Is it to be QE for everyone and everywhere?

It was only yesterday that I signed off with the heat is on and indeed it was. That was true if you looked at the fall in the UK Pound or the Norwegian Krona and even more so with crude oil. In response there was an evening emergency meeting ( by telephone) of the European Central Bank. This was because it had been on the back foot in several of its bond markets in spite of its announcement of more QE ( Quantitative Easing) bond buying as recently as last Thursday. In Italy the benchmark ten-year yield approached 3% and reignited crisis fears. So let us go to the response and the emphasis is mine.

To launch a new temporary asset purchase programme of private and public sector securities to counter the serious risks to the monetary policy transmission mechanism and the outlook for the euro area posed by the outbreak and escalating diffusion of the coronavirus, COVID-19.

We know what temporary means as for example the original emergency interest-rate cuts were supposed to be that as was the original QE and negative interest-rates. They are all still here. In a way that is the difference this time around as central bank action is supposed to be reversed a few years later when things are better but that never happened. Instead it is “More! More! More!”

This new Pandemic Emergency Purchase Programme (PEPP) will have an overall envelope of €750 billion. Purchases will be conducted until the end of 2020 and will include all the asset categories eligible under the existing asset purchase programme (APP).

Actually they highlight my temporary point because that feels like an end date but later we get this.

The Governing Council will terminate net asset purchases under PEPP once it judges that the coronavirus Covid-19 crisis phase is over, but in any case not before the end of the year.

Number-Crunching

There are various perspectives to this as assuming they started immediately which they have then there will now be around 115 billion Euros of QE bond purchases from the ECB. There was also this for Italy.

If capital key is fully respected this means almost 10.5 bln additional monthly purchases of BTPs, for the next 9 months. #BringItON  ( @gusbaratta)

As you can see Gus was enthusiastic. I do not know if he was long the market but anyway it seemed set to offer some relief to hard-pressed Italy.

There was also something that looks set to be significant but has got a little lost in the fog.

To the extent that some self-imposed limits might hamper action that the ECB is required to take in order to fulfil its mandate, the Governing Council will consider revising them to the extent necessary to make its action proportionate to the risks that we face.

That made me thing of the capital key point made by Gus where purchases are proportionate to each country’s share in the ECB itself, This is mostly but not entirely related to the size of their economy. So clearing the decks in case Italy for example needs more and also at the other end of the scale should they run out of bonds to buy in the Netherlands or Germany.

Also there was a plan for Greece.

A waiver of the eligibility requirements for securities issued by the Greek government will be granted for purchases under PEPP.

Rather curiously there are not that many Greek bonds to buy because they have bought so many in the past! The European Stability Mechanism has a very large holding for example.

Together, the EFSF and ESM disbursed €204 billion to Greece, and now hold more than half of its public debt.

Market Reaction

It seems as though the ECB has steamed in this morning all guns blazing or as they put it.

At the same time, purchases under the new PEPP will be conducted in a flexible manner. This allows for fluctuations in the distribution of purchase flows over time, across asset classes and among jurisdictions.

This has seen the Italian bond future rally over 8 points to 138 as the ten-year yield fell to 1.7%. This is a tactical success although care is needed as only central bankers regard paying much more for something as a success. It should help Italy relax fiscal policy if it is sustained. However, there is a deeper perspective which is that some short of Italian bonds will have been screaming for the financial stretcher-bearers and may not return. Please remember that if down the road we see central bankers and their acolytes complaining of a lack of liquidity.

The situation in equity markets is not so happy because as I type this the Dax of Germany is some 1% lower although the EuroStoxx 50 is hanging onto a few points gain.

The Euro

This is off 1% versus the US Dollar at 1.083 but as we looked at yesterday we are seeing a phase of King Dollar so the picture is blurry. We maybe learn a little that the Euro has slipped against the UK Pound £ but the move is much smaller than its gain yesterday so again we learn not much. So lower yes but we have no way of knowing if the QE has contributed much here in another fail for economics 101.

On that subject someone has announced this morning that they are buying.

The SNB is intervening more strongly in the foreign exchange market to contribute to the stabilisation of
the situation. ( Swiss National Bank)

Australia

It feels like yesterday when the Reserve Bank of Australia announced it might do QE if interest-rates were cut to 0.25%. Well this morning we learnt that beds may be burning in the land of midnight oil.

A reduction in the cash rate target to 0.25 per cent.

Followed by.

A target for the yield on 3-year Australian Government bonds of around 0.25 per cent.

This will be achieved through purchases of Government bonds in the secondary market. Purchases of Government bonds and semi-government securities across the yield curve will be conducted to help achieve this target as well as to address market dislocations. These purchases will commence tomorrow.

As I have pointed out earlier please remember the “market dislocations” bit should liquidity disappear and the RBA complains about it.

Poland

Earlier this week the Polish central bank joined the party.

NBP will also purchase government bonds on the secondary
market as part of the structural operations that change the long-term liquidity structure in the banking sector and contribute to maintaining the liquidity in the government bond secondary market.

Notice how they are getting a liquidity denial in early? Also they did this.

The Council decided to cut the NBP reference rate by 0.5 percentage points, i.e. to 1.00%

Bank of Korea

From Bloomberg.

The Bank of Korea plans to buy $1.2 billion in government bonds to stabilize markets

I would imagine the central banking dark web is full of messages saying “lightweights” after starting with such a small amount.

Comment

When the credit crunch started some central banks sung along with Huey Lewis and te News.

