LCG Market Wrap: Markets not listening to ECB’s PEPP Talk. Sterling to 35-year low

19 maart 2020

The ECB has started a new 750 billion euro bond-buying program that they have named the Pandemic Emergency Purchase Program (PEPP). Markets are not listening to the ECB’s PEPP talk!

European shares look set for steep opening losses, taking no comfort from the kind of monetary stimulus that had been propping them up since the financial crisis. When German Chancellor Angela Merkel is calling the pandemic the worst thing for Germany since World War 2, it will be almost impossible to relieve the financial stress that implies.

The Reserve Bank of Australia (RBA) cut interest rates by another 0.25%. According to previous statements, this is as low as they’ll go. They will also start the purchase of Australian bonds in what looks more like yield curve control than outright quantitative easing. Interestingly the central bank is not intervening in the currency market and appears happy about the sharp losses in the Aussie dollar to decade lows as a “shock absorber”.

The Federal Reserve kick-started a new money market liquidity facility. The purpose is to lend support to mutual funds, especially money market funds that are facing large redemptions from scared investors. The Bank of Korea will also being the purchase of Korean government bonds tomorrow.

All the central bank intervention is being rejected by markets as a solution to the coronavirus pandemic. Investors have voted with their feet. It’s almost funny to hear other policymakers trying to rerun the history of former ECB President Mario Draghi’s “whatever it takes” line that saved the euro in the European debt crisis. New ECB President Lagarde is saying there are “No limits” to her commitment to the euro. But these are different times and there is a different problem.

The central bank policies have exaggerated already extreme moves across the forex market. King Dollar is sleighing all those who come before it.

Sterling has been utterly crushed. GBP/USD was pummelled to 1.15, a new post-Brexit and a 35-year low. The new Chancellor is getting some stick for his stimulus measures but the moves are outside his control. The chance of securing a trade deal with the EU by the end of the year when the coronavirus is occupying the full attention of both governments is next to zero. Boris needs to do a one-eighty on his end of year deadline for Brexit to stop what is becoming a complete collapse in Sterling.

The Swiss franc has risen to its strongest against the pound since the Swiss National Bank dropped the franc peg to the euro in 2015. Depending on the decisions made by the SNB today, or perhaps irrespective of them, the Swissie could be about to reach its highest since euro-franc peg.

Oil prices crashed 24% on Wednesday. The preceding days probably won’t be much better. The oil price war on top of the demand destruction from the coronavirus is causing some insane moves in the price of oil. There are now some serious forecasts for oil going to zero. Having made the decision on output, presumably neither Russia nor Saudi Arabia will back down in the price war. The only market-based solution to these falling oil prices will be lower supply through the bankruptcy of US shale producers for whom it is no longer worth getting the oil out of the ground.

Opening calls

FTSE 100 set to open 64 points lower at 5016 DAX set to open 69 points lower at 8372 S&P 500 to open 59 points lower at 2359