Wednesday, 18 March 2020

P. 1

Rates: Huge US fiscal stimulus ahead, but markets still shaky

The prospect of a >$1tn US fiscal stimulus package lifted US stocks by up to 6% yesterday. US yields rose by 40 bps, but fresh Fed measures highlight that liquidity issues remain a major problem/impact as well. Risk sentiment is dwindling this morning. Governments continue adding contagion-avoiding measures, probably extending and deepening the downturn.

Currencies: Preference for USD (liquidity) persists

Yesterday, the dollar staged quite an impressive intraday rebound. Several measures of the Fed to mitigate USD liquidity stress hardly reduced the USD bid. Widening intra-EMU spreads were a negative for the euro too. For now, the dollar retains the advantage of the doubt even as few parties involved (US or other countries) profit from a strong USD.

Calendar

• US stocks rallied, licking their wounds from the biggest rout since 1987, as US

authorities stepped up efforts. The Nasdaq outperformed (6.23%). Asian markets are struggling for direction. Australia underperforms (-6.43%).

• The WH goes big and bold and will inject $1.2 tn in the US economy to combat the coronacrisis and keep the lid on unemployment rates. The proposal is said to include cash disbursements, loans for SMEs and stabilization funds.

• The Fed has put in motion 2 emergency lending programs, the primary dealer credit facility and commercial paper funding facility, to ease credit flow to households and businesses amid growing fears over a liquidity crunch.

• The New York City Mayor warned the city is on the verge of an unprecedented “shelter-in-place” order to contain the fast-moving outbreak of the coronavirus pandemic, adding a decision will be made in the following two days.

• The EU is contemplating to kick-start joint debt issuance as a coronavirus-busting fiscal boost. German Chancellor Merkel voiced support for the idea and the proposal is also backed by French president Macron, Bloomberg reported.

• Belgian banks are drafting measures to support households and businesses hit by the coronacrisis. The measures would boost credit extension to struggling businesses and include a delay and/or spreading of debt repayments.

• Today’s economic calendar eyes meagre with only (outdated) secondary data due (housing data US, inflation figures Canada, final CPI prints EMU) which will be waved off by investors. Germany taps the bond market.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Wednesday, 18 March 2020

P. 2

Huge US fiscal stimulus ahead, but markets still shaky

European and US stock markets whipsawed yesterday, but remained off Monday’s sell-off lows and eventually closed 3% (EU) to 6% (US) higher. Echoes resonated through WS on the compilation of a huge (>$1tn) US fiscal stimulus package. US Treasuries significantly underperformed German Bunds thanks to this expected growth booster. The US yield curve bear steepened with yields rising by 13.5 bps (2-yr) to 40.1 bps (30-yr). The German yield curve bear flattened with yields ending 4.3 bps (2-yr) to 2.3 bps (30-yr) higher. While obviously being a short term (risk) momentum generator, we hold a more cautious approach. New York City is rumoured to follow European lockdown procedures, money market rates continue to show signs of dollar scarcity and corporate/sovereign credit spreads remain elevated. The latter probably also partly explains the higher core bond yields: a return of credit risk premium even for German/US bonds.

Asian stock markets are back downhill this morning. They lose up to 6% with Australia (stricter measures) and South Korea (contagions not under control) underperforming. Core bonds face more selling pressure. They have been declining in lockstep with stocks as well with investors dumping everything in a dash for cash. Rumors on issuing joint EU debt to provide a coordinated European fiscal answer are an interesting lead, but not specific enough yet. We think we could compare them to the war bond principle. The bonds could be called “pandemic” bonds and might even end up being financed by the ECB (monetary policy sponsoring fiscal stimulus).

Today’s scheduled Fed meeting is cancelled. The US central bank yesterday took additional action by allowing approved dealers in government debt to borrow cash against some stocks, municipal debt and higher-rated corporate bonds (primary dealer lending facility). It highlights the fact that liquidity problems aren’t at all from the radar yet. We expect more volatility on markets this week, but the downside in core bond yields is probably limited in the short run.

