ECB's Bazooka Support Bonds But Not The Euro

Overview: It is not just that the dollar soared while stocks and bonds continued to plunge. The dollar's strength is, in effect, a powerful short-covering rally. It was used to fund a great part of the global circuit of capital. The circuit of capital is in reverse now, and the funding currency is being bought back. The dollar's strength is a function of the sell-off of other assets. Meanwhile, officials continue to announce more measures to combat the economic and financial fallout of the coronavirus. The ECB announced a substantial increase in its efforts, and the markets have responded well. Although Asian Pacific equities saw some large declines (e.g., South Korea -8.4%, Taiwan -5.8%, Australian -3.4%) Europe equities are firmer (Dow Jones Stoxx 600 +1.4%).  The Philippines ' market re-opened for the first time since Monday (after a unilateral shutdown) and tumbled more than 13%. US shares are trading with a firmer bias. The more significant reaction to the ECB's moves is the dramatic rally in European bonds (around Italy -70 bp, Greece -170 bp, Spain and Portugal -45 bp, France -25 bp). The US 10-year yield is about four basis points lower at 1.15%. The US dollar continues to motor higher.  The Norwegian krone, dragged by the collapse of oil prices and illiquidity, has dropped around 6.5%. The Reserve Bank of Australia delivered an emergency 25 bp rate cut, and the Australian dollar is off almost 1%. The dollar is firmer against most of the major currencies. The Canadian dollar is the exception, and it is a little changed. Indonesia and the Philippines cut rates too. While the rupiah is off 4.3%, the Philippine peso is a little firmer. Gold is pinned near its recent lows as it found new sales when poked above $1500. Oil is rebounding smartly (~+16%) after yesterday's 24% swoon.  

Asia Pacific

Summary of policy actions in Asia-Pacific:

Japan--the BOJ offered to lend JPY2 trillion in an unscheduled auction. Tokyo is reportedly preparing a JPY30 trillion aid package, the third effort.  

Australia--cut interest rates 25 bp to 25 bp, the effective floor and will target the three-year yield of 25 bp, as well. It will provide A$50 bln of funds for banks

Philippines--cut the borrowing and deposit rates by 50 bp to 3.25% and 2.75%, respectively. Local markets re-opened.

Indonesia--reduced the seven-day repo rate by 25 bp to 4.5%. 

There are now more cases of the Covid-19 infection in Europe than in China. There were no more new cases reported in Wuhan today. The concern there is two-fold.  New clusters of infection have been traced, according to reports, to people returning from overseas. There is also concern that as economic and social activity picks up, will there be a new flare-up?   

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Read more by Marc on his site Marc to Market.

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