I want a new drug, one that won’t hurt my head
One that won’t make my mouth too dry
Or make my eyes too red

As time has passed more joined in and now the chorus is deafening as more join the QE party. I expect that there will be more in terms of volume for existing players and more new entrants because it is now about oiling the wheels of fiscal policy. When central banks were made “independent” this was not the purpose ( they are not that bright) but the traditional bureaucratic way of appointing people who are to coin a phrase “one of us” means that actually they are doing more than elected politicians would be allowed to. There is a democracy deficit hidden behind the crisis measures.

The picture is complex as there are many areas which badly need help right now. On a personal level in a short space of time I heard about 2 people losing jobs and a business owner losing work. But the history of central bank action is that it favours big not small business or the self employed. One certainty is that once we get any bit of stability the money will pour into the housing market as banks find that easy to do.

Meanwhile we are reminded that mistakes can be very expensive but not for our lords and masters.

Last Thursday: Lagarde says ECB is not there to close bond spreads

Tonight: ECB announces an extra 750 billion of QE to close bond spreads

 

The world wants and needs US Dollars and it wants them now

In the midst if the financial market turmoil there has been a consistent theme which can be missed. Currency markets rarely get too much of a look in on the main stream media unless they can find something dramatic. But CNN Business has given it a mention.

The US dollar is rallying against virtually every other currency and it seems like nothing can stop it.

There are lots of consequences and implications here but let us start with some numbers. My home country has seen an impact as the UK Pound £ has been pushed back to US $1.20 and even the Euro which has benefited from Carry Trade reversals ( people borrowed in Euros to take advantage of negative interest-rates) has been pushed below 1.10. Even the Japanese Yen which is considered a safe haven in such times has been pushed back to 107.50. We can get more thoughts on this from The Straits Times from earlier today.

SYDNEY (REUTERS) – The Australian dollar was ravaged on Wednesday (March 18) after toppling to 17-year lows as fears of a coronavirus-induced global recession sent investors fleeing from risk assets and commodities, with panic selling even spilling over into sovereign bonds.

The New Zealand dollar was also on the ropes at US$0.5954, having shed 1.7 per cent overnight to the lowest since mid-2009.

The Aussie was pinned at US$0.6004 after sliding 2 per cent on Tuesday to US$0.5958, depths not seen since early 2003.

So there are issues ans especially in a land down under as an Aussie Dollar gets closer to the value of a Kiwi one. In fact the Aussie has been hit again today falling to US $0.5935 as I type this. No doubt it is being affected by lower commodity prices signalled in some respects by Dr. Copper falling by over 4% to US $2.20

Sadly the effective or trade-weighted index is not up to date but as of the 13th of this month the official US Federal Reserve version was at 120.7 as opposed to the 115 it began the year.

Demand for Dollars

It was only on Monday we looked at the modifications to the liquidity or FX Swaps between the world’s main central banks. Hot off the wires is this.

BoE Allots $8.210B In 7 Day USD Repo Operation ( @LiveSquawk )

This means that even in the UK we are seeing demands for US Dollars which cannot be easily got in the markets right now. Maybe whoever this is has been pushing the UK Pound £ down but we get a perspective by the fact that this facility had not been used since mid-December when the grand sum of $5 million was requested. There were larger requests back in November 2008.

I was surprised that so little notice was taken when I pointed this out yesterday.

Interesting to see the Bank of Japan supply some US $30.3 billion this morning until June 11th. Was it Japanese banks who were needing dollars?

Completing the set comes the European Central Bank or ECB.

FRANKFURT (Reuters) – The European Central Bank on Wednesday lent euro zone banks $112 billion at two auctions aimed at easing stress in the U.S. dollar funding market, part of the financial fallout of the coronavirus outbreak.

The ECB said it had allotted $75.82 billion in its new 84-day auction, introduced by major central banks last weekend in response to global demand for greenbacks, and $36.27 billion at its regular 7-day tender.

Actually it was good the ECB found the time as it is otherwise busy arguing with itself.

With regards to comments made by Governor Holzmann, the ECB states:

The Governing Council was unanimous in its analysis that in addition to the measures it decided on 12 March 2020, the ECB will continue to monitor closely the consequences for the economy of the spreading coronavirus and that the ECB stands ready to adjust all of its measures, as appropriate, should this be needed to safeguard liquidity conditions in the banking system and to ensure the smooth transmission of its monetary policy in all jurisdictions.

So we see now why the Swap Lines were reinforced and buttressed.

Oh and even the Swiss Banks joined in.

*SNB GETS $315M BIDS FOR 84-DAY DOLLAR REPO ( @GregBeglaryan )

Emerging Markets

This is far worse and let me give you a different perspective on this. During the period of the trade war we looked regularly at the state of play in the Pacific as it was being disproportionately affected.

Let me hand you over to @Trinhnomics or Trinh Nguyen.

Swap lines to EM please (also to Australia – we like Australia in Asia too as it’s APAC). “the supply of liquidity by central banks is beneficial only to those who can access it,

Her concern was over that region and EM is Emerging Markets. I enquired further.

Operationally, the bid for USD in Asia and squeeze in liquidity reflects the massive role of the USD in the global economy & finance. For example, 87% of China merchandise trade is invoiced in US. and the loss of income from export earnings will further push higher the demand of USD. To overcome the global USD squeeze, the Fed must step up its operational support via swap lines with economies such as South Korea.

