Following yesterday’s torrid market moves, Asian equities traded in positive territory today with European equity markets also trading higher in morning trade. At the time of writing, USTs have retraced Monday’s extreme move with the yield on the 10 year now back at 0.71%, off yesterday’s record intraday low of 0.318%. The S&P 500 future in Tuesday morning trading is indicated higher most likely helped by Trump talking of “a payroll tax cut or relief” to help counter the negative impact from coronavirus adding “I will be having a press conference to talk about various things that we’re doing economically, they’ll be very major”. Clearly, policy responses are required around the world with recession fears mounting and longer-term inflation expectations under pressure: US 5-year-5-year forward inflation expectations have plunged to ~1.3% and the 5-year-5year EUR inflation swap rate has fallen below 1%.
Both Wednesday’s UK budget and the ECB meeting on Thursday will be closely watched. However, the ECB alone is unlikely to be able to offset economic hit to the Eurozone with more policy action/fiscal response required by the governments. Italy is particularly concerning: it was already in a precarious position with the economy barely growing before the coronavirus struck, a high government debt to GDP ratio and a weak banking system. Italy has already announced some stimulus measures, but further measures are needed. Germany announced some measures and €12.4bn in state investments with the finance minister, Olaf Scholz, stating Germany would “do everything needed to stabilise the economy and secure jobs”. France and Italy have called for fiscal stimulus in response to coronavirus: Bruno Le Maire, the French Finance Minister, stated: “I expect a strong, massive and coordinated response from Europe to avoid the risk of an economic crisis after the epidemic”. Ursula von der Leyen, the Commission President, has noted that the commission is looking at ways for state aid to be allowed to help afflicted sectors but clearly more action is required. Today, EU leaders are due to have a conference call but measures falling short of a decisive and concerted response are likely to disappoint markets.
Against this backdrop we continue to favour higher credit quality, stronger net foreign asset positions and asset buffers to weather more challenging periods.