From a technical point of view, both the German and US 10-yr yields significantly moved away from the early month lows. The German 10-yr yield returned to the lower half of the trading band since last Summer. The US 10-yr yield trades volatile, but still below the previous all-time low (2016), which is first resistance and probably a tough nut to crack. We fear that lockdown measures might be implemented longer than currently envisaged, with the economic impact deeper and taking longer to recover.

Rates

US yield -1d2 0.49 0.135 0.67 0.2510 1.08 0.3630 1.68 0.40

DE yield -1d2 -0.84 0.045 -0.66 0.0410 -0.43 0.0330 -0.14 0.02

Af

German 10-yr yield: back in old trading range. US 10-yr yield: volatile, but significantly off lows. 2016 low is first resistance.

Wednesday, 18 March 2020

P. 3

EUR/USD: USD liquidity preference persists

EUR/GBP: tentative signs of a breather?

USD (liquidity) preference persists Hunt of USD liquidity again dominated big parts of FX yesterday and interest rate markets. The dollar staged quite an impressive rebound despite additional measures of the Fed to address shortage of USD liquidity. USD/JPY closed the session well north of 107. The prospect of a big US fiscal package maybe was a (secondary) supportive for the USD currency. In addition, the euro faced additional headwinds as intra-EMU spreads again widened substantially, putting additional pressure on EUR/USD. The pair closed the session near 1.10. Overnight, Asian equity markets were not able to build on the technical rebound of US and European equities yesterday and even returned to outright risk off modus. Broader USD strength due to the hunt for USD liquidity this time also weighs slightly on the yuan. USD/CNY returns north of 7.00. The likes of the Aussie and the kiwi dollar are holding near recent lows despite domestic fiscal packages being put in place (expectations on QE?). The yen regains slightly ground (USD/JPY 107 area). EUR/USD also tries to rebound from yesterday’s sub-1.10 levels. Today, the multiple fiscal plans to try to manage the economic fall-out from the corona crisis and developments with respect to US liquidity remain the key drivers for global FX. The USD liquidity topic probably will prevail. After the bold Fed easing earlier this week, one could have assumed the USD dollar had lost some of its advantage. For now, USD cash remains favoured. The impact of (technical) measures to mitigate USD liquidity stress is mixed at best. In EMU, we look out for measures to fund fiscal stimulus on an EU level. From an eco-point of view this would be positive, but the impact on widening intra-EMU spreads (and thus on the euro) is unclear. Over the previous days, we assumed that some balance among the FX majors could return after the multiple Fed actions. Yesterday’s decline of EUR/USD below 1.1050/1.10 suggests ongoing USD preference. In a LT term perspective, one can raise the question whether a base might be building for global action to slow the rise of the USD (is in no one’s interest) but we’re not at that stage yet. Yesterday, EUR/GBP entered calmer waters. The pair found a new ST equilibrium in the 0.91 area. Some euro softness maybe supported the relative performance of sterling against the euro. North of 0.91, EUR/GBP is moving into overbought territory, but for now we see little reason to expect a sustained sterling comeback.