That was from a piece she wrote for the Financial Times but got cut from it. On twitter she went further with a theme regular readers will find familiar

Guys, the reason why we have a dollar shortage is because we have levered!!!!!!!!!!! So when income collapses, we got major problem because we have leveraged & so debt needs servicing etc. Aniwaize, the stress u see is because we live in a world that’s too leveraged!!!

And again although I would point out that leverage can simply be a gamble rather than a hope for better times.

Don’t forget that low rates only lower interest expense, u still got principal that is high if ur debt stock is high. When u lever, u think the FUTURE IS BETTER THAN TODAY. Obvs very clearly that whoever thought there was growth is in for a surprise given the pandemic situation.

She looks at this from the perspective of the Malaysian Ringgit which has fallen to 4.37 versus the US Dollar and the Singapore Dollar which is at 1.44.

Comment

We are now seeing a phase of King Dollar or Holla Dollar and let me add some more places into the mix. We have previously looked at countries which have borrowed in US Dollars and they will be feeling the strain especially if they are commodity producers as well. This covers quite a few countries in Latin America and of course some of those have their own problems too boot. I also recall Ukraine running the US Dollar as pretty much a parallel currency.

The beat goes on.

In times of stress, capital flees emerging markets to seek safety in $USD . This crisis is no different. ( @IceCapGlobal)

which got this reply.

Investors have yanked at least US$55bn from EMs since January 21, according to the Institute of International Finance, exceeding the withdrawal in 2008. ( @alexharfouche1 )

Let me finish by reminding you that ordinarily we discuss matters around the price of something. But here as well as that we are discussing how much you can get and for some right now that people will not trade with you at all. That is why we are seeing what is effectively the world’s central bank the Federal Reserve offering US Dollars in so many different ways. It is spraying US $500 billion Repo operations around like confetti but I am reminded of the words of Glenn Frey.

The heat is on, on the street
Inside your head, on every beat
And the beat’s so loud, deep inside
The pressure’s high, just to stay alive
‘Cause the heat is on

The Investment Channel

The US Repo cavalry arrives with the “Lagarde bond yield bounce”

This has been an extraordinary week, so much so that I am going to relegate the shambles that was the ECB action yesterday as President Lagarde lived down to all my criticisms of her to second place. This is because at around 5pm London time yesterday the US Cavalry arrived so let me hand you over to the New York Federal Reserve,

As a part of its $60 billion reserve management purchases for the monthly period beginning March 13, 2020 and continuing through April 13, 2020, the Desk will conduct purchases across a range of maturities to roughly match the maturity composition of Treasury securities outstanding.  Specifically, the Desk plans to distribute reserve management purchases across eleven sectors, including nominal coupons, bills, Treasury Inflation-Protected Securities, and Floating Rate Notes

So most of the “not QE” is now outright QE ar least for now and we know what tends to happen to such temporary moves. After all weren’t the daily Repos supposed to be temporary when they started last September?

Also in another very familiar theme we see that any attempt at a “taper” seems to morph into an expansion.

Today, March 12, 2020, the Desk will offer $500 billion in a three-month repo operation at 1:30 pm ET that will settle on March 13, 2020.  Tomorrow, the Desk will further offer $500 billion in a three-month repo operation and $500 billion in a one-month repo operation for same day settlement.  Three-month and one-month repo operations for $500 billion will be offered on a weekly basis for the remainder of the monthly schedule.

There is a lot of numbers bingo there and many on social media either fell for it or chose to fall for it by declaring an extra US $1.5 trillion of QE. But let us take the advice of Kylie Minogue.

I’m breaking it down
I’m not the same

We had to wait less than an hour to discover that the first Repo was for US $78.4 billion. So we saw that the Fed has in fact finally taken my advice and made sure it was offering too much to find out as much as possible what the true state of play is. Rather late in the day though as it is doing it in an equity market inspired panic as opposed ti thinking ahead. As to QE we have something of a US $78.4 as an 84 day Repo qualifies for me in spite of officially being “not QE” plus we have an Operation Twist style extension of average maturity on the existing US $60 billion a month.

I do not know what today’s Repo allocations will be only that bids will be filled in full up to the US $500 billion maximum. Should they be like last night’s then we will see a US $225 billion increase in QE which is quite some distance from many claims. Of course more or less might be taken.

What is really happening here?

There is an elephant in the room and it was sung about by Aloe Blacc

I need a dollar dollar, a dollar is what I need
Hey hey
Well I need a dollar dollar, a dollar is what I need
Hey hey
And I said I need dollar dollar, a dollar is what I need
And if I share with you my story would you share your dollar with me

Indeed he was especially prescient here.

Bad times are comin’ and I reap what I don’t sow
Hey hey
Well let me tell you somethin’ all that glitters ain’t gold
Hey hey

Actually at US $1583 gold is not glittering much either with rumours abounding that it is being sold to help settle margin payments elsewhere. In a crisis people want the security of King Dollar or the world’s reserve currency. This adds to the existing dollar shortage which I wrote about on the 25th of September 2018, and to the issue last September when a Euro area bank had to go to the US Federal Reserve for dollars.

This brings us to the banks who are the drivers of this. The suspicion is that at a minimum some cannot get dollars in the usual way via markets and thus have to go to the US Federal Reserve. With markets being as they have ( oil, bonds and equities) frankly I would not be surprised if some banks are in trouble. On that note I see one at least has made an official denial of such problems already today.

