Overnight, the Fed announced that it would launch a series of massive cash injections into funding markets as well as a change in the maturity structure of their Treasury purchases. It announced that more than USD1.5tn will be pumped into the banking system to ease pressure and install confidence, as well as to begin buying longer-term government bonds. They will expand repo operations by offering USD500bn 3- and 1-month repos on a weekly basis for the duration of the current schedule. They will also continue to offer USD175bn in daily overnight repo operations and at least USD45bn in two-week term repo operations twice a week over this period. In the announcement that came with the funding, the New York Fed said ‘These changes are being made to address highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak’.
From one central bank that seems to be doing ‘whatever it takes’ to another across the pond that maybe is not on the same page. Yesterday the ECB left their key policy rates unchanged, contrary to market expectations. The ECB did make two bold new policy decisions – TLTRO-iii terms will be made significantly easier with a higher maximum capacity, and QE will be increased by €120bn. Christine Lagarde, the European Central Bank boss was very clear that the ECB consider this (rather than rate cuts) to be the most efficient response to the current crisis. When referring to calls for the ECB to also cut interest rates she said ‘We are not here to close bond spreads, there are other tools and other actors to deal with these issues’ adding ‘An ambitious and coordinated fiscal stance is now needed in view of the weakened outlook and to safeguard against the further materialisation of downside risks’.
Right from the bell yesterday, US stock markets were a sea of red as equity investors sold off stocks over concern about the spreading coronavirus pandemic. It took just minutes before the markets were suspended after falling 7%. All 3 major US markets closed nearly 10% lower. In Europe, the FTSE was down nearly 11% with the STOXX Europe 600 Index down 11.3%. US Treasuries whipsawed around the Fed’s announcements and are currently traded at 1.65% and .88% for the 30 and 10 year respectively. Italy’s 10-year bond got smoked, selling off nearly 59bps on the suspicion that the ECB might not support Italian spreads at a time when Italy and others are relying on ECB support to embark on needed fiscal stimulus.
Lastly, it’s Friday the 13th, how apt for the Dow Jones. At the close of business yesterday, the Dow was down 18.03% on the week, within touching distance of its worst week in its 124 year history. The current record is the 18.15% weekly drop that happened in 2008 at the height of the financial crisis. At time of writing, it seems the record will hold; Dow futures are up 430 points.