The Market Today

Fed and ECB Continue Machinations to Smooth Markets


by Craig Dismuke, Dudley Carter

CENTRAL BANKS TOOK MORE ACTION WEDNESDAY NIGHT

ECB Emergency Meeting Concluded with New QE Program: After the U.S. markets closed, the ECB concluded its emergency meeting with an announcement that it would buy 750B Euro of public and private sector securities spread over the remainder of the year. The new program, named the Pandemic Emergency Purchase Programme (PEPP), is intended “to counter the serious risks to the monetary policy transmission mechanism and the outlook for the euro area posed by the outbreak and escalating diffusion of the coronavirus, COVID-19.” Despite the plan for PEPP to wrap up at the end of the year,  it could be extended until the ECB “judges that the coronavirus COVID-19 crisis phase is over.” The allocation of the new purchases will still be based on each country’s capital key, although this parameter will be applied in “a flexible manner,” and Greek government debt received a waiver to be included. The terms of the existing corporate purchase program were also loosened, including adding non-financial commercial paper to the list of eligible assets. The statement noted the ECB “is fully prepared to increase the size of its asset purchase programmes and adjust their composition, by as much as necessary and for as long as needed,” adding it “will not tolerate any risks to the smooth transmission of its monetary policy in all jurisdictions of the euro area.” ECB President Lagarde shared the statement on Twitter, saying “Extraordinary times require extraordinary action. There are no limits to our commitment to the euro.”

Fed Backs Prime Money Funds to Ease Liquidity Lock-ups: At 10:30 p.m. CT on Wednesday, the Fed announced its latest action to relieve liquidity pressures in key U.S. funding markets. In addition to measures announced on Sunday to improve “the flow of credit to households and businesses,” the Fed said it had established a Money Market Mutual Fund Liquidity Facility (MMLF) to ease disruptions that had emerged across the sector in recent days. The loans under the facility will be offered to prime money funds through various financial institutions. Loans that are collateralized by Treasurys or agency and GSE securities will be priced at the Discount Rate of 0.25%. Loans collateralized by secured and unsecured commercial paper that is highly rated will be priced at a spread of 100 bps to the Discount Rate. No new lending from the facility will occur after September 30, 2020 unless the Fed decides at a later date to extend it. Similar to the Commercial Paper Funding Facility announced on Tuesday, the Treasury will provide a credit guarantee of up to $10B.

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TODAY’S CALENDAR

Jobless Claims Jump and Philly Fed Index Plunges: The economic data are now beginning to show the effects of the coronavirus.  Initial jobless claims for the week ending March 14 rose 60k to 281k.  This marks the highest number of claims since Hurricanes Harvey and Irma in September 2017.  Unfortunately, reports coming from some state agencies indicate that claims are likely to go materially higher in coming weeks.  Also released this morning, the Philly Fed index on regional manufacturing conditions joined the New York Fed’s index in posting its largest monthly decline on record. While the New York index goes back to 2001, the Philly index dates back to 1968.  The sharp declines in these data indicate how sudden the economic stop is likely to be.


YESTERDAY’S TRADING

Another Historic Day for Markets: The recent run of incredible volatility continued Wednesday despite efforts from the Federal Reserve and Federal Government to stabilize the markets amid growing fears the virus will send the global economy into a deep recession. U.S. equities triggered the 7% circuit breaker for a fourth time in the last seven sessions during the daily White House briefing on the virus. However, the equity headlines were forced to make room for updates on sharp and unusual swings in Treasury and other sovereign yields as well as a historic movements in the value of the U.S. Dollar and the price of oil. The number of global cases crossed 200,000 and the total tally in Europe finally overtook China as infections in the region continued to spread at a double-digit pace. The havoc that COVID-19 is wreaking on the global economic outlook continued to deepen and draw stronger responses from governments around the world.

Negative Economic Effects Continue to Grow: Among the many headlines, the U.S. and Canada mutually agreed to close the border to all non-essential travel. Honda, Toyota, GM, Ford, and Fiat Chrysler said they would shut down their North American plants for now, although GM said it could potentially shift to producing ventilators. Delta said it expects a $2B hit to March revenues and the National Restaurant Association estimated the virus could cause $225B in damages across the industry. New York Governor Cuomo said no business could have more than 50% of its workforce present as he announced cases nearly doubled across the state from Tuesday, from 1,008 to 2,382. Italy said it would consider banning all outdoor activity amid reports that citizens weren’t abiding by the parameters of the country-wide quarantine. The U.K. indicated it will close down schools nationwide.