FRANKFURT (Reuters) – Deutsche Bank’s <DBKGn.DE> top executives sought to assure employees and investors over its ability to weather the coronavirus as shares in the German lender hit a new low on Thursday amid a wider stock market sell-off.

Christian Sewing, chief executive of Germany’s largest bank, told employees in a memo seen by Reuters that Deutsche Bank’s business was in “good shape as the positive momentum of the fourth quarter has continued”.

A Communications Break Down at the ECB

There was some surprise at the lack of much action from the ECB yesterday highlighted by the fact that even more bank subsidies were accompanied by further falls in bank share prices. But it got worse and then much worse. The worse bit was when the ECB press officer had to correct President Lagarde about the size of the extra QE announced as it was 120 billion Euros and not 100 billion. So the claim that Christine Lagarde was good at reading off a teleprompter crashed and burned, But then things got even worse.

Well, we will be there, as I said earlier on, using full flexibility, but we are not here to close spreads[1]. This is not the function or the mission of the ECB.

Curious because you could summarise the term of her “Whatever it takes” predecessor as doing exactly that. Rather than me describe the issue let me hand you over to the correction issued by the ECB.

[Statement in CNBC interview after press conference:] I am fully committed to avoid any fragmentation in a difficult moment for the euro area. High spreads due to the coronavirus impair the transmission of monetary policy. We will use the flexibility embedded in the asset purchase programme, including within the public sector purchase programme.

By down she meant up etc….

This was issued because the statement detonated across Euro area bond markets with the Italian ten-year yield going from 1.3% to 1.8%. Actually as a result of what no doubt will be called “The Lagarde Bounce” the ten-year yield is now 1.88%. So just as the corona virus ravaged Italy needs a helping hand Christine Lagarde has kicked it in the teeth. In fact just like she did to Greece and Argentina. You might think there was a theme there and that such a theme would have stopped her appointment. But no and of course so much of the media joined in by lauding it. Sadly we have a sort of Marie Antoinette theme in play.

Meanwhile two bank subsidies were announced. Firstly the new liquidity measures announced that via the TLTRO banks will be able to get cash at interest-rates as low as -0.75% compared to the -0.5% of everyone else. As Gollum would say.

We wants it, we needs it. Must have the precious.

Also there was something tucked away in the rules so let me hand you over to JohannesBorgen on twitter

As pointed out by @borisg_work I forgot to remove our Brexited friends, so RWA are more likely around 14tn now (anyone has an accurate recent # i’m interested) which suggest between 500bn and 600bn – still very big!

Changes in the Risk Weighted Assets rules meant a boost of around 500 billion Euros of capital relief. He got a boost as the ECB press officer retweeted him so perhaps he explained their own policy to them.

Comment

As you can see this is a bit of a shambles. If you argue that this could be like 2008 then the central planners at least managed a concerted fusillade. This time around they are taking individual pop shots and in at least one case have shot themselves in the foot. Actually at the ECB things are going from bad to worse.

@bancaditalia  governor #Visco @ecb  will do more if needed and can front load purchases if needed. Thursday decision was “not the final word” and ECB policy is aimed to ensure adequate liquidity. in exclusive interview with @BloombergTV

Let me deal with it in terms of bullet points.

  1. Presumably the Governor of the Bank of Italy is furious
  2. What is the point of declaring a number and then saying not only it might be larger but also the timing could be faster only 24 hours later?
  3. Actually they declared the next meeting would not be until April Fools Day less then 24 hours ago.
  4. QE reduces bond market liquidity.

Looking at markets then equity markets are surging as I type this because the stimulus fairy has been deployed. Is that the same stimulus fairy that was supposed to appear in the Euro area yesterday or a different one please? But that is my point because as the swings get wider I am more concerned about a fund or funds blowing up. This week alone we have seen wild swings in the bond,oil,equity and gold markets so in fact I am surprised it has not happened and wonder if we are being told the whole truth?

What can the ECB and European Commission do to help the Euro area economy?

Today our focus switches to the Euro area and the European Central Bank as we await a big set piece event from the ECB. However as is his wont The Donald has rather grabbed the initiative overnight. From the Department of Homeland Security.

(WASHINGTON) Today President Donald J. Trump signed a Presidential Proclamation, which suspends the entry of most foreign nationals who have been in certain European countries at any point during the 14 days prior to their scheduled arrival to the United States. These countries, known as the Schengen Area, include: Austria, Belgium, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, and Switzerland.

I have pointed it out in this manner as sadly the mainstream media is misreporting it with Beth Rigby of Sky News for example tweeting it as Europe. Much of it yes but not all of it. Moving on to our regular economics beat this will impact on an area we looked at back on the 27th of February.

Announcing the new findings, ENIT chief Giorgio Palmucci said tourism accounted for 13 percent of Italy’s gross domestic product…… tourism-related spending by both French residents and non-residents, represents around 7.5% of GDP (5% for residents, 2.5% for non-residents)…..This figure represented 11.7% of GDP, 0.4% more than in 2016.  ( Spain)

Numbers must have been hit already in what is as you can see an important economic area. One sector of this is illustrated by the German airline Lufthansa which has a share price dipping below 9 Euros or down 11% today as opposed to over 15 Euros as recently as the 19th of February. There are the beginnings of an official response as you can see from @LiveSquawk below.

Spanish Foreign Minister Gonzalez: Spain To Special Steps To Support Tourism

I presume the minister means the tourism sector here as there is nothing that can be done about current tourism as quarantines and the like move in exactly the opposite direction.

