MORNING BID-Zero rates, and so far – zero impact

LONDON, March 16 – A look at the day ahead from EMEA deputy markets editor Sujata Rao. The views expressed are her own.

ZIRP (zero interest rate policy) has arrived in the United States. The Federal Reserve also resumed quantitative easing (QE), added to cash injections and reactivated swap lines with other central banks. On top of that, New Zealand has cut interest rates by 75 bps, following on from a reserve ratio cut in China and Canada’s 50 bps downward move on Friday. Japan too has undertaken more liquidity enhancing measures.

But so far, to no avail — markets continue to crumble and U.S. equity futures are down 5% this morning. A G7 leaders’ teleconference is scheduled for 1400 GMT but given so much shock and awe has failed to lift spirits it’s unclear what more they can do.

One analyst looking on the bright side of things says there is not much clearing out of volatility left to do. But after a decade of exuberance and every kind of risk-taking, that sounds too good to be true. In any case, asset class vols today show little sign of having normalised — euro-dollar implied volatility is around minus 40 bps, better than Friday levels but still showing extreme levels of stress. Chinese weekend data gave us a taste of the damage, with double-digit falls in industrial output and retail sales in January and February.

Across world markets this morning it’s a sea of red — European shares are opening lower following declines across Asia. Expect bank stocks to get further hammered by the rate-cutting measures — some of them have traded as low as 1992 levels. The other thing the Fed move did is to push down the dollar which fell sharply to the yen, euro, pound and most other currencies — but has already started to recoup some of that ground, especially against currencies such as the Aussie. The yen meanwhile has shrugged off the BOJ’s easing moves and jumped 1.5%, while the euro and sterling are up half a percent against the greenback.

The fact remains that at a time of extreme financial stress, there is a dash to buy and hold dollars by safety-seeking investors as well as corporates with debts to pay — meaning it will be hard to dent the U.S. currency’s strength in any lasting manner.

The shift in the global backdrop, especially with oil prices slumping 5% again (the impact has already faded of Friday’s announcement of massive oil purchases for U.S. strategic reserves), are putting all kinds of changes into motion. Kazakhstan’s decision to let the tenge “find a balance” — in other words, let it fall — is an example.

Will we see similar in other oil-exporting countries like Nigeria? EM currencies are really suffering, led by the usual suspects such as the Turkish lira, which has hit a new low, and a currency index is trading close to six-month lows.

On bond markets, the massive liquidity injections may ease some of the pressure on credit markets but for now they have pushed U.S. Treasury yields down. Note though that 10-year U.S. yields were down 30 bps in Asian trading but those falls are starting to be trimmed back — yields are now just 15 bps below Friday close. In Europe, most noteworthy is French bonds coming under pressure, a possible sign markets are pricing in multi-billion euro bailouts for beleaguered companies. Its 10-year bond, normally seen as a safe asset along with the other big core euro zone country Germany, has risen to 3-1/2 month highs. Yields on already risky markets such as Italy and Spain have blown out 12-15 basis points.

So what do markets really want? The F-word is looming large — with calls for a giant fiscal impulse getting louder by the day. In fact this could be the perfect opportunity for a) Germany to realise it can and should spend more, and b) to everyone to try out helicopter cash. That’s probably what could help businesses shuttered by lockdowns and people seeing incomes collapse in a way that tax cuts and lower rates may not.

We wait to see what comes out of the 1400 GMT call, meanwhile enjoy this Rabobank headline on its morning note: “I love the smell of MMT in the morning”, a reference to modern monetary theory which posits governments should borrow and spend in their own currencies as long as inflation stays low.

In European stock markets, airlines, airports and hospitality groups are taking another hit as more countries impose new travel restrictions and lockdowns. EasyJet may ground the majority of its fleet and is calling for coordinated government backing to save the aviation industry. Same from travel operator TUI, which is suspending many operations, scrapping its outlook and requesting state aid.

French airports group ADP is considering closing down some areas in its main Paris airports.

In a sign of the times, LVMH is preparing to manufacture antibacterial gel instead of perfume.

In emerging markets, an MSCI equity index is down 3.85%, with country-specific indexes down 4-8% A number of developing central banks are springing into action — South Korea is holding an emergency policy meeting and South African President Cyril Ramaphosa declaring a national state of disaster. Russia’s rouble and Mexico’s peso, both exposed to falling crude prices, are down 2%.

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