The daily increase in confirmed Covid-19 cases on Wednesday amounted to 22159 or 11.24% compared to Tuesday. This is the highest on record percentage gain, indicating that the spread is gaining momentum, increasing the likelihood of harsher government response and deeper economic fallout. If we leave out the possibility of upside event risks, the upside moves in risk assets today could be considered as purely technically driven with a likely deeper sell-off on cards.
Oil prices recovered on Thursday, however, not enough to convince Asian and Australian stock markets, which continued to fall today. Futures on US indices bounced off the 2300 level, reducing losses, a variety of credit facilities proposed by the Fed (CPFF, TALF, PDCF, yesterday’s MMLF) as well as the ECB’s monstrous 750 billion euros program; which is yet to reverse the expectations of a recession and credit crunch. The idea of the fight of central banks against this threat is simple – lower the level of quality of collateral for loans issued (by credit facilities) thus making more assets eligible for purchases. Commercial papers, corporate bonds, securities (where cars and education loans are collateral) and the Fed exchanges all these financial assets for liquid dollars to prevent a credit crisis and stabilize financial markets.
RBA lowered its key interest rate to 0.25% and began to target the yield curve following the example of the Bank of Japan. As changing the key rate, the bank can affect only short-term market rates, the formation of the expectations of low rates for a longer time requires targeting the yield curve through appropriate purchases of securities from the market. The outflow of capital from the market led to the fact that the yield on Australian 10-year bonds rose to a maximum since July 2019, which led to intervention of the Central Bank in the form of QE to keep yields low.
A weak yen and gold under pressure indicates that an imminent liquidity crisis continues to hinder their strengthening. If it can be successfully solved, the flow of capital into defensive assets should become more pronounced. The South Korean won decreased by 3%. Shares in the Philippines crashed 24% at the opening, after a risky decision by the government to suspend trading.
A new stimulus package from the ECB aims to combat the effects of the pandemic. The aim is that emphasis should be placed on those participants in the financial market and companies that have suffered the most from the wave of isolationist measures and lockdowns. The ECB program will allow the bank to directly redeem private and public sector securities and expand the range of credit quality of securities to be purchased.
Trump’s adviser Larry Kudlow said the government could start to directly buy shares in a scheme for bailouts. Authorities determine the size of fiscal aid, the upper threshold of which is now considered to be $1 trillion.
VIX continues to remain at an elevated level (> 75) but expected bullish correction today should balance negative expectations with a portion of optimism, providing the market with the timeout necessary to reassess the situation according to the latest incoming data.
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