Friday, 13 March 2020

P. 1

Rates: Dash for cash

ECB Lagarde’s screw-up horrible trading day into a catastrophic one. Her remark during the central bank’s press conference that the ECB is “not here to close spreads” sent stock markets and peripheral bond markets into tailspin. This week’s crisis mode on financial markets results in a significant dash for cash with investors getting rid of all illiquid assets.

Currencies: Hunt for liquid assets favours the dollar

The USD outperformed as investors favour the most liquid currencies. EUR/USD dropped as ECB’s Lagarde indicated that the central bank didn’t intend to aggressively narrow intra-EMU spreads and only recovered part of this loss on Fed liquidity operations. The dollar probably retains the benefit of the doubt as long as market stress remains extremely elevated.

Calendar

• US stocks were in freefall in their worst day since the 1987 Black Monday crash.

All three indices entered bear market territory with losses up to -10% (DJI). Asian markets follow the spooky WS session. South Korea underperforms (-7%).

• The Fed pledged to pump $5 trillion of liquidity into markets over the next month to counter a surge in ST funding rates. The Fed will also widen the scope of its purchases of US government securities to include more than just T-bills.

• Russian oil producers (e.g. Gazprom and Tatneft) are digging deeper in their draw with the Saudis, announcing they can jack up their output from April 1 onwards and are able to withstand further oil price drops.

• US House Speaker Nancy Pelosi disclosed the House of Representatives is nearing an agreement with the Trump administration on a coronavirus economic aid package, adding she hoped to announce the deal today.

• The RBA provided substantial additional liquidity today through A$8.8 bn repo operations, more than twice the amount it had originally intended, in a bid to counter possible funding crunches as investors panic over the coronacrisis.

• According to DJ, the BoJ sees no demand for coordinated rate cuts by CBs and is reluctant to cut rates further. Instead, the BoJ is inclined to step up purchases of ETFs and provide aid for businesses affected by the corona outbreak.

• Today’s economic calendar contains final February CPI figures in Europe (Germany, France and Spain) and U. of Michigan Sentiment indicator in the US which is likely to reflect mounting worries over the coronacrisis.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Friday, 13 March 2020

P. 2

Dash for cash

ECB Lagarde’s screw-up horrible trading day into a catastrophic one. Her remark during the central bank’s press conference that the ECB is “not here to close spreads” sent stock markets and peripheral bond markets into tailspin. The ECB’s earlier announced easing package had already received a lukewarm response, painfully pointing out that there’s not much the central bank can do and that coordination with fiscal policy (e.g. UK) is totally absent. European stock markets recorded double digit losses with the Euro Stoxx 50 closing below key 2673 support, suggesting a technical return to the 2011 low (1935). US stock markets lost over 9% with the S&P 500 closing in on the 2018 low (2346). Peripheral bond spreads widened significantly: 58 bps for Italy, 52 bps for Greece, 32 bps for Portugal, 25 bps for Spain, but also 20 bps for Belgium and France. This week’s crisis mode on financial markets results in a significant dash for cash with investors getting rid of all illiquid assets (e.g. decline of gold prices). It could also be the reason why (long-term US) bond yields didn’t drop during yesterday’s huge risk aversion. Daily changes on the US yield curve ranged between -9.8 bps (5-yr) and +5.2 bps (30-yr). Changes on the German yield curve varied between -0.3 bps (10-yr) and +3.7 bps (5-yr). Towards the end of yesterday’s trading session, the Fed announced a third increase this week in the amount it puts available for repos. Over the next month, they are prepared to inject a cumulative total of above $5tn in funding markets.

Asian stock markets reverse part of the opening losses, but remain in negative territory. Japan and South Korea underperform. Core bond yields are slightly higher. We stick with our view and prefer to err on the side of caution. Ignore any bear market rallies at this stage. There remains too much misplaced trust in what monetary policy can and fiscal policy is willing to do. Yesterday’s ECB meeting was exemplary. The dash for cash is creating dollar scarcity off US shores, prompting questions whether the Fed should re-install USD swap lines with other major central banks like it did in 2008. Such sign of coordinated action could be a possible trigger for some market calm. The same could be true in case of a strong G7/G20 commitment over the weekend on the fiscal front. Low oil prices continue to pose another risk, which could cause problems in the US junk bond market where energy companies are the biggest representative. Free cash flow is a scarce good. Credit spreads in general are coming under pressure and add a credit crisis element to the current economic downturn. It’s hard to see a lasting improvement in risk sentiment against this background. Technically: The speed of decline in core bond yields is slowing. We might get some stabilization at best.

Rates

US yield -1d2 0.48 -0.045 0.63 -0.1010 0.80 -0.0730 1.60 0.05

DE yield -1d2 -0.93 0.025 -0.87 0.0410 -0.74 0.0030 -0.42 0.02

Af

German 10-yr yield: ECB out of ammo. Speed of decline slowing. US 10-yr yield: volatile, but away from record lows.

Friday, 13 March 2020

P. 3

USD trade weighted (DXY) dollar outperforms as hunt for liquidity

prevails.

EUR/GBP: sterling stays in the defensive.

