Tuesday, 10 March 2020

P. 1

Rates: Low oil prices poses additional risk

Asian markets join a fiscal relief rally this morning with the US and Japan pledging to step up efforts. We remain cautious and think that any improvement in risk sentiment will be short-lived. European authorities are still stepping up efforts to contain the virus outbreak with horrible eco data looming. Low oil prices pose an additional risk to the US credit market.

Currencies: Dollar decline taking a breather…

Yesterday, the global risk-off repositioning reinforced by the oil crisis kept the dollar in the defensive. This morning, the prospect of potential US fiscal stimulus is causing a (ST?) USD countermove. However, uncertainty on the credit-implications of the oil crisis probably keeps the dollar in a sell-on-uptick pattern.

Calendar

• WS nosedived with losses up to -7.79% (DJI) forcing a brief halt to trading for the

first time since 1997. Asian markets regain footing on hopes for coordinated stimulus from CBs and governments. Australia outperforms (3.11%).

• WHO Chief Ghebreyesus warned that the threat of the coronavirus outbreak evolving to a pandemic has become “very real” but sought to boost hopes by saying “it would be the first pandemic in history that could be controlled.”

• US president trump lifted market moods as he vowed to take “major” steps such as a payroll tax cut and seek “very substantial relief” to gird the economy against the coronavirus epidemic, which was also underlined by USTR Mnuchin.

• The Bank of Russia announced it is pushing forward plans to sell foreign currency – which was initially planned for next month if oil prices would stay below $42.40 bpd – to today after the rout in oil prices caused the ruble to slide.

• The Fed and other regulators urged all US banks to meet the financial needs of borrowers hit by the coronavirus who struggle to repay their debt and vowed to provide appropriate regulatory assistance to affected institutions.

• Japanese finance minister Aso disclosed the government will unveil a second package of steps and stimulus to cope with the economic fallout of the coronavirus epidemic, focussing in particular on support for small businesses.

• Today’s economic calendar eyes meagre with only secondary data due across Europe. Recession fears and hopes for coordinated stimulus measures will be driving market themes. The Netherlands and the US tap the bond market.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Tuesday, 10 March 2020

P. 2

Low oil prices poses fresh risk to the (US) economy

Panic across markets intensified yesterday after Saudi Arabia announced a free-for-all in the oil market. Last week, Russia didn’t want to join OPEC calls to cut production further, sparking a fuming Saudi reaction. They will flood the oil market, sending prices crashing. Brent crude fell from a $45/barrel close on Friday to $37/barrel currently. Core bonds are again main beneficiaries with US yields down 12.7 bps (2-yr) to 29.2 bps (30-yr). The market currently discounts a 75 bps Fed rate cut in March. The NY Fed also raised the size of its overnight and short-term operations in the repo market. The German yield curve bull flattened as well with yields crashing by 14.7 bps (2-yr) to 20.7 bps (30-yr). Markets currently discount another 15 bps deposit rate cut by the ECB, but we’ve argued before that the central bank won’t be lured into doing so given that costs of deeper negative policy rates outweigh benefits. Liquidity-enhancing measures, stronger forward guidance or even slightly increasing the monthly number of asset purchases are distinct possibilities, but we fear they won’t be able to revamp market sentiment. European markets had to take into account draconic measures taken by the Italian government to quarantine several parts of the country. Main European stock markets lost around 8% with Italy underperforming (-11%). Semi-core spreads vs Germany rose by 11bps; peripheral one by 20 bps and Italian/Greek spreads by 50-60 bps.

Markets rally this morning as US President Trump promised very substantial relief for industries hit by the coronavirus (incl. payroll tax cut). Japanese FM Aso also boasted a second round of emergency countermeasures. Asian stock markets turned opening losses into gains of up to 2% currently. The US yield curve bear steepens with yields gaining up to 13 bps. We remain cautious at the start of European trading. First, the previous US fiscal stimulus relief rally lasted for only one session. Second, European markets still need to react Italy’s decision to lockdown the entire country. Italian assets will continue underperforming. An additional risk comes from low oil prices, which could cause problems in the US junk bond market where energy companies are the biggest representative. Chapter 11s in the sector could put credit spreads in general under pressure. It’s hard to see a lasting improvement in risk sentiment already at this stage.

Technically: both the German Bund and US Note future are in heavy overbought conditions. Corrections lower are possible and even likely, but we fear that they’ll be temporary in nature.

Rates

US yield -1d2 0.38 -0.135 0.59 -0.1310 0.54 -0.2230 1.12 -0.29

DE yield -1d2 -1.00 -0.155 -0.99 -0.1310 -0.86 -0.1530 -0.49 -0.21

Af

German 10-yr yield sets all-time low. US 10-yr yield: recession alert.

Tuesday, 10 March 2020

P. 3

EUR/USD holding well north of 1.1250 reference. Entering a buy-on-

dips trading pattern.

EUR/GBP holding near the 0.87 big figure.

