With the Pacific G10 Macro Rates Team
Global Macro Overview
Financial markets experienced another turbulent week, as liquidity continued to be challenging even in the largest markets. Volatility remained elevated with the VIX staying above 70 most of the week, TYVIX (VIX for US Treasuries) at the highest levels since 2008 and various instruments (S&P futures, 30y US Treasury futures, 10y BTP futures) hitting their daily limits up and down on several occasions. While markets were evaluating damage to the economic activity, more and more regions in the developed countries were put under lockdown.
A potential lockdown of London sent the currency plummeting, with GBP reaching the cheapest levels against the US Dollar since the early 80s. Central Bank actions added to volatility in the financial markets, with the ECB QE announcement sending 10y yields on Italian bonds 1% tighter to the 10 yields on German bonds at the open on Thursday and the RBA announcement was followed by almost a 1% roundtrip in 10y yields within 10 minutes.
On the upside, both Governments and Central Banks seem to be throwing the kitchen sink at the problem. The question is whether what has been announced is going to be enough to safeguard a V-shape recovery. Central Banks spent last week cutting interest rates and trying to fix broken markets by pumping liquidity into the system and providing funding for the struggling sectors.
US: The Fed slashed interest rates back to 0% on Sunday at an unscheduled meeting and re-started the QE to fix the broken Treasury markets. However, these measures have failed to improve the market functionality so far, as dealing costs remain 6-8 times the normal. Earlier in the week volatility in FX forwards increased and the Fed had to step-in by providing currency swaps to other Central Banks at reduced spreads. On fiscal policy Congress started debating $1.2 trillion in spending, including direct payments of $1,000 or more to Americans within two weeks.
Canada: The Government set aside a C$1 billion ($702 million) in funding and C$10 billion in new credit. It may buy as much as C$50 billion in home mortgages. Additional fiscal stimulus was to be announced Wednesday. The Central bank cut rates by a full percentage point, loosened capital requirements to boost lending and re-introduced repo operations.
Eurozone: The ECB has announced the extension of it’s QE programme that will cover Greece and corporate issuers. This was not expected by the markets and had a strong positive effect on the peripheral spreads. The German government announced they will make as much as 550 billion euros available in lending for businesses from German the state bank KfW. France approved an emergency budget to include 45 billion euros of spending and 300 billion euros loan guarantees. Italy approved a 25 billion-euro package, including loan guarantees, the takeover of Alitalia and funds for businesses and individuals.
Norway: Norges Bank cut interest rates to 0.25% and introduced funding scheme.
The BoJ raised the upper limit of its annual ETF purchase target to 12 trillion yen ($112 billion) but disappointed interest rate cut expectations. In addition, the BoJ had to implement several unscheduled Rinban (Government Bond QE) operations to stabilise the JGB market.
The Government promised help with mortgage payments, and support for airlines, shops and the hospitality industry, with 350 billion pounds ($424 billion) of government-backed loans, grants and tax cuts. The BoE cut interest rates to 0.1% and announced a £200bn extension of the QE programme (Gilts and corporate bonds).
Australia: The RBA cut benchmark interest rate to 0.25%, introduced Yield Curve Control by targeting the 3y yield at 0.25%. The Government is expected to release a second stimulus package after an initial A$17.6 billion ($10.6 billion) to support the economy.
New Zealand: The RBNZ cut interest rates to 0.25% and promised to keep it stable for the next 12 months. They also introduced a funding scheme.
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