Market news 20 March 2020

Continued support from Governments and Central Banks amid COVID-19 outbreak

• The Governing Council of the European Central Bank (ECB) have launched a temporary asset purchase program, the Pandemic Emergency Purchase Programme (PEPP), worth EUR750bn in additional support across the Euro area. Following the announcement, current President of the ECB vowed “there are no limits” to its commitment to the euro and the Governing Council said they will increase and adjust asset purchases “as much as necessary and for as long as necessary” amid this crisis.
• The Bank of England held their Monetary Policy Committee (MPC) meeting ahead of schedule on Thursday, announcing a crisis-response package in the form of a further 15bp rate cut (to 0.1%), an additional £200bn asset purchase programme (to target £645bn), and expansion of term funding for small and medium sized companies. The package was largely as anticipated, but the scale of the increases in asset purchases has not been seen since the European Sovereign Debt Crisis in 2011. Asset purchases will come in the form of both gilt and corporate bond purchases.

Business sentiment tumble

• The US Empire Manufacturing Index fell by 34.4pt to -21.5 in March (consensus: 4.4, February: 12.9), representing expectations of worsening business conditions and reaching the lowest level since 2009. New orders and shipments fell to -9.3 and -1.7 respectively, and delivery times and inventories increased.
• The Philadelphia Fed Manufacturing Index also declined by 49.4 to -12.7 in March (consensus: 8.0, February 36.7), with declines seen across all components. Jobless claims increased by 70,000 last week to 281,000, as company’s lay off staff owing to virus-related closures.
• In Europe, the German ZEW Index recorded a decline of -27.4 in March to -43.1 (consensus: -30.0, February: -15.7). The sectors expected to be worst hit by COVID-19 were services (-66.9pt over the month), construction (-59.6pt), electronics (-57.2pt) and retail / consumer goods (-55.6pt). The survey relates to expectations for the next six months, but respondents noted expectations of a 1% decline in real GDP in Germany for FY2020.
• The German Ifo business climate survey saw a record fall of -8.4 in March to 87.7 (February: 96.0), higher than the largest monthly fall seen in 2008 of -4.5. The survey recorded declines in all sectors; services fell to -2.0 (Feb: +17.4), retail / wholesale to -20.4 (Feb: 1.0), manufacturing to -17.2 (Feb: -1.5).

and markets continued to fall albeit by less than last week

• Gilts and treasuries are rallying after increased support from central banks
• While news that the Fed was reinstating its commercial paper facility is likely to have helped, the main thing helping bond markets right now is likely to be the huge amount of QE announced by the Fed, ECB and BoE. This is an unprecedented pace of purchasing
• Pronounced rally in peripheral Eurozone markets, including Italy
• This has to some extent arrested the dysfunction in financial markets and should allay the freefall in risk assets we’ve been seeing
• Even in the depths of the post-Lehman bear market we saw some fierce bear market rallies, but the market did not ultimately bottom until the markets were convinced that the crisis had been effectively contained. At that time the market had to be convinced that the global financial system would not collapse, today it must be convinced that the coronavirus has been contained. This may not be possible for several months – not only do we need to arrest the current rapid increase in cases in Europe and North America, but we also need to be convinced that there will not be a “second wave” when normal economic activity resumes, otherwise we may be forced to conclude that the recession will extend well into 2021
• Hence despite the positive steps taken this week, which ought to arrest the freefall in markets, we are likely to see the resumption of the bear market before too long, albeit along more “orderly” lines with less extreme volatility
• The extension of sizeable USD swap lines from the Fed to other G7 central banks, who can then on-lend the dollars to their domestic financial institutions who are currently starved of USD liquidity, ought to slow the pace of USD appreciation; however, as long as we are unsure that corona has truly been brought under control, USD is likely to go on strengthening (again, in a parallel to 2008)