores stocked. (Newswires)

US House voted 363-40 to pass bill to make coronavirus testing free and require paid sick leave for those impacted by the coronavirus outbreak. (Newswires)

New York City Mayor De Blasio ordered restaurants, bars, nightlife and cinemas to shut except for delivery and the Los Angeles Mayor also ordered the close of restaurants, bars and nightclubs in an effort to contain spread of coronavirus. Elsewhere, Washington Governor Inslee said will sign state-wide emergency proclamation to temporary shut-down restaurants, bars, entertainment and recreational facilities, although restaurants will be allowed to provide take-out and delivery, while the ban will not apply to grocery stores nor pharmacies. (Newswires) US CDC recommends all gathering of over 50 people be suspended. (Newswires)

New Zealand PM Ardern said business continuity package which will be announced on Tuesday will be significant. PM Ardern also stated the focus is on jobs and that this is phase 1 of the response, while she added that the impact of virus could be greater than the global financial crisis. (Newswires)

Mainland China reported 16 additional cases of coronavirus and 14 additional deaths on March 15th vs. Prev. 20 additional cases and 10 additional deaths on March 14th. In other news, South Korea coronavirus cases increased by 74 to a total of 8236, while there were 303 additional recovered patients and there were no additional deaths reported for the first time since Feb. 15th. (Newswires/Yonhap)

Italy’s coronavirus cases rose to 24747 from 21157 and there were 368 new deaths to bring the total death toll to 1809. (Newswires)

France and Spain banned all non-essential activities and Paris warned as much as 70% of the population would be infected by the coronavirus, while Germany is to impose temporary controls on its borders with France, Switzerland, Austria, Denmark and Luxembourg on Monday to contain the spread of the coronavirus. (Times/BBC)

Apple (AAPL) shutdown all stores globally outside of mainland China for the next 2 weeks as a measure to tackle the coronavirus outbreak and Lululemon (LULU) is to also close all North America and Europe stores from March 16th-27th, while MGM (MGM) and Wynn Resorts (WYNN) are to temporary close their Las Vegas properties due to the coronavirus. (Newswires)

 

ASIA-PAC

Asia equity markets weakened and US equity futures hit limit down to start the week as coronavirus fears and disruptions continued to spook investor sentiment, despite numerous policy measures to address the fallout from the outbreak including the Fed throwing the kitchen sink with a 100bps emergency cut and USD 700bln QE announcement. This followed the national emergency declaration by US President Trump last Friday which opens access to USD 50bln of emergency funds for states to tackle the coronavirus, while BoC and RBNZ also recently announced emergency cuts of 50bps and 75bps respectively. Nonetheless, ASX 200 (-9.7%) failed to benefit from the global policy measures and announcement the RBA stands ready to purchase government bonds, with heavy losses in mining names, financials and industrials resulting the index’s worst ever drop, while Nikkei 225 (-1.5%) was choppy amid the BoJ’s emergency meeting in which it kept rates and the yield target unchanged but doubled ETF and J-REIT purchases. Hang Seng (-3.8%) and Shanghai Comp. (-1.8%) were both negative due to widespread fears and after surprise contractions to Chinese Industrial Production (-13.5% vs. Exp. 1.5%) and Retail Sales (-20.5% vs. Exp. 0.8%), but with losses in the mainland stemmed after the PBoC’s recent targeted RRR cuts of 50bps-100bps and additional 100bps cut for joint-stock banks which will unleash CNY 550bln of funds, while the HKMA authority also announced a rate cut in lock step with the Fed albeit to a lesser extent of just 64bps. Finally, 10yr JGBs opened lower due to the after-hours slump on Friday as stock markets found some firm but brief relief, although JGB prices rebounded off their lows as fears returned to the fore of investors’ minds before retreating again after the BoJ announced to keep main policy settings unchanged but instead boosted purchases of ETFs, J-REIT, Commercial Paper and Corporate Bonds, while pressure was also seen in the Australian 10yr yield after the RBA signalled a readiness to purchase government bonds.