Currencies

R2 1.1514 -1dR1 1.1448EUR/USD 1.0997 -0.0186S1 1.1000S2 1.0879

R2 0.9415 -1dR1 0.9325EUR/GBP 0.9123 0.0009S1 0.8786S2 0.86

Wednesday, 18 March 2020

P. 4

Wednesday, 18 March Consensus Previous US 12:00 MBA Mortgage Applications -- 55.40% 13:30 Building Permits Total/MoM (Feb) 1500k/-3.20% 1550kR/9.20% 13:30 Housing Starts Total/MoM (Feb) 1500k/-4.30% 1567k/-3.60% Canada 13:30 CPI NSA MoM/YoY (Feb) 0.40%/2.10% 0.30%/2.40% 13:30 CPI Core- Median YoY% (Feb) 2.2% 2.20% 13:30 CPI Core- Common YoY% (Feb) 1.8% 1.80% 13:30 CPI Core- Trim YoY% (Feb) 2.1% 2.10% Japan 00:50 Imports/Exports YoY (Feb) -14.0%A/-1%A -3.60%/-2.60% EMU 08:00 EU27 New Car Registrations (Feb) -- -7.50% 11:00 CPI MoM/YoY (Feb F) 0.20%/1.20% 0.20%/1.20% 11:00 CPI Core YoY (Feb F) 1.20% 1.20% Italy 10:00 Industrial Sales MoM/WDA YoY (Jan) --/-- -3.00%/-1.40% 10:00 Industrial Orders MoM/NSA YoY (Jan) --/-- 1.40%/6.00% Events 11:30 Germany to Sell 1.5 Billion Euros of 0% 2050 Bonds

Calendar

Wednesday, 18 March 2020

P. 5

10-year Close -1d 2-year Close -1d Stocks Close -1dUS 1.08 0.36 US 0.49 0.13 DOW 21237.38 1048.86DE -0.43 0.03 DE -0.84 0.04 NASDAQ 7334.782 430.19BE 0.29 0.06 BE -0.54 0.05 NIKKEI 16726.55 -284.98UK 0.55 0.12 UK 0.31 0.05 DAX 8939.1 196.85

JP 0.06 0.04 JP -0.16 0.02 DJ euro-50 2530.5 80.13

IRS EUR USD GBP EUR -1d -2d USD -1d -2d3y -0.35 0.63 0.56 Eonia -0.4510 0.00005y -0.25 0.80 0.66 Euribor-1 -0.4950 -0.0070 Libor-1 0.6116 0.000010y -0.05 0.99 0.78 Euribor-3 -0.4080 0.0020 Libor-3 0.8894 0.0000

Euribor-6 -0.3730 -0.0010 Libor-6 0.8438 0.0000

Currencies Close -1d Currencies Close -1d Commodities Close -1d

EUR/USD 1.0997 -0.0186 EUR/JPY 118.44 -0.03 CRB 130.29 -2.43USD/JPY 107.7 1.87 EUR/GBP 0.9123 0.0009 Gold 1525.80 39.30GBP/USD 1.2055 -0.0216 EUR/CHF 1.0570 -0.0016 Brent 28.73 -1.32AUD/USD 0.6 -0.0117 EUR/SEK 10.868 -0.0602USD/CAD 1.4202 0.0186 EUR/NOK 11.5495 0.0568

If you no longer wish to receive this mail, please contact us: “kbcmarketresearch@kbc.be ‘ to unsubscribe

Brussels Research (KBC) Global Sales Force Mathias Van der Jeugt +32 2 417 51 94 Corporate Desk(Brussels) +32 2 417 45 82 Peter Wuyts +32 2 417 32 35 Institutional Desk(Brussels) +32 2 417 46 25 Mathias Janssens +32 2 417 51 95 CBC Desk (Brussels) +32 2 547 19 19 Dieter Lapeire +32 2 417 25 47 France +32 2 417 32 65 Dublin Research London +44 207 256 4848 Austin Hughes +353 1 664 6889 Singapore +65 533 34 10 Shawn Britton +353 1 664 6892 Prague Research (CSOB) Prague +420 2 6135 3535 Jan Cermak +420 2 6135 3578

Jan Bures +420 2 6135 3574 Bratislava Research (CSOB) Marek Gabris +421 2 5966 8809 Bratislava +421 2 5966 8820 Budapest Research

David Nemeth +36 1 328 9989 Budapest +36 1 328 99 85

ALL OUR REPORTS ARE AVAILABLE VIA OUR KBC RESEARCH APP (iPhone, iPad, Android) This non exhaustive information is based on short term forecasts for expected developments

This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

Contacts