Daily Outlook: ECB announces new bond buying programme

The ECB held an emergency call last night where it agreed to an extra bond buying programme worth EUR 750bn.  The move should help to lower yields on European sovereign bonds which have risen as governments have announced additional spending measures in response to the impact of the coronavirus on economies.  ECB President Lagarde reiterated the bank’s commitment to the euro. 

The RBA cut its benchmark rate by 25bp to 0.25% this morning in line with expectations, and said it would target a yield of 0.25% on three-year Australian government bonds.  The RBA also announced a term funding facility to support SMEs and other measures to ensure sufficient liquidity in the financial system, including longer term repos. 

A flight to safe-haven assets and reduced liquidity has benefitted the USD, with the Bloomberg dollar index at a three year high.  GBP fell sharply overnight to its lowest level agains the USD in 35 years on doubts about the government’s response to the coronavirus as well as concerns that a potential lock-down of London would further reduce liquidity in fx markets. In more positive news, the Bank of England provided details on its new COVID commercial lending facility, which will buy commercial paper of up to 1 year maturity in a minimum size of GBP 1mn for firms making a “material contribution to the economy”. 

US housing starts declined by a less than forecast at -1.5% m/m in February, following a revised 1.4% rise in January.  However, mortgage applications last week declined -8.4% from the week before.  Key data today will be initial jobless claims for last week, which are forecast to have increased by 220k. 

The UAE has paused the issuance of visas on arrival in the UAE and won’t allow residents currently outside the country to return for two weeks, as it imposes stricter measures to combat the spreak of COVID-19.  Reuters reports that the steering committee of Expo 2020 will reassess the situation in the coming weeks.  Dubai’s CPI declined -0.3% m/m and -1.2% y/y in February with lower housing costs continuing to offset higher prices in some other components of the index.

Fixed Income

Treasuries closed lower as investors are forced to sell whatever they can to raise cash. Yields on the 2y UST and 10y UST closed at 0.53% (+4 bps) and 1.19% (+12 bps) respectively.

Regional bonds continued to remain under pressure. The YTW on Bloomberg Barclays GCC Credit and High Yield index rose 36 bps to 4.56% and credit spreads widened 17 bps to 345 bps.

FX

The USD is surging as demand for liquidity is rising pressuring both bonds and equities in the process amidst the deepening global pandemic. GBP is the worst affected major currency as the UK’s approach to the crisis has been criticized with the government there only this week adopting emergency measures deployed in other parts of the world. Markets are also guessing that with London likely to come under lockdown soon an important part of the global financial system will be affected further reducing liquidity in the global FX market. GBPUSD at 1.15 is at the lowest level since 1985, having dropped approximately 5% since yesterday.

The NOK also fell 13% to reach an all-time low yesterday. Meanwhile the ECB announced a 750 billion euros temporary asset purchase program, which has helped the EUR to steady around 1.09 this morning, having fallen to 1.08 yesterday. The RBA has also made another interest rate cut to 0.25% from 0.5%, saying that it would target a yield of 0.25% on three-year Australian government bond, as the AUD has plunged to 0.55 this morning, down almost 4% since yesterday and 7.5% since Tuesday.    

Equities

Developed market equities closed lower as volatility continued to remain high and worries over the impact of coronavirus on global economy continued. The S&P 500 index and the Euro Stoxx 600 index dropped -5.2% and -3.9% respectively.

Regional markets closed mixed with some buying interest coming back. The DFM index and the Tadawul added +1.0% and +0.8% respectively.

Commodities

Oil markets continue to display irrational and radical moves with enormous intraday swings. As the market struggles to accurately price in how badly demand has been destroyed along with the expected tsunami of supply expected from Saudi Arabia, Russia and others over the coming weeks these extreme moves will likely be with us for some time. There is little point in taking a firm conviction about “where the bottom” will be as a low point may only be touched for one day before skyrocketing higher the next.

Earlier this week we wrote that we didn’t think the “dust had settled” following the Saudi-Russian declaration of a price war. Even with yesterday’s extreme moves we still don’t think we are out of this volatile cycle. Brent moved to USD 24.88/b overnight, down 13.4%. WTI showed even more extreme moves, down by almost 26% at one point before settling at USD 20.37/b, down 24%.

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