With the Pacific G10 Macro Rates Team
Global Macro Overview
Another week passed with more and more parts of the world coming under lockdown. It remains to be seen how much damage is going to be done to the global economy, but we started getting the first evidence of a slowdown from economic data released last week.
PMIs across Europe and the US as expected collapsed, but as these are sentiment indicators they were bound to overreact. The extent of the spike in Jobless claims in the US (over three million) grabbed the headlines but failed to have an effect on financial markets. Not all countries were shutting down their borders and economies. China reportedly has been trying to restart it’s economy and is now planning to reopen Wuhan in early April.
Last week started with more negative news, as the US Congress failed to pass the stimulus bill over the weekend. Equities reacted strongly as the S&P session began Monday by hitting the 5% limit down. However the rest of the week was definitely more positive, as the spending bill was eventually passed and other countries continued announcing fiscal packages and rates cuts to support their economies. A recovery in equities and the central bank actions finally stabilised Interest Rate markets, with global bond markets having a relatively quiet five trading sessions.
Liquidity remains challenging, but there is widespread evidence that financial markets stresses have continued to ease. Volatility in FX forward markets calmed down together with the lower costs of funding USD assets. Liquidity in the funding markets and the general functioning of the US Treasury market has improved, with significantly cheaper quarter-end funding and less discrepancy between the prices of the Bond Futures and their underlying US Treasuries.
However, the corporate funding market continued to be stressed. Most importantly, the interbank market in USD but also in CAD, GBP, AUD and NOK was under clear stress, with interest rates increasing despite the unprecedented easing measures from Central Banks. The US Federal Reserve is preparing a funding facility to act as a backstop, and it is expected to be operational in early April, this will hopefully reduce the stress on corporate funding. In addition, quarter end and fiscal measures are likely to remove a significant amount of pressure from the banks and corporates.
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