There is also the specific case of Italy where it is easier now I think to say what is open rather than closed. As the economic numbers will be out of date we can try and get a measure from the stock market. We see that the FTSE MIB index is at 17,000 as I type this as opposed to 25,477 on the 19th of last month. It is of course far from a perfect measure but it is at least timely and we get another hint from the bond market. Here we see for all the talk of yield falls elsewhere the ten-year yield has risen to 1.3% as opposed to the 0.9% it had fallen to. That is a signal that there are fears for how much the economy will shrink and how this will affect debt dynamics albeit we also get a sign of the times that an economic contraction that looks large like this only raises bond yields by a small amount.

Meanwhile actual economic data as just realised was better.

In January 2020 compared with December 2019, seasonally adjusted industrial production rose by 2.3% in the euro area (EA19) and by 2.0% in the EU27, according to estimates from Eurostat, the statistical office of the
European Union. In December 2019, industrial production fell by 1.8% in the euro area and by 1.6% in the EU27.

The accompanying chart shows a pick-up in spite of this also being true.

In January 2020 compared with January 2019, industrial production decreased by 1.9% in the euro area and by
1.5% in the EU27.

The problem is that such numbers now feel like they are from a different economic age.

The Euro

This has been strengthening through this phase as we note that the ECB effective or trade weighted index was 94.9 on the 19th of February and was 98.14 yesterday. So if there is a currency war it is losing.

As to causes I think there is a bit of a Germany effect an the interrelated trade surplus. But the main player seems to be the return of the carry trade as Reuters noted this time last year.

On the other hand, the Japanese yen, Swiss franc and euro tend to be carry traders’ funding currencies of choice, as their low yields make them attractive to sell.

Yields in Switzerland on the benchmark bond return -0.35 percent; in Germany barely 0.07 percent. But the euro has been particularly popular this year as the struggling economy has further delayed policy tightening plans in the bloc.

Of course both Euro interest-rates and yields went lower later in the year as the ECB eased policy yet again. But can you spot the current catch as Reuters continues?

Should U.S. growth deteriorate, international trade conflicts escalate or the end of the decade-long bull run crystallise, the resulting volatility spike can send “safe” currencies such as the yen, euro and Swiss franc shooting higher, while inflicting losses on riskier emerging markets.

Comment

There is quite an economic shock being applied to the Euro area right now and it is currently being headlined by Italy. In terms of a response the Euro area has been quiet so far in terms of action although ECB President Christine Lagarde has undertaken some open-mouth operations.

Lagarde, speaking on a conference call late on Tuesday, warned that without concerted action, Europe risks seeing “a scenario that will remind many of us of the 2008 Great Financial Crisis,” according to a person familiar with her comments. With the right response, the shock will likely prove temporary, she added. ( Bloomberg).

 

I have no idea how she thinks monetary action will help much with a virus pandemic but of course in places she goes ( Greece, Argentina) things often get worse and indeed much worse. She has also rather contradicted herself referring to the great financial crisis because she chose not to coordinate her moves with the US Federal Reserve as happened back then. Also all her hot air contrasts rather with her new status as a committed climate change warrior.

A real problem is the limited room for manoeuvre she has which was deliberate. In my opinion she was given the job and was supposed to have a long honeymoon period because her predecessor Mario Draghi had set policy for the early part of her term. But as so often in life  we are reminded of the Harold MacMillan statement “events, dear boy, events” and now Christine Lagarde has quite a few important decisions to make. Even worse she has limited room. It used to be the case that the two-year yield of Germany was a guide but -1% seems unlikely and instead we may get a frankly ridiculous 0.1% reduction to -0.6% in the Deposit Rate.

The ECB may follow the Bank of England path and go for some credit easing to rev up the housing market, so expect plenty of rhetoric that it will boost smaller businesses. We may see the credit easing TLTRO with a lower interest-rate than the headline to boost the banks ( presented as good for business borrowers).

However the main moves now especially in the Euro area are fiscal even more than elsewhere as the monetary ones have been heavily used. So the ECB could increase its QE purchases to oil that wheel. Eyes may switch to European Commission President Von der Leyen’s statement yesterday.

These will concern in particular how to apply flexibility in the context of the Stability and Growth Pact and on the provision of State Aid.

I expect some action here although it is awkward as again President Von der Leyen had a pretty disastrous term as German Defence Minister. Although not for her, I mean for the German armed forces. So buckle up and let’s cross our fingers.

Also do not forget there may be a knock on effect for interest-rates in Denmark and Switzerland in particular as well as Sweden.

The Investing Channel

Italy faces yet more economic hardship

Italy is the country in Europe that is being most affected by the Corona Virus and according to the Football Italia website is dealing with it in Italian fashion.

In yet another change of plan, it’s reported tomorrow’s Juventus-Milan Coppa Italia semi-final will be called off due to the Corona virus outbreak.

In fact that may just be the start of it.

News agency ANSA claim the Government is considering a suspension of all sporting events in Italy for a month due to the Coronavirus outbreak, as another 27 people died over the last 24 hours.

Thus the sad human cost is being added to by disruption elsewhere which reminds us that only last week we noted that tourism represents about 13% of the Italian economy. Again sticking with recent news there cannot be much demand for Italian cars from China right now.

China has also suffered its biggest monthly drop in car sales ever, in another sign of economic pain.