PBoC conducted CNY 100bln in 1yr MLF operations at 3.15% vs. Prev. 3.15%. (Newswires) PBoC set USD/CNY mid-point at 7.0018 vs. Exp. 7.0067 (Prev. 7.0033)

Chinese Industrial Production (Feb) Y/Y -13.5% vs. Exp. 1.5% (Prev. 6.9%). (Newswires) Chinese Retail Sales (Feb) Y/Y -20.5% vs. Exp. 0.8% (Prev. 8.0%) Chinese House Prices (Feb) Y/Y 5.8% (Prev. 6.3%)

China stats bureau said China's economy remains resilient despite coronavirus impact, while it expects the economy to show significant improvement in March and sees the impact to economy from coronavirus to decrease in Q2. (Newswires)

 

UK/EU

BoE Governor Carney said Fed, BoJ, Bank of Canada, ECB and SNB have agreed to lower pricing on standing US Dollar liquidity swaps by 25bps and that central banks will offer US Dollar swaps with 84-day maturities in addition to 1-week operations, while he added that the actions will ease strains in global funding markets. (Newswires)

UK Government is to hold daily televised press conferences to update the public about the virus outbreak, according to Downing Street. The media briefing later today will be followed by another Cobra committee meeting. (BBC) Furthermore, over 10k British soldiers, sailors and airmen could be put on standby in the coming weeks amid the worsening outbreak. Officials have reportedly been drawing up plans for a few weeks and are now ready to submit proposals to the PM. (Sky News) Meanwhile, a Public Health England briefing for senior NHS officials revealed that the epidemic in the UK will last until next spring and could lead to 7.9mln people being hospitalised. (Guardian)

UK Rightmove House Prices (Mar) M/M 1.0% (Prev. 0.8%). (Newswires) UK Rightmove House Prices (Mar) Y/Y 3.5% (Prev. 2.9%)

 

FX

DXY briefly dropped below 98.00 after the Fed’s 100bps emergency rate cut and QE announcement in which it will increase Treasury purchases by at least USD 500bln and MBS purchases by USD 200bln, with the Fed expecting target interest rates to remain in this range until the economy has weathered recent events and is on track to meet inflation and employment targets. Furthermore, Fed Chair Powell commented during the conference call that the Fed doesn't see negative rates as an appropriate policy response in the US but suggested the Fed has plenty of policy space and that fiscal policy should also play a major role. The Fed’s move to the zero-lower bound briefly underpinned the greenback’s major counterparts although the upside in EUR/USD proved to be short-lived after hitting resistance at the 1.1200 handle and with both Spain and France joining the bloc’s widening lockdown, while the upside in GBP/USD also stalled after failing to breach 1.2400. Elsewhere, the risk averse flows saw USD/JPY attempted a breakdown of the 106.00 level where support eventually held as markets await the conclusion of the BoJ’s emergency meeting which was later perceived as somewhat of a disappointment, and antipodeans were lacklustre due to their high-beta statuses and following the abysmal Chinese data releases, as well as the RBNZ’s 75bps emergency rate cut and RBA signalling it is prepared to conduct government bond purchases. 

 

COMMODITIES

Commodities were mostly lacklustre in which WTI crude futures briefly slipped to below the USD 30/bbl level despite the Fed’s efforts to contain the fallout from the coronavirus outbreak with an emergency 100bps cut and USD 700bln of QE, as the drastic measures and increased global shutdowns/lockdown stoked market disarray, and although there were recent reports President Trump asked the energy department to purchase oil through the SPR amid current  low price environment, Goldman Sachs remained cynical on the effects this would have to stem the risks of further weakness. Elsewhere, gold only saw limited gains despite the risk averse tone and weaker greenback following the Fed’s 100bps cut and QE announcement, while copper deteriorated in tandem with the broad risk-aversion.  

US President Trump asked the energy department to purchase oil through for the SPR and said they will it "will fill it to the top”. (Newswires)

Goldman Sachs said SPR purchases could raise equilibrium price where global oil market rebalances by USD 2/bbl, but added that SPR purchases could be insufficient to reverse increasingly likely risk prices decline beneath Q2-Q3 USD 30/bbl Brent forecast to cash costs. (Newswires)

 

US 

The TPLEX bear steepened again on Friday amid a renewed risk appetite. The Treasury selling coincided with strength in equities, following on from Thursday where both were sold amid a flight to cash. It is possible that the move in government debt was less correlated to risk appetite and more to technical factors, such as the ongoing duration selling by risk parity-type players, as well as profit taking from exhausted levels, as has broadly been suggested in recent sessions. The TPLEX did find a bid after the NY Fed stepped into move forward its Treasury purchase schedule, although it ultimately proved short-lived, as the selling pressures resumed heading into settlement. The 10-year yield rose by around 9bps to just over 0.94%, while the 2-year yield remained unchanged at 0.48%. US T-note futures (H0) settled 1 point 3 ticks lower at 135-25+.

US Treasury Secretary Mnuchin said there is an agreement on the virus package and that he doesn’t anticipate the coronavirus pandemic to tip the economy into recession, while expects there will be a big rebound later in the year. (Newswires)

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