Money Matters 24th March 2020

Last week saw the Federal Reserve’s (Fed) comprehensive set of measures which were taken to reduce debt service costs, ensure credit flow to the economy and to reduce liquidity-related stress in financial markets. This week, the Fed took further steps by expanding the number of open USD swap lines with central banks (including some emerging central banks, such as the Brazilian, Mexican and South Korean), setting up a special purpose vehicle backed by the Treasury’s guarantee to purchase commercial papers, establishing a liquidity facility to enhance the functioning of state and municipal money markets amongst a raft of other measures. This seems to suggest the Fed is attempting to target as many segments of its domestic money market as possible, whilst doing its best to distribute USD liquidity through most economically significant geographical regions. These targeted tools serve as proof that the Fed is doing everything it can to prevent the sudden stop in economic activity turning into a financial crisis.
Meanwhile, the fiscal rescue package in the US got stuck in the Senate on Sunday, as the motion to advance the legislation failed on a 47-47 vote, short of the 60 votes needed. The total value of the blocked agreement would have totalled a meaningful USD 1.3tn (about 6% of GDP). Democrats claimed that the Republican-designed package favoured corporations, whilst not going far enough to aid individuals facing unemployment and loss of income.
United States 24 March 2020UNITED STATES
S&P 2,305 -14.98%, 10yr Treasury 0.82% -11.49bps, HY Credit Index 848 +186bps, Vix 74.58 +8.21Vol
A very high degree of risk aversion weighed on asset prices in the US stock markets, which sent the major indices lower during the week. As a result, the S&P 500 declined 15% (-28.7% year-to-date), whilst the Nasdaq Composite fell 12.6% (-23.3% year-to-date). Although the Fed has been pro-actively delivering targeted liquidity enhancing measures, dislocations materialised in certain segments of money markets and debt markets during the week. Due to market dislocations, the 10-year US Treasury yield spiked during the week: from about 0.70% to over 1.20%, closing the week around 0.85%. Such market dislocations were triggered by USD shortages, which in turn contributed to the substantial appreciation of the greenback, by 4.1% by the end of the week (on a trade-weighted basis). As the Fed’s liquidity facilities are established and start firing on all cylinders, it could be expected that asset price volatility will to start to smooth over time. 
Europe 24 March 2020EUROPE
Eurostoxx 2,455 -5.13%, German Bund -0.36% +22.30bps, Xover Credit Index 731 -146bps, USDEUR .934 +3.88%
European stock markets finished in the red by the end of the week. The UK’s FTSE 100 (-8.9% in USD) underperformed the stock indices of Euro Area’s four largest economies (Italy: -5.1%, France: -5.4%, Spain: -6.4%, Germany: -6.9% all in USD). The difference in performance was largely due to sterling weakness, which – according to the Bank of England’s governor – significantly depreciated on speculations that London could come under a full lockdown. During the week, both the European Central Bank and the Bank of England delivered further comprehensive monetary stimulus measures, whilst many governments revealed large-scale fiscal stimulus packages (including governments in the UK, Germany, etc.).
Asia 24 March 2020ASIA
HSCEI 8,752 -5.29%, Nikkei 16,887.78 -7.38%, 10yr JGB 0.07% +0bps, USDJPY 110.250 +3.06%

Some of the emerging Asian stock markets held up relatively well during the week despite the highly risk-averse global investor sentiment. Chinese “H” shares (-5.3% in USD) and “A” shares (-6.1% in USD) were among the relative outperformers (i.e. declined to a smaller extent than others), as Chinese authorities kept reassuring investors that they are in control of the economy as much as possible under these circumstances (details in the next paragraph). Meanwhile, the Indian Nifty 50 index declined 13.9% in USD during the week.
China’s economy is beginning to show some signs of normalization after the full-blown shock caused by coronavirus, International Monetary Fund officials said in a blog on the economic impact of the pandemic. To mitigate the simultaneous negative shock, Chinese policymakers quickly stepped in and targeted vulnerable households and small businesses, waiving social security fees, utility bills and channelling credit through fintech firms. Authorities also arranged subsidized credit to support scaling up the production of medical equipment, backstopped interbank markets and supported firms under pressure. Policies also attempted to incentivise financial institutions to lend to smaller firms and providing targeted cuts to reserve requirements, whilst continuing to lend generously to larger firms and state-owned enterprises. There are further stimulus measures in the pipeline (e.g. raising public infrastructure investment spending, reducing banks’ reserve requirement ratio in a targeted way, etc.). Most larger Chinese firms have reopened, and many local staff have returned to work, according to the IMF. According to Citi’s Chinese economic activity tracker, the normalisation of the Chinese economy remained on track, as property sales continued to rise (51.6% of the level a year ago), whilst 73.8% of the workforce returned by the 21st March (vs. 63.2% a week ago). The central bank expects the economy to return to its potential growth rate in 2Q20.
There was a number of monetary policy decisions in emerging Asian countries, where central banks opted for rate reductions and shifted to an even more dovish monetary policy stance:

  • In Thailand, the Monetary Policy Council reduced the key policy rate by 25bp to 0.75% at an unscheduled meeting. The central bank created a special liquidity facility for banks and established a corporate bond stability fund to help firms refinance maturing debt.
  • The central bank in the Philippines reduced the key policy rate by 50bp to 3.25%, whilst relaxing various regulations for banks.
  • In Indonesia, the key policy rate was cut 25bp to 4.50% to boost bank lending and in turn economic growth.
  • The Taiwanese monetary authority opted for a 25bp rate reduction, which lowered the key policy rate to 1.125%. The central bank announced a guaranteed loan programme for SMEs for six months.
  • The Pakistani central bank opted for a 75bp rate cut to 12.50% and flagged further rate cuts going forward. The central bank starts a refinancing programme called Temporary Economic Refinancing Facility (TERF), which will provide refinancing for banks for plant and machinery lending, at 7% p.a. fixed for 10 years.

