No Rest for the Weary

Overview:  The ECB boosted this year's asset purchases, lightened capital requirement rules, liberalized collateral requirements, suspended the annual stress tests, and provided for long-term loans at a rate as much as 25 bp below the negative 50 bp deposit rate. The market was nonplused.  Later in the day, the Federal Reserve announced $2 trillion in new repo operations over starting yesterday and continuing through early next week.  It also indicated that its purchases would not be limited to bills anymore, but would match the maturity distribution of the outstanding Treasury debt.  The market reacted positively for a brief moment, and US equities recorded new lows into the close, leaving the Dow Industrials off 10%, and the S&P 500 was down 9.5%.  However, as we have argued, the focus is on the US fiscal response, and it appears that a prospect for a deal is helping stabilize the capital markets today.  It was not sufficient to hold back equity losses in most large Asia Pacific markets, including Japan, China, Hong Kong, Taiwan, and South Korea. However, Australian and Indian markets rose over 4%, and European bourses, led by utilities and materials, are 3-4% higher, as are US stocks.  Bond yields have jumped, 17-19 bp in Australia and New Zealand, and 7-15 bp higher in Europe.  The US 10-year benchmark yield is up around 7 bp to 0.88%.  The dollar is paring this week's gains and is heavier against most of the major currencies today but the euro and yen.  For the week, the Norwegian krone is posting the largest decline (~-7.5%), followed by the Australian dollar (~-5,0%).  The yen and Swiss franc were the strongest, losing 1.0% and 0.75%, respectively this week.  Emerging market currencies are mixed.  While Asian currencies moved lower, the liquid, accessible currencies, like the South African rand, Turkish lira, and Mexican peso, are trading higher.  With today's 0.6% gain, the JP Morgan Emerging Market Currency Index is off 3.5% this week.  Gold initially extended yesterday's almost $59 fall to test a one-month low near $1550 today and is recovering.  For the week, it is off about $88 an ounce, which is about what it gained last week.  Oil too is steadying as it found support near $30 a barrel.  WTI for April delivery is still off almost 21% this week to bring its three-week slide to around 45%.  

Asia Pacific

The equity crash is one powerful optic of the disruption in the capital markets.  This disruption was also evident in the scramble for dollars as bank-to-bank lending dried up.  The cross-currency basis swap is price expressed relative to LIBOR how shifting liquidity from one currency to another.  Yen holders were willing to give up yen for dollars as 60 bp lower than LIBOR because they were is such need of dollars.  It reached about -90 bp earlier today.  This is the biggest discount in more than two years, and it finished last week near a 40 bp discount.  In early and mid-January, the discount sometimes was smaller than -10 bp.  

The Bank of Japan and the Reserve Bank of Australia injected liquidity into the market today.  The BOJ offered a JPY500 bln repo, but there were only JPY500 mln in bids.  It later bought 5-10-year bonds outright in an unscheduled purchase, to inject about JPY200 bln (~$1.9 bln) into the banking system.  The RBA added A$8.8 bln  (~$5.5 bln) via a repo operation.   The Bank of Korea indicated it was considering an emergency board meeting, which would ostensibly cut rates and/or provide liquidity.  

The dollar traded at new highs for the week today against the Japanese yen, reaching about JPY106.20 in Europe after finding support in Asia near JPY104.50.  There is a $2.4 bln option at JPY106.00 that expires today.  The next area of resistance is seen in the JPY106.50-JPY106.70 area. The greenback finished last week around JPY105.40.  The Australian dollar plunged to almost $0.6200 yesterday.  It settled a week ago near $0.6635.  It is trying to snap a four-day drop today and is hovering around $0.6300. It is mostly trading in about a quarter-cent range around there.  The dollar shot up to almost CNY7.04 yesterday, the highest in a few weeks, but has unwound most of the gains to trade back toward CNY6.98.  The yuan strengthened for the first time this week today and finished the week about 0.75% lower.   

Europe

In an unusually direct criticism of the ECB, French President Macron said the ECB's moves did not go far enough.  The only action that was not delivered upon by the ECB was a rate cut, and it is not clear that a 10 or even a 20 bp cut from the current minus 50 bp deposit rate would have produced a different outcome.  The Dutch and German central bankers, who were often vocal critics of Draghi, defended the decision not to cut rates further.  Without a rate cut, there was less pressure to adjust the amount and type of deposits subject to negative rates (tiering).  Macron may have been referring to the asset purchases.  With the 120 bln this year on top of the 20 bln euros a month already being purchased, it works out to about 33.5 bln euros a month for the remainder of the year.  Meh?  At its peak, the ECB was buying 80 bln a month.