New auto sales slumped by 80% year-on-year in February, the China Passenger Car Association reports. ( The Guardian )

Actually that,believe it or not is a minor improvement on what it might have been.

Astonishingly, that’s an improvement on the 92% slump recorded in the first two weeks of February. It underlines just how much economic activity has been wiped out by Beijing’s efforts to contain the coronavirus.

Backing this up was a services PMI reading of 26.5 in China and if I recall correctly even Greece only went into the low thirties.

GDP

The outlook here looks grim according to the Confederation of Italian industry.

ITALY‘S BUSINESS LOBBY CONFINDUSTRIA SEES ITALIAN GDP FALLING IN Q1, CONTRACTING MORE STRONGLY IN Q2 DUE TO CORONAVIRUS OUTBREAK ( @DeltaOne )

This comes on the back of this morning’s final report on the last quarter of 2019.

In the fourth quarter of 2019, gross domestic product (GDP), expressed in chain-linked values ​​with reference year 2015, adjusted for calendar effects and seasonally adjusted, decreased by 0.3% compared to the previous quarter and increased by 0.1 % against the fourth quarter of 2018.

That is actually an improvement for the annual picture as it was previously 0% but the follow through for this year is not exactly optimistic.

The carry-over annual GDP growth for 2020 is equal to -0.2%.

That was not the only piece of bad news as the detail of the numbers is even worse than it initially appeared.

Compared to previous quarter, final consumption expenditure decreased by 0.2 per cent, gross fixed capital formation by 0.1 per cent and imports by 1.7 per cent, whereas exports increased by 0.3 per cent.

There is a small positive in exports rising in a trade war but the domestic numbers especially the fall in imports are really rather poor. If you crunch the numbers then the lower level of imports boosted GDP by 0.5% on a quarterly basis.

The long-term chart provided with the data is also rather chilling. It shows an Italian quarterly economic output which peaked at around 453 billion Euros in early 2008 which then fell to around 420 billion. So far so bad, but then it gets worse as Italy has just recorded 430.1 billion so nowhere near a recovery. All these are numbers chain-linked to 2015.

Markit Business Survey

This feels like something from a place far, far away but this is what they have reported this morning.

Italian services firms recorded a further increase in business activity during February, extending the current sequence of growth to nine months. Moreover, the expansion was the quickest since October last year, as order book volumes rose at the fastest rate for four months. Signs of improved demand led firms to take on more staff and job creation accelerated to a moderate pace.

They go further with this.

The Composite Output Index* posted 50.7 in February, up
from 50.4 in January, to signal a back-to-back expansion in
Italian private sector output. The reading signalled a modest monthly increase in business activity.

Mind you even they seem rather unsure about it all.

“Nonetheless, Italian private sector growth remains
historically subdued”

You mean a number which has been “historically subdued” is now a sort of historically subdued squared?

ECB

This is rather stuck between a rock and a hard place. It has already cut interest-rates to -0.5% and is doing some 20 billion Euros of QE bond buying a month. Thus it has little scope to respond which is presumably why there are reports it did not discuss monetary policy on its emergency conference call yesterday. In spite of that there are expectations of a cut to -0.6% at its meeting next week.

Has it come to this? ( The Streets)

As you can see this would be an example of to coin a phrase fiddling while Rome Burns. Does anybody seriously believe a 0.1% interest-rate cut would really make any difference when we have had so many much larger cuts already? Indeed if they do as CNBC has just suggested they will look even sillier as why did they not join the US Federal Reserve yesterday?

ECB and BOE expected to take immediate policy action on coronavirus impact.

Those in charge of the Euro area must so regret leaving the ECB in the hands of two politicians. No doubt it seemed clever at the time with Mario Draghi essentially setting policy for them. But now things have changed.

Fiscal Policy

This is the new toy for central bankers and there is a new Euro area vibe for this.

French Finance Minister Bruno Le Maire says the euro-area must prepare fiscal stimulus to use if the economic situation deteriorates due to the coronavirus outbreak ( Bloomberg)

That is a case of suggesting what you are doing because as we have previously noted France had a fiscal stimulus of around 1% of GDP last year. But of course back when she was the French Finance Minister Christine Lagarde was an enthusiast “shock and awe” for exactly the reverse being applied to Greece and others.

The ECB has already oiled the wheels for some fiscal expansionism by the way its QE bond buying has reduced bond yields. It could expand its monthly purchases again but would run into “trouble,trouble,trouble” in Germany and the Netherlands, pretty quickly.

Comment

If we return to a purely Italian perspective we see some of the policy elements are already in play. For example the ten-year yield is a mere 0.94% although things get more awkward as the period over which it has fallen has also seen a fall in economic growth. The fiscal policy change below is relatively minor.

Italy is planning to hike its 2020 budget deficit target to 2.4% of its GDP from 2.2% to provide the economy with the funds it needs to battle the impact of coronavirus outbreak, Reuters reported on Monday, citing senior officials familiar with the matter.

By contrast according to CNBC the Corona Virus situation continues to deteriorate.

Italy is now the worst-affected country from the coronavirus outside Asia, overtaking Iran in terms of the number of deaths and infections from the virus.

The death toll in Italy jumped to 79 on Tuesday, up from an official total of 52 on Monday. As of Wednesday morning, there are 2,502 cases of the virus in Italy, according to Italian media reports that are updated ahead of the daily official count, published by Italy’s Civil Protection Agency every evening.

