Last week was another torrid week across asset markets as the dual shock of the coronavirus pandemic and the breakdown in supply discipline in the OPEC+ oil market riled investors. In fact, the moves have been so violent that the S&P suffered its quickest shift to a technical bear market (down 20% from the trading peak) on record. The Brent crude price ended the week down 25.2%. Thursday was particularly brutal for equities with a close to 10% decline in the S&P and the Italian market losing 16.9%: President Trump inflicted a ban on visitors from continental Europe but gave no further details of a fiscal stimulus plan which weighed on already weak sentiment. Later that day, the ECB disappointed investors by failing to deliver a rate cut in addition to its announced further asset-purchases and TLTRO iii while urging governments to provide fiscal stimulus. Christine Lagarde’s comment regarding it not being the ECB’s role to “close the spread” in sovereign debt markets was taken badly by bond markets with the spread of BTPs over bunds blowing out in response; the yield on the Italian 10-year BTP rose 71bps over the week to yield 1.78% into Friday’s close. On Friday, Philip Lane attempted to ease market concerns saying ECB was “ready to do more” if required.
Importantly, on Thursday the Fed announced that it would inject USD1.5tn into funding markets and purchase USTs to improve the Treasury market trading and liquidity. The S&P ended the week down 8.73% (total return) helped by a bounce into Friday’s close: on Friday Trump declared a national emergency making additional funding available to fight coronavirus in addition to the USD8bn already announced. USTs conceded ground from the previous week’s close: the yield on the UST 10 year rose 20bps to end the week at 0.96% but this was having touched a low of 0.318% intraday on Monday. Credit spreads have widened with the lower grade/high yield coming under particular pressure.
Elsewhere, stimulus was on the cards, notably in the UK where the BoE cut rates 50bps on the same day that the UK chancellor Rishi Sunak announced a stimulatory budget attempting to address coronavirus and the floods. Italy and France continued to pledge more fiscal stimulus and even Germany by the end of the week pledged €550bn through state bank KfW to support business hurt by the virus while the Finance Minister Olaf Scholz said Germany is prepared to undertake full-blown fiscal stimulus if required. On Friday the EU Commission revised down its growth forecasts significantly for the euro-area noting that real GDP could be reduced by 2.5% due to the pandemic implying it could fall just over 1% in 2020 “with a substantial but not complete rebound in 2021”. In terms of policy Executive-VP Dombrovskis commented “The Commission will support countries that use the full flexibility in the EU Stability and Growth Pact at this time of need.” Noting also that “The unusual events clause can accommodate exceptional spending to contain the virus outbreak.”
On Sunday night, the Fed cut the Federal Funds Target range by 100bps to 0-0.25% and said that it would resume asset purchases of USD700bn in Treasuries and MBS. There is a FOMC meeting due on March 17-18th although the Fed is clearly now acting as and when it sees the need. The BoJ also announced an increase in asset purchases on Monday morning. Markets are trading with a risk-off tone on Monday morning with equity markets down and US Treasuries trading stronger. While the uncertainty of the coronavirus impact continues to unsettle markets developments in China in terms of new cases, returning to work and factories ramping up production remain important to monitor as China was the first into the virus-related crisis and will give a feel for the timeframe of any impact.