- Markets wait to see how long it will take for Washington to produce a third virus-relief bill
- ECB announces 750 billion euro bond purchase program to stabilize the markets
- Markets see historic swings with dollar at 3-year high, oil down -24%, GBP at 35-year low, and bond yields surging
Markets wait to see how long it will take for Washington to produce a third virus-relief bill — The markets are mainly focused on the Senate’s attempt to formulate a third relief bill. The stock market will not be happy if there are any delays or major infighting about the content of the bill. Some in Congress remember that the Dow Jones index back in September 2008 plunged by -7% after the House failed to pass the TARP bailout bill on its first attempt. The markets this time around will be similarly ruthless in its demand for a massive relief bill very soon.
Treasury Secretary Mnuchin is pushing for a relief package as large as $1.3 billion to include direct payments to Americans, small business loans, support to severely distressed sectors” such as the airlines, tax deferrals, and much more. The Treasury is also proposing to gain the authority to temporarily guarantee money market mutual funds if that becomes necessary.
On a more reassuring note, the Senate on Wednesday approved the phase-two virus relief bill by the wide margin of 90-8 and sent it to President Trump’s desk for his signature. The House virus-relief bill includes free virus testing, two weeks of paid sick leave, enhanced job benefits, increased food aid, and higher funding for Medicaid benefits.
ECB announces 750 billion euro bond purchase program to stabilize the markets — The ECB Wednesday evening, after the U.S. markets closed, announced a massive 750 billion bond purchase program, adding to its already-existing QE program. The new program will be carried out through year-end and will be highly flexible since the ECB can buy both sovereign bonds and corporate bonds. The ECB will therefore be able to battle spikes in country yields as well as provide support for the corporate bond market to ensure that credit keeps flowing to corporations.
The size of the program shows that the ECB means business and represents the “whatever it takes” action that is currently needed to settle down the European and global financial markets.
The need for a new ECB bond program became obvious yesterday when Italian bond yields spiked higher on doubts about Italy’s ability to finance its virus-relief efforts given its already-massive national debt. The spread of the Italian 10-year bond yield over the 10-year German bund yield took a wild ride on Wednesday, spiking up to a new 10-month high but then falling sharply after the ECB intervened to buy Italian bonds. The spread closed the day at 267 bp, which was more than double the 130 bp level seen as recently as mid-February.
The ECB cannot afford to have panic breaking out about whether countries such as Italy have the ability to finance their coronavirus relief programs.
Markets see historic swings with dollar at 3-year high, oil down -24%, GBP at 35-year low, and bond yields surging — Wednesday’s +1.6% surge in the dollar index to a 3-year high was particularly consequential because the dollar’s overall +7% surge seen since last Monday illustrates the dollar-funding stress in the market and also the increased default risks for overseas dollar-denominated debt.
The sharp rally in the dollar is a credit-negative event for the rest of the world because corporations and banks will have to pay their dollar-denominated debt back in more expensive dollars, likely increasing default rates. The Fed obviously needs to provide even more dollar liquidity to central banks around the world.
The S&P 500 index (SPX) on Wednesday fell to a new 3-year low and closed the day -5.18%. On Wednesday’s low, SPX fell by a total of -32.8% from the mid-Feb record high. The VIX index on Wednesday edged to a new 11-1/4 year high of 85.47 (still below the Nov-2008 record high of 89.53) and closed the day +0.54 at 76.45.
Government bond yields on Wednesday surged since the bond markets will be called on to finance the hundreds of billions of dollars of rescue measures that governments are proposing. The 10-year T-note yield on Wednesday closed sharply higher by +11 bp at 1.19% and is now up by +88 bp from last Monday’s record low of 0.31%. The 10-year T-note VIX on Wednesday reached a record high of 19.94 and closed the day up +5.81 at 15.39.
The 10-year German bund yield on Wednesday jumped to a 2-month high of -0.21% after German Finance Minister Scholz said that Germany will maintain record spending to address the coronavirus despite the “considerable” disruption to the country’s budget prospects. The 10-year UK gilt yield rose to a 2-1/4 month high of 0.80% after the UK released a “wartime” funding plan that will provide 350 billion pounds ($424 billion) worth of government backed loans, grants, and tax cuts for businesses struggling from the coronavirus pandemic.
Meanwhile, GBP/USD on Wednesday plunged -3.87% to a 35-year low on expectations for additional BOE stimulus measures. BOE Governor Bailey said that “everything is on the table that is reasonable, within the policy tool set” to help the economy. Concerns are also mounting of a liquidity crisis if London, a major financial center, is forced to shut down to stop the spread of the coronavirus.
April WTI crude oil prices on Wednesday plunged by -24.42% to $20.37 and posted an 18-year low. Saudi Arabia remains deadly serious about its price war despite the pandemic after the government instructed Aramco on Wednesday to supply crude oil at 12.3 million bpd over the coming months, up 26% from Feb’s level of 9.7 million bpd.
