All was temporarily right in the world early Friday morning in the US (other than the deadly pandemic, of course).
Asian equities were higher, as were stocks in Europe. Oil built on Thursday’s record gains and Nasdaq futures touched the limit-up band prior to the cash open as markets seem satisfied that, even if COVID-19 has more physical pain in store for humanity, at least policymakers and politicians are taking the situation seriously.
Some were disappointed overnight that China left the loan prime rate (the de facto benchmark) unchanged in the March fixing, but I’d argue that’s not wholly surprising. The PBoC is keen to keep as much powder dry as possible and the MLF rate (off which LPR is priced) was unchanged earlier this month when one-year funds were injected.
The Norges bank cut rates for the second Friday in a row, this time by 75bps to 0.25%. The bank said it “will continually consider measures to ensure that the policy rate passes through to money market rates [and] does not rule out a further rate cut”. In other words: Norway is going to zero – and probably soon. The krone is caught up the FX whirlwind and like other currencies tied to crude, has been under pressure amid the pernicious combination of a surging greenback and plunging oil.
Speaking of the dollar, it’s off sharply on Friday, which, perhaps more than anything else, accounts for buoyant risk sentiment globally.
The dollar’s relentless ascent this week was indicative of USD funding-stress and the Fed may have helped turn the tide with Thursday’s swap line extensions. Today’s respite (i.e., dollar weakness) is more than welcome if it can be sustained.
The pound, which plunged to the lowest since 1985 earlier this week during the worst day of FX chaos in recent memory, rose the most since 2008, snapping an eight-day losing streak. Sterling was up 3.4% at one juncture.
“While markets have stabilized and some oversold currencies like the pound are recovering, we advise caution given that next week’s global PMIs could underwhelm the already gloomy market expectations”, Credit Agricole’s Valentin Marinov wrote, adding that “moreover, the COVID-19 pandemic is not yet under control. The mad dash for USD cash could therefore resume”.
Germany is reportedly mulling a rescue fund for companies waylaid by the virus, Spiegel said. The fund – which would have €500 billion in firepower – would be designed to rescue corporates from bankruptcy by guaranteeing their liabilities and/or injecting capital. In other words: Germany may be considering partially nationalizing some companies.
The DAX was up sharply Friday and European yields have come off since the ECB announced a €750 billion emergency asset purchase program. European yields are lower across curves, with the largest moves coming in Italy where yields are 17bps-21bps lower out to 10 years.
But, again, it’s far too early to get excited. Indeed, it’s too early even to be optimistic.
The coming collapse in global activity “leaves a lot of people with US dollar liabilities to finance, and not enough dollars coming in to do it”, SocGen’s Kit Juckes wrote Friday. “It doesn’t matter that they don’t owe these dollars to Americans, nor does it matter that many of these sort-term liabilities are financing longer-dated dollar assets”, he went on to say, adding that “what matters is that they need dollars and need them now”. The Fed’s extension of the swap lines beyond the G-7 will help, Juckes remarked, noting that’s “one of the reasons behind markets being more cheerful [on Friday]”.
False dawn? Maybe. But any dawn will do right now.
