15-5-2020 10:45:4315-5-2020 10:14:52Just over a week after the Fed slashed rates to the lower bound, and with global stock markets once again sharply lower, the US central bank intervened decisively again this morning, by announcing an open ended unlimited quantitative easing program, buying US treasuries and mortgage backed securities, a QE infinity if you like.

The central bank also announced it would be working on a program to help small businesses. It has also reintroduced TALF which gives the bank the ability to buy securities backed by student, credit card and car loans.

While US politicians continue to procrastinate the US central bank has decided to double down, and go all in, by not only helping Wall Street, but by also helping to keep Main Street on its feet as well, against worries that US economic output could see in excess of a 20% contraction in Q2.

With the US dollar sweeping all before it and rising sharply, especially against emerging market economies, it would also appear the Fed officials have decided that they needed to do something radical to slow the advance of the US dollar, as well as try and put a floor under equity markets.

US futures which were sharply lower, and actually opened limit down in Asia earlier, have turned around sharply, and could well open higher, while markets in Europe are also off their lows.

While the markets appear to like this morning’s measures, the rebounds being seen don’t get anywhere close to reversing the sharp slide seen in US markets on Friday. 

US treasury yields have slid back on the longer end with 10-year yields slipping 10 bps

The US dollar has also slipped back with the pound and euro being notable beneficiaries, on the back of this morning’s actions.

Investors are still awaiting the US governmental response, and the hope is that US politicians will come together to pass some interim legislation, even if they can’t agree on all of the basic package.

If they procrastinate too much ahead of this week’s jobless claims and next week’s payrolls numbers, then the long-term economic damage could well be much more significant and long term. These jobs numbers are expected to be ugly. Right now, US politicians are fiddling while the US economy burns.

The rebound in the euro and the pound while welcome only eases modestly the downside pressure on both currencies, and while the Fed’s action is welcome, it still doesn’t change the US dollar’s position as a safe haven destination. It just dilutes it.

The break below 1.1960 is a negative development for the pound, and while the UK fiscal response has been much more dynamic and ahead of the curve than its peers in Europe and the UK, the currency still remains under pressure.

The Bank of England is pretty much all in, though it could do more QE, while the UK government’s final bill could well be much higher than the £330bn announced last week. This is likely to keep a lid on the pound in the short term.

If we can get back above 1.2000 we could see a stabilisation, however the risk remains for a move towards $1.1000 in the absence of a rebound.


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