Latin America 24 March 2020LATIN AMERICA
Latin American stock markets went through a very challenging week in the context of a highly risk-averse global investor sentiment. The Peruvian stock index exhibited more defensive behaviour than its Latin American peers, as the country’s benchmark decreased 9.5% in USD during the week. Meanwhile, the Brazilian benchmark lost 21.7% of its value in USD by the end of the trading week.
The Brazilian government announced assistance plans amounting to BRL 179.6bn (about 2.5% of GDP). Specifically, BRL 108.4bn (ca. 60% of the plan) is supposed to support the most vulnerable, BRL59.4bn for ‘keeping jobs,’ and BRL 11.8bn to ‘fight the pandemic.’ Later during the week, the Federal Reserve announced that it would provide USD liquidity to the Brazilian central bank through a swap line to ease USD liquidity strains and to smooth asset price volatility.
The central bank of Mexico eased financial conditions by cutting the policy rate 50bp to 6.50% at an unscheduled meeting. In a separate event, the Federal Reserve opened a USD swap line with the central bank of Mexico (similarly to the swap line with the Brazilian central bank).
The central bank of Peru held an unprecedented extraordinary meeting, where the Monetary Policy Council decided to lower its monetary policy rate by 100bp, to 1.25%, a record low. The Council also stated that it would continue to carry out all the policy actions necessary to maintain an adequate flow in the payments system and the credit chains.
The President of Chile announced a USD 11.8bn stimulus package (about 4.7% of GDP). Up to 2ppt will be directed to health spending. The government also announced funding for companies to pay wages, and also allows employers to reduce working hours by half but using the solidarity fund so workers income does not fall below 75% of their regular salary. The government also proposed tax relief measures for companies, in terms of postponing payments of the income tax, and also VAT and contributions for smaller companies.
The Argentine administration called for a sustainable debt restructuring plan. According to Economy Minister Guzmán, the government has no more room to reduce outlays, as the country’s current debt structure is ‘unfinanceable, unaffordable and unsustainable.’ The Minister added that the administrations wants to achieve a debt restructuring program that will be sustainable in the long term.
Africa 24 March 2020AFRICA
The African stock markets did not remain insulated from external developments, as the highly risk-averse investor sentiment adversely influenced stock market developments in the region. The Kenyan (-7.6% in USD) and Moroccan (-10.7% in USD) stock indices decreased to a smaller extent than some others, such as the South African (-14.4% in USD) or the Egyptian market (-18.9% in USD).
At the beginning of the week, the central bank of Egypt delivered a 300bp interest rate to 9.25%. Later, the central bank of Egypt has announced that it would directly purchase equities in a bid to stem the stock market decline. The central bank will buy up to EGP 20bn worth of shares listed on the EGX. This amounts to more than 5% of the total EGX100 market cap, which – at the time of writing – stands around EGP 380bn. President Abdel Fattah El Sisi announced earlier in the day that the CBE would allocate EGP 20 bn to support the exchange but didn’t elaborate on how the funds would be deployed. No details have been revealed yet how and when the central bank plans to move into the market. In a separate event, President El Sisi and his administration announced various economic support measures in the amount of EGP 100bn (ca. USD 6.4bn), which include:

  • EGP 27.6bn will be disbursed to 2.4mn families ‘possibly within weeks.’
  • The implementation of the tax on agricultural land will be suspended for two years.
  • Annual raises for pensioners will be 14% starting next fiscal year (i.e. July 2020).

The central bank of South Africa unanimously opted for a 100bp key policy rate cut to 5.25%. The Monetary Policy Council found room for monetary policy manoeuvre, as the inflationary environment is benign (CPI inflation 4.5% YoY in February), whilst economic activity remains depressed and in need of stimulus. The central bank sees real GDP to contract 0.2% in 2020 and to grow 1% in 2021.
Kenyas central bank took measures in an attempt to mitigate the impact of potential coronavirus-related economic shocks. Measures include allowing small and medium enterprises to restructure or extend their loan repayment period. Kenya, East Africa’s largest economy will also quarantine all bank notes from commercial banks for a week to limit possible transmission of coronavirus, central bank governor Patrick Njoroge said.
The Nigerian central bank adjusted the official naira exchange rate vs. the USD from 306.5 to 360.5 (about 17.5%) by the end of the week. The country is facing an increasing pressure on its capital account, due to the combination of risk averse global investor sentiment, collapsing oil prices and dwindling FX reserves. The pricing by the offshore FX forward contracts imply – at the time of writing – that the broad market expects further substantial naira devaluation on a 12-month horizon by about 30%.
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