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ECB and RBA ease further, but can’t stop the bleeding

ECB and RBA ease further, but can’t stop the bleeding

11-5-2020 10:09:09In a day that is likely to go down in history financial markets sank under a weight of selling yesterday, as we saw big declines across the board, with bond markets, equities and crude oil all getting battered as forced liquidations saw investors move into cash. This has continued overnight with not even gold prices being spared, though they have fared slightly better than most.

Fears about the effects of record bond issuance by governments in response to the coronavirus, has seen investors move out of long-term government bond markets in droves, sending long end bond yields sharply higher, with the US 10 year up over 50bps since the beginning of the week, while the 30 year has also seen a similar rise. In the last nine days the yield on the 30 year has risen by over 1%. 

It was a similar story for UK gilts which have seen a 40bps rise since Monday, removing the benefits that came with this month’s emergency rate cuts from both central banks, while bunds also sank sharply, pushing yields up to -0.23%, from levels close to -0.6%. This spike in yields only serves to undo the work of lowering interest rates in the first place, and needs to prompt further action by central banks in order to regain control of the curve.

Oil prices had their third worst day on record, sinking to an eighteen year low in the process, getting hit by a double whammy of a surging US dollar, as well as fears about the effects of a huge supply glut. With demand grinding to a halt and the Saudi’s flooding the market, it’s getting to the point that they are struggling to give the stuff away, as storage capacity quickly fills up, not only for oil, but it’s by products as well. At some point oil companies will have to wind back their production of gasoline, and other by-products, as storage capacity runs out. 

The pound is now trading at a 35 year low against the US dollar, its seventh successive daily decline in a row as the greenback swept all before it, pushing it through the 2016 flash crash lows and below the 1.1500 area. It is important not to understate what a big level this 1.1960 level was given that there is little in the way of significant support between this level and the all-time lows at 1.0500 seen at the beginning of 1985. We also saw the pound hit its lowest levels against the euro since 2008.

The last few weeks have seen central banks in full scale easing mode with the Federal Reserve, European Central Bank, Bank of England and the Bank of Japan taking steps to ease monetary policy as aggressively as they can.

Last night the European Central Bank went further by announcing an additional €750bn pandemic response program of sovereign and corporate bond purchases, while also expanding the range of assets that it could buy to include non-financial commercial paper. The ECB fell short of committing to dropping its limit which prevents it from buying more than a third of a country’s debt issuance but said this was under consideration.

Overnight the Reserve Bank of Australia cut rates again, by another 25 basis points to another record low of 0.25%, as well as announcing a term funding scheme as well as a three yield target, with the RBA board saying they expect the cash rate to remain at its current level for many years. The Australian dollar continued its recent falls, dropping to levels last seen in 2002.

Today it’s the turn of the Swiss National Bank, who face similar problems to the Bank of Japan, with a strong currency and rates that are deeply negative. We’re not expecting any changes in rates here from the current -0.75%, and even if they were to do so it’s doubtful, they would make much difference, but we could see a further expansion of additional tools in terms of buying other assets.

Monetary policy is almost a busted flush at this point with fiscal policy now the only game in town. With politicians now speaking as if they were fighting a war against an invisible enemy, they are struggling to keep pace with the ever-changing nature of events, as cases of the virus continuing to rise exponentially.

Even the fiscal measures that are being passed don’t appear to be helping to stop the rot, even as the US senate passed a measure to help millions of Americans on unpaid sick leave.

It is becoming ever clearer that the current market falls could well get worse before they get better, with dark predictions of annualised H1 contractions of up to 20% of GDP being bandied about. It is now becoming increasingly apparent that the global economy is about to undergo a painful contraction of varying degrees.

It is also becoming apparent that politicians will need to do much more in the coming weeks, blowing budgets in the process in order to mitigate the economic damage that is likely to occur over the rest of the year.

After yesterday’s bloodbath, markets in Asia have continued to fall, with markets here in Europe set to also open lower once more as the bloodletting gets set to continue. 

EURUSD – fell through the 1.0920 level and slid back all the way towards the 1.0800 level before rebounding. We could see a recovery back towards the 1.1020 area, without diminishing the downside risk of a move towards 1.0500. The key support remains down at the 1.0780 level and this year’s low.

GBPUSD – the pound slid through every key support yesterday, breaking below the 1.1960 area, and slicing all the way down to the 1.1450 area, before rebounding. The break of the 1.1960 area is huge and could well see a move down towards 1.1000, on a move through the lows this week.

EURGBP – continues to advance higher, breaking above the 0.9325 area and its highest levels since 2009. We could well see a move back to the 2008 highs of 0.9800 in the coming weeks. The 0.9200 area now becomes a key support area.

USDJPY – finding the 108.50/70 area a tough nut to crack, as it struggles to close above the 200-day MA at 108.30. We need a close above this level to target a move to the 109.20 area. While below 108.50 the risk is for a return to the 104.20 area.

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