Foreign Virus Response Continues to Grow: Governments and other policymakers continued to consider stronger measures to try and offset the economic devastation caused by the virus and virus responses. Canada announced a stimulus package worth roughly 3% of the size of its economy. The Bank of England and U.K. Treasury announced a plan similar to the Fed’s commercial paper program, in which the U.K.’s Covid Commercial Financing Facility will purchase non-bank commercial paper with a maturity of up to one year for at least the next 12 months. BoE President Bailey said they “didn’t put a limit on it, and the reason for that is that we don’t know.” On the mainland, the EU was reportedly considering activating ESM funds and allowing the ECB to buy sovereign bonds using its Outright Monetary Transactions (OMT) authority. The ECB’s Governing Council held an emergency conference call in the afternoon to discuss the virus response.

U.S. Virus Response Continues to Grow: In the daily U.S. briefing, a key member of the president’s task force said the push to significantly expand testing capacity across the country will necessarily result in a significant jump in the number of cases, and again encouraged Americans from following the recommended social distancing guidelines for the next two weeks. President Trump announced the U.S. would invoke the Defense Protection Act to allow the government more authoritative input into private domestic production, aimed at increasing gear for healthcare workers. The President later said the government had ordered 500MM N95 masks. Also during the press conference, he announced that two Navy hospital ships would be deployed, one with 1,000 beds to New York and the other somewhere along the West Coast, and said HUD would suspend foreclosures and evictions through April. Separately, Fannie and Freddie also said no foreclosures would occur for at least 60 days.

Investors Continue to Watch for Details on Fiscal Stimulus: While the details of the White House’s $1T aid package continued to be worked out, the Treasury asked Congress to reinstate its ability to use the Exchange Stabilization Fund to provide guarantees for and alleviate pressure on money market funds. Later in the day, the Senate passed the House’s aid bill that offers paid sick leave, food aid, and free virus testing. Majority Leader McConnell said lawmakers would immediately shift focus toward the third bill and stay in session until it’s passed.

Market Dislocations Persist with Volatility: With so much uncertainty still overhanging the global virus situation, global markets continued to swing wildly. After re-opening from the 15-minute trading halt, the S&P fell as much as 9.8% before bouncing into the close. Ultimately, the index ended 5.2% lower with energy companies leading sector losses with a 14% tumble. The sector’s slump unfolded as U.S. WTI prices plunged nearly 24% to $20 per barrel, the lowest level since February 2002. Despite the demand shock from the virus, Saudi Arabia doubled down on its pledge for record production of 12.3MM barrels today. Reflecting the continued dislocations in markets, Treasurys again shunned their role as a safe haven asset. The 2-year yield rose 4.1 bps to 0.53% while the 10-year yield jumped 11.3 bps to 1.20%, widening the spread between the two to more than 65 bps, the widest in more than two years. As investors dumped what they could, they dove back into the U.S. Dollar. The ICE Dollar index jumped to a near-three year high. Against the British Pound, the Dollar hit its strongest level since 1985.


OVERNIGHT TRADING

Central Banks Continue to Strike Back Against the Virus Effects: Global equities have continued to struggle overnight while Treasury yields and peripheral European yields pulled back after the ECB and Fed announced Wednesday evening new efforts to ease financial and economic strains caused by the virus. As discussed above, the ECB announced a new asset purchase program (QE) before the Fed released a statement saying it would offer to liquidity to prime money market mutual funds. Despite previous efforts to dust off other crisis era policies since last week to calm turbulent liquidity conditions, markets have remained extremely volatile amid the growing economic concern caused by COVID-19. The Reserve Bank of Australia announced Thursday it was cutting rates, implementing government bond purchases across the curves, and rolling out a term funding facility to support smaller and medium-sized businesses.

Yields Pull Back after Central Bank Actions: Asian equities fell while European indexes and U.S. futures rose early before retreating into negative territory. Treasury yields finally edged back after pressing higher steadily throughout the week from an opening plunge Monday following the Fed’s emergency decision on Sunday evening. The 2-year yield was 3.9 bps lower at 0.49% around 7 a.m. CT with the 10-year yield down 7.2 bps to 1.12%. Core yields in Europe were mixed but peripheral yields plunged after the ECB’s asset purchase announcement. Italy’s 10-year yield was 60 bps lower. Germany yields were largely unchanged after the government said it could approve emergency borrowing next week. A preliminary measure of Germany business sentiment in March tumbled 8.3 points, its biggest drop since at least 2005, to the weakest level since 2009.Oil prices bounced for the first time this week, with WTI up around 10% to $22 per barrel. The Dollar’s persistence strength continued to draw focus as evidence of demand for safety and potential bottlenecks for liquidity. Capturing its astronomical ascent in the flight to safety, the ICE Dollar index is up 7.7% over the last eight days, its sharpest gain in any eight-day period back to 1992, and could serve as an additional headwind to emerging markets already weighed down by the virus.


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