Dollar decline taking a breather Global FX trading still developed to the tune of the global risk-off scenario. The dollar faced an uphill battle as markets perceived the loss in interest rate support as likely to be permanent. The turmoil in oil markets and a further rise in global/FX volatility were further negatives for the US currency. EUR/USD closed the session at 1.1450 (open 1.1293). USD/JPY already dropped below 102 in Asian trading and hovered around the big figure for the rest of the day, closing at 102.36. This morning, the market sell-off is easing, at least temporarily with most markets developing a technical countermove on yesterday’s sharp declines (in equities, yields, the dollar). The move was at least partially supported by US president Trump preparing an aid package (possibly including a payrolls tax cut and other measures to address the economic fall-out of the corona virus). Asian equity markets are showing modest gains with Australia and China outperforming. The yuan strengthened slightly (USD/CNY 6.9360 area). The yen declined, with USD/JPY rebounding to the 105 area (104.65 at the time of writing). EUR/USD also eases back to the 1.1350 area. Later today, eco data are few and probably will again be largely ignored as a driver for global (FX) trading. Price action this morning suggests that tension might ease temporarily as markets ponder the possible impact of (US) fiscal measures. The full lockdown in Italy is a potential ST euro negative, too. However, we expect any risk rebound to be short-lived. The corona crisis (in the VS) probably hasn’t reached its peak yet. (Credit) implications of the oil-crisis for the US high yield market are a factor of uncertainty for the US economy, too. In this context, we see the dollar as probably captured in sell-on upticks pattern. 1.1250/1.1620 might be a new trading range, with intermediate resistance at 1.15. We don’t anticipate a sustained USD rebound yet. By default, euro (and yen) strength might persist. EUR/GBP showed some hefty intraday swings but, in the end, followed the EUR/USD intraday uptrend. The pair closed the day north of 0.87. A temporary easing in global tensions might also temporary ease the pressure on sterling. Markets are still pondering the fiscal room of the government to contain the impact of corona. Even so, we don’t see much room for a sustained sterling rebound as long as global uncertainty remains as high as it is now.

Currencies

R2 1.1514 -1dR1 1.1448EUR/USD 1.1450 0.0166S1 1.1239S2 1.1199

R2 0.88981 -1dR1 0.8786EUR/GBP 0.8718 0.0071S1 0.8600S2 0.8275

Tuesday, 10 March 2020

P. 4

Tuesday, 10 March Consensus Previous US 11:00 NFIB Small Business Optimism (Feb) 104.5A 104.3 UK 01:01 BRC Sales Like-For-Like YoY (Feb) -0.40%A 0.00% EMU 11:00 GDP SA QoQ / YoY (4Q F) 0.10%/0.9% 0.10%/0.9% Germany 08:00 Labor Costs SA QoQ / WDA YoY(4Q) --/-- 0.90%/3.1% France 08:45 Industrial Production MoM / YoY (Jan) 1.8%/-1.9% -2.80%/-3% 08:45 Manufacturing Production MoM / YoY (Jan) 1.7%/-1.7% -2.60%/-3.2% Italy 10:00 Industrial Production MoM / WDA YoY (Jan) 1.60%/-3.7% -2.70%/-4.3% China 01:01 Manpower Survey (2Q) 6%A 7% 02:30 PPI YoY (Feb) -0.40%A 0.10% 02:30 CPI YoY (Feb) 5.20%A 5.40% 10MAR-15MAR Money Supply M2 YoY (Feb) 8.50% 8.40% 10MAR-20MAR Foreign Direct Investment YoY CNY (Feb) -- 4.00% Norway 08:00 CPI MoM / YoY (Feb) 0.60%/1.7% 0.00%/1.8% 08:00 CPI Underlying MoM / YoY (Feb) 0.70%/2.3% 0.40%/2.9% Events 11:00 Netherlands to Sell Up to €6bn 0% 2030 Bonds 18:00 US to Sell $38bn 3-yr Notes

Calendar

Tuesday, 10 March 2020

P. 5

10-year Close -1d 2-year Close -1d Stocks Close -1dUS 0.54 -0.22 US 0.38 -0.13 DOW 23851.02 -2013.76DE -0.86 -0.15 DE -1.00 -0.15 NASDAQ 7950.676 -624.94BE -0.32 -0.04 BE -0.72 -0.04 NIKKEI 19867.12 168.36UK 0.16 -0.08 UK 0.09 -0.02 DAX 10625.02 -916.85

JP -0.05 0.11 JP -0.23 0.08 DJ euro-50 2959.07 -273.00

IRS EUR USD GBP EUR -1d -2d USD -1d -2d3y -0.49 0.50 0.44 Eonia -0.4560 0.00005y -0.45 0.56 0.45 Euribor-1 -0.4960 0.0050 Libor-1 0.8626 0.000010y -0.31 0.62 0.46 Euribor-3 -0.4680 0.0050 Libor-3 0.8960 0.0000

Euribor-6 -0.4210 0.0060 Libor-6 0.8799 0.0000

Currencies Close -1d Currencies Close -1d Commodities Close -1d

EUR/USD 1.1450 0.0166 EUR/JPY 117.13 -1.92 CRB 144.81 -11.03USD/JPY 102.36 -3.03 EUR/GBP 0.8718 0.0071 Gold 1675.70 3.30GBP/USD 1.3117 0.0069 EUR/CHF 1.0588 0.0001 Brent 34.36 -10.91AUD/USD 0.6587 -0.0049 EUR/SEK 10.801 0.1951USD/CAD 1.3702 0.0284 EUR/NOK 10.9485 0.4906

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