Now what about a regular topic the Italian banks? From Axa.

and banks such as Unicredit and Intesa have offered “payment holidays” to some of their affected borrowers.

The ECB could be the next central bank to start buying equities

It feels like quite a week already and yet it is only Monday morning! As rumours circulated and fears grew after some pretty shocking data out of China on Sunday the Bank of Japan was limbering up for some open mouth action. Below is the statement from Governor Kuroda.

Global financial and capital markets have been unstable recently with growing uncertainties about the outlook for economic activity due to the spread of the novel coronavirus.
The Bank of Japan will closely monitor future developments, and will strive to provide ample liquidity and ensure stability in financial markets through appropriate market operations and asset purchases.

Actually most people were becoming much clearer about the economic impact of the Corona Virus which I will come to in a moment. You see in the language of central bankers “uncertainties” means exactly the reverse of the common usage and means they now fear a sharp downturn too. This will be a particular issue for Japan which saw its economy shrink by 1.6% in the final quarter of last year.

But there was a chaser to this cocktail which is the clear hint of what in foreign exchange markets the Bank of Japan calls “bold action” or intervention. This not only added to this from Chair Powell of the US Federal Reserve on Friday but came with more.

The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.

As an aside if the fundamentals of the US economy were strong the statement would not be required would it?

The Kuroda Put Option

The problem for the Bank of Japan is that it was providing so much liquidity anyway as Reuters summarises.

Under a policy dubbed yield curve control, the BOJ guides short-term rates at -0.1% and pledges to cap long-term borrowing costs around zero. It also buys government bonds and risky assets, such as ETFs, as part of its massive stimulus program.

The Reuters journalist is a bit shy at the end because the Bank of Japan has been buying equity ETFs for some time as well as smaller commercial property purchases. I have been watching and all last week apart from the public holiday on Monday they bought 70.4 billion Yen each day.

Regular readers will be aware that the Bank of Japan buys on down days in the equity market and that the clip size is as above. Or if you prefer Japan actually has an explicit Plunge Protection Team or PPT and it was active last week. This morning though Governor Kuroda went beyond open mouth operations.

BoJ Bought Japan Stock ETFs On Monday – RTRS Market Sources BoJ Normally Does Not Buy ETFs On Day TOPIX Index Is Up In Morning ( @LiveSquawk )

As you can see they have changed tactics from buying on falls to singing along with Endor.

Don’t you know pump it up
You’ve got to pump it up
Don’t you know pump it up
You’ve got to pump it up

Also there was this.

BANK OF JAPAN BOUGHT RECORD TOTAL 101.4B YEN OF ETFS TODAY ( @russian_market )

Actually about a billion was commercial property but the principle is that the Bank of Japan has increased its operations considerably as well as buying on an up day. So the Nikkei 225 index ended up 201 points at 21,344 as The Tokyo Whale felt hungry.

Coordinated action

The Bank of England has also been indulging in some open mouth operations today.

“The Bank continues to monitor developments and is assessing its potential impacts on the global and UK economies and financial systems.

The Bank is working closely with HM Treasury and the FCA – as well as our international partners – to ensure all necessary steps are taken to protect financial and monetary stability.” ( The Guardian)

The rumours are that interest-rate cuts will vary from 1% from the Federal Reserve to 0.5% at places like the Bank of England to 0.1% at the ECB and Swiss National Bank. The latter are more constrained because they already have negative interest-rates and frankly cutting by 0.1% just seems silly ( which I guess means that they might….)

There have already been market responses to this. For example the US ten-year Treasury Bond yield has fallen below 1.1%. The ten-year at 0.75% is a full percent below the upper end of the official US interest-rate. So the hints of interest-rate cuts are in full flow as we see Treasuries go to places we were assured by some they could not go. Oh and you can have some full number-crunching as you get your head around reports that expectations of an interest-rate cut in Australia are now over 100%

The Real Economy

China

If we switch now to hat got this central banking party started it was this. From the South China Morning Post on Saturday.

Chinese manufacturing activity plunged to an all-time low in February, with the first official data published amid the coronavirus outbreak confirming fears over the impact on the Chinese economy.

The official manufacturing purchasing managers’ index (PMI) slowed to 35.7, the National Bureau of Statistics (NBS) said on Saturday, having slipped to 50.0 in January when the full impact of the corona virus was not yet evident.

The only brief flicker of humour came from this.

Analysts polled by Bloomberg had expected the February reading to come in at 45.0.

Although you might think that manufacturing would be affected the most there was worse to come.

China’s non-manufacturing PMI – a gauge of sentiment in the services and construction sectors – also dropped, to 29.6 from 54.1 in January. This was also the lowest on record, below the previous low of 49.7 in November 2011, according to the NBS. Analysts polled by Bloomberg had expected the February reading to come in at 50.5.

To give you an idea of scale Greece saw its PMI ( it only has a manufacturing one) fell into the mid-30s as its economic depression began. So we are now facing not only a decline in economic growth in China but actual falls. This is reinforced by stories that factories are being asked to keep machines running even if there are no workers to properly operate them to conceal the size of the slow down.

Comment

The problem for central banks is that they are already so heavily deployed on what is called extraordinary monetary policy measures. Thus their ammunition locker is depleted and in truth what they have does not work well with a supply shock anyway as I explain in the podcast below. So we can expect them to act anyway but look for new tools and the next one is already being deployed by two central banks. I have covered the Bank of Japan so step forwards the Swiss National Bank.