Dollar outperforms as liquidity is key Yesterday, the ECB didn’t cut rates but eased conditions on TLTROs and raised the amount of bond purchases. The dollar was already well bid in the run-up to the ECB decision, probably as the USD is seen as the most liquid currency. At the press conference, ECB’s Lagarde suggested that the bank won’t aggressively narrow intra-EMU spreads. This caused further selling of EMU equities and the euro. Later, the Fed announced massive repo operations, including bond buying across the yield curve. This eased the rise of the dollar, even as the reaction was uneven across different cross rates. EUR/USD rebounded and closed at 1.1185, still below the 1.1250 technical level. USD/JPY ceded part of an intraday rebound to close at 104.68. Smaller, less liquid currencies mostly were again in free-fall, irrespective of their eco fundamentals. Overnight, Asian equities opened again with steep losses after the sell-off on WS, but indices regained some ground off the intraday lows. Liquidity remains a key factor for FX trading, with smaller currencies still in the defensive. Still, the yuan reversed a big part of yesterday’s decline (USD/CNY currently again below the 7.00 mark). USD/JPY also keeps an upward bias (105.50 area) as the BOJ and the MOF discussed a coordinated crisis response. EUR/USD is holding a remarkably stable trading pattern near the 1.12 level. Markets are looking out for a more coordinated policy response today or during the weekend. Yesterday’s price action suggests that liquidity is the dominant factor for currency trading as long as market stress stays at extremely elevated levels. For now, the euro apparently stays second best, rather than the yen, even as Lagarde’s comments on intra-EMU bond spreads highlighted potential ‘institutional fragility’. The expectation of more aggressive Fed easing still might weigh on the dollar over time but this factor apparently will only come again on the radar when the extreme market stress and hunt for (USD) cash abates. Earlier this week, we assumed the dollar to be captured in a sell-on upticks pattern with EUR/USD 1.1250 a potential floor. This assumption is more or less rejected after yesterday’s price action, making the EUR/USD picture again more neutral, or even slightly in favour of the dollar ST. Yesterday, sterling stayed under pressure, even against the euro, as the UK currency is less liquid compared to the other major currencies. EUR/GBP tried to extend gains beyond 0.89 overnight, but the move shows tentative signs of slowing. As is the case for other smaller currencies, any sterling rebound probably needs global tensions to ease.

Currencies

R2 1.1514 -1dR1 1.1448EUR/USD 1.1185 -0.0085S1 1.1100S2 1.0879

R2 0.9019 -1dR1 0.8898EUR/GBP 0.8898 0.0107S1 0.8786S2 0.86

Friday, 13 March 2020

P. 4

Friday, 13 March Consensus Previous US 13:30 Import Price Index MoM / YoY (Feb) -1.0%/-1.5% 0.00%/0.3% 13:30 Import Price Index ex Petroleum MoM (Feb) 0.1% 0.20% 13:30 Export Price Index MoM / YoY (Feb) -0.4%/-0.6% 0.70%/0.5% 15:00 U. of Mich. Sentiment (Mar P) 95.0 101 15:00 U. of Mich. Current Conditions (Mar P) 112.8 114.8 15:00 U. of Mich. Expectations (Mar P) 88.1 92.1 Germany 08:00 CPI EU Harmonized MoM / YoY (Feb F) 0.60%/1.7% 0.60%/1.7% France 08:45 CPI EU Harmonized MoM / YoY (Feb F) 0.00%/1.6% 0.00%/1.6% Spain 09:00 CPI EU Harmonised MoM / YoY (Feb F) 0.00%/0.9% 0.00%/0.9% Sweden 09:30 Unemployment Rate SA (Feb) 7.00% 7.10%

10-year Close -1d 2-year Close -1d Stocks Close -1dUS 0.80 -0.07 US 0.48 -0.04 DOW 21200.62 -2352.60DE -0.74 0.00 DE -0.93 0.02 NASDAQ 7201.802 -750.25BE -0.05 0.20 BE -0.65 0.08 NIKKEI 17431.05 -1128.58UK 0.27 -0.03 UK 0.20 0.05 DAX 9161.13 -1277.55

JP 0.01 0.07 JP -0.17 0.05 DJ euro-50 2545.23 -360.33

IRS EUR USD GBP EUR -1d -2d USD -1d -2d3y -0.45 0.51 0.51 Eonia -0.4580 0.00005y -0.37 0.63 0.55 Euribor-1 -0.5200 -0.0170 Libor-1 0.7966 0.000010y -0.25 0.77 0.58 Euribor-3 -0.4890 -0.0160 Libor-3 0.7725 0.0000

Euribor-6 -0.4470 -0.0180 Libor-6 0.7440 0.0000

Currencies Close -1d Currencies Close -1d Commodities Close -1d

EUR/USD 1.1185 -0.0085 EUR/JPY 117.04 -0.75 CRB 141.94 -5.86USD/JPY 104.64 0.10 EUR/GBP 0.8898 0.0107 Gold 1590.30 -52.00GBP/USD 1.2571 -0.0249 EUR/CHF 1.0556 -0.0021 Brent 33.22 -2.57AUD/USD 0.6236 -0.0248 EUR/SEK 10.9127 0.1815USD/CAD 1.3925 0.0146 EUR/NOK 11.3701 0.4480

Calendar

Friday, 13 March 2020

P. 5

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Brussels Research (KBC) Global Sales Force Mathias Van der Jeugt +32 2 417 51 94 Corporate Desk(Brussels) +32 2 417 45 82 Peter Wuyts +32 2 417 32 35 Institutional Desk(Brussels) +32 2 417 46 25 Mathias Janssens +32 2 417 51 95 CBC Desk (Brussels) +32 2 547 19 19 Dieter Lapeire +32 2 417 25 47 France +32 2 417 32 65 Dublin Research London +44 207 256 4848 Austin Hughes +353 1 664 6889 Singapore +65 533 34 10 Shawn Britton +353 1 664 6892 Prague Research (CSOB) Prague +420 2 6135 3535 Jan Cermak +420 2 6135 3578

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