At the press conference Lagarde, whose candidacy was supported by Macron, said that the ECB was not in the business of closing bond spreads, which acts as a risk-appetite metric.  However, a wide spread or dispersion of rates also challenges the transmission mechanism of the ECB's monetary policy. This is what appeared to spur the criticism from Italy's Prime Minister Conte. Lagarde tried walking back her comments, but the damage was done.  The Italian 10-year premium over German jumped almost 60 bp to 2.50% after surging 50 bp on Monday.  At the shorter end of the curve, Italy offers 208 bp more than Germany to borrow for three years. As recently as mid-February is was around 60 bp.  It reached almost 700 bp in 2011 during the sovereign debt crisis, but unlike then, the redenomination risk (i.e., that Italy leaves the monetary union) does not appear to have risen.  The ECB's chief economist Lane also stressed the importance of avoiding market segmentation and the transmission of monetary policy.  Still, the 10-year spread is little changed on the day, while the Italian premium at the short end is wider.  

The euro's sell-off after reaching nearly $1.15 on Monday retraced (61.8%) of its rally since the end of last month when it briefly traded below $1.08. That retracement objective was about $1.1050, which was approached yesterday.  It has held above $1.1150 today and has been capped near $1.1220.  There is a 1.6 bln euro at $1.12 that expires today. The $1.1225 area is a (38.2%) retracement of this week's decline, and the next retracement (50%) is near $1.1275.  Sterling traded below $1.25 yesterday for the first time since last October.  It has traded as high as $1.2625 today.  It needs to resurface above the $1.2700-$1.2760 area, which houses the 200-day moving average at the lower end and a 38.2%) retracement of this week's drop at the upper end.   Its roughly 3.4% loss this week is the most since October 2016.  

America

The Fed is going to flood the market with liquidity.  As the stock market was imploding yesterday, the Federal Reserve offered a $500 bln three-month repo and promised another one tomorrow and another on Monday.  On Monday, it will provide $500 bln in a one-month repo operation as well.  Several more are planned for April too.  A drawback of the operation is that it is removed from direct lending.  The repo funds have to be taken up by the banks and then re-lent.  Yesterday, the Fed had provided around $200 bln in term and overnight repos, so by the time it offered $500 bln 3-month repo, the market was nearly satiated and took less than $80 bln.  Over the next month, the Fed could inject as much as $5 trillion into the banking system.  

The Fed also announced that it will buy bonds across the yield curve in proportion to the Treasury issuance.  The moves are designed to address the apparent squeeze on dollar funding and the disruption in the Treasury market itself, the largest and most liquid bond market in the world. There had been some dispute whether the Fed's bill purchases, which were not designed to ease financial conditions, were QE, but there seems to be no such doubt now.  The resumption of QE also signals that the Fed is at the zero-bound, which means a 100 bp cut in the fed funds target rate to 0-0.25% is likely next week.

House Speaker Pelosi postponed a vote yesterday on what may have been an all-Democrat fiscal bill to negotiate with Treasury Secretary Mnuchin.  A deal appears to be close though the details are not clear.  As recently as Wednesday, President Trump had dismissed the Democrat proposals as 'ideological goodies." Still, it appears that the payroll savings tax holiday that he had suggested lacks much support for either party.   While the House can vote on the measure today, the Senate has postponed its vacation planned for next week to take up the bill.  

The US dollar reached almost CAD1.40 yesterday (~CAD1.3960).  After CAD1.38 was paid, there was little on the charts ahead of CAD1.40. It was the fourth consecutive session that the dollar closed above its upper Bollinger Band (set two standard deviations above the 20-day moving average).  Initially in Asia, the greenback consolidated, but by late in the session, and then in the European morning, it saw yesterday's gains peeled back to trade below CAD1.38.  Yesterday's low CAD1.37 and a break and close below there would lift the Loonie's technical tone.  The Mexican peso fell to record lows yesterday, and the central bank auctioned about $460 mln of its $2 bln hedge facility.  In the 20 sessions since February 14, the US dollar has risen in all but three sessions, and one of them is today.   The dollar is about 1.4% lower near MXN21.62.  It finished last week around MXN20.11.  A break of yesterday's low (~MXN21.3450) would be encouraging.

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