Total sight deposits at the SNB rose by CHF3.51bn last week… ( @nghrbi)

Adding that to last weeks foreign exchange intervention suggests it has another 1 billion Swiss Francs to invest in (mostly US) equities.

Who might be next? Well the Euro is being strong in this phase partly I think because of the fact it has less scope for interest-rate cuts and partly because of its trade surplus. Could it copy the Swiss and intervene to weaken the Euro and investing some of the Euros into equities? It would be a “soft” way of joining the party. Once the principle is established then it can expand its activities following the model it has established with other policies.

As for other central banks they will be waiting for interest-rates to hit 0% I think. After all then the money created to buy the shares will be “free money” and what can go wrong?

Podcast

 

What does Safe Haven mean in these troubled times?

We find ourselves yet again in a crisis and are reminded that some perspective is needed.  From CNBC at the end of last year.

The S&P 500 has returned more than 50% since President Trump was elected, more than double the average market return of presidents three years into their term, according to Bespoke Investment Group.

After that the equity market took the advice of Jeff Lynne and ELO as 2020 began.

And you, and your sweet desire
You took me higher and higher, baby
It’s a livin’ thing

Whereas a few minutes ago Bloomberg tweeted this.

European equities are poised for their worst week since the 2008 financial crisis.

So ch-ch-changes and another clear reminder of this came from Bloomberg as recently as the 20th of this month.

Virgin Galactic climbed again to a record high, defying analysts who say the stock is overdue for correction

We can stay with the theme of the man who fell to earth because since then the share price has halved from $41.55 to $21.30 after hours last night.

If we take this as a broad sweep ELO were on the case it seems.

It’s a terrible thing to lose
It’s a given thing
What a terrible thing to lose

Where can you go?

Japanese Yen, Swiss Franc and Euro

You may be questioning two of those so let me explain. If you look back in time I wrote quite a few articles on the “Currency Twins” the Yen and the Swissy. This was because they were borrowed heavily in before the credit crunch and people rushed to cover positions as it developed. This was equivalent to buying them and they surged building a safe haven psychology. Although it was more minor there was some of this in the Euro as well.

If we move forwards to now the simplest is the Swiss Franc based as it is in a country which is considered safe and secure, hence the demand at times of fear and uncertainty. The Swiss National Bank has returned to selling the Swiss Franc recently to try and keep it down. Switching to the Yen the main issue here is the large size of Japanese overseas private investments. At times of uncertainty the fear is that the Japanese will start to repatriate this and push the Yen higher so markets shift the price just in case. The Euro is not quite so clear but the area does have strengths as for example its current account surplus. Also at times like this it gets a bit of a German sheen as well.

You may have noted an interesting similarity here. This is that all these three currencies have negative interest-rates and I have posted before that there are avenues ahead where the SNB will cut to -1%.

US Treasury Bonds

There are two factors here of which the opening one is the effective reserve currency status of the US Dollar. So you can always buy commodities and the like in US Dollars with no risk of devaluation or depreciation. Next comes the fact that bonds offer a guaranteed return as in you will always get your nominal US $100 back as well as some interest, or if you prefer yield or coupon. So you get both the reserve currency and some interest, hence the knee-jerk rush into US Treasuries at a time like this.

The problem is the old familiar refrain that things aren’t what they used to be. In particular you get a lot less yield now as for example both the two and five-year yields have fallen below 1% overnight. I have chosen these because in a safe haven trade you tend  buy short maturity bonds. But it is also true that longer-dated bonds do not offer much these days as even the ten-year Treasury Note has seen its yield fall below 1.2% now. Some events here are contradictory because the two-year future is up 27 ticks this week and whilst that is really rather satisfactory for those who got in early it should not move like that if you are looking for stability. You do not want Blood Sweat and Tears.

What goes up must come down
Spinnin’ wheel got to go ’round
Talkin’ ’bout your troubles it’s a cryin’ sin
Ride a painted pony let the spinnin’ wheel spin

Some of the logic above applies to other bond markets which have soared too. Although in some cases the logic gets awkward because both the German and Swiss bond markets have yields which are negative across all maturities. So here we are back to the currency being a safe haven and such a strong one that people are willing to accept increasingly negative yields to take advantage of it. My home country the UK has seen Gilt yields plummet too as a combination of factors are in play. The irony is that the safest UK  haven which is RPI linked Gilts already were extremely expensive and frankly having little relationship with inflation which seems set to fall in response to the present crisis.

Gold

This is something of an old curiosity shop in these times. In general we have seen a gold price rally which continues a phase we have been noting in recent months. But it is also true that just when we might have expected it to rally rally further the price of gold fell backwards.  There are an enormous number of conspiracy stories about gold and its price but for out purposes it is something of a patchy safe haven. Our favourite precious metal was of course “The Precious! The Precious! ” in Lord of the Rings but in our world the central banks give that title to other banks.They however are most certainly not a safe haven as we learn more about the use of the word “resilient ” by central bankers.

Comment

Let me add another factor in the safe haven world which is timing.If you had movd into any of the markets above earlier this week you would now be doing rather well. This comex with an implication that prices and levels matter which often gets forgotten in the melee and excitement.

There are also other winners which get given temporary safe haven status at times like these.For example those producigface masks or involved in teleconferencing.  I have to confess I had a wry smile at the price of teleconferencing companý Zoom rising as it did not work on my laptop when I tried it for Rethinking the Dollar.

Apologies to those affected by a blog misfire earlier as Windows 10 played up again.