Comment by Ranko Berich, Monex Europe
The dollar weakened against most developed and emerging market economies overnight and is also lower compared to Friday’s close when measures using broad indices such as the Bloomberg dollar index after the Federal Reserve embarked on a historic expansion of its monetary accommodation. The Fed’s measures announced yesterday had two main thrusts: a commitment to massive, open ended asset purchases on one hand, and the opening of new facilities to support lending to consumers and businesses. The initial pace of the asset purchases is unprecedented: the New York Fed will be purchasing $75 billion of treasuries and $50 billion of mortgage backed securities every day this week, with a commitment to continue purchases “in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy”. Three new facilities were announced, two of which were created to purchase corporate debt on both primary and secondary markets. The third was the re-establishment of the Term Asset-Backed Securities Loan Facility, which will purchase asset-backed securities consisting of bundles of student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration. The three facilities will provide up to $300 billion in new financing and will be capitalised by $30 billion in equity from the US Treasury. Although the measures were clearly aimed at halting or reversing the decline in US financial conditions, many measures of financial system stress worsened or were flat after the announcement. US equities declined after the release, as did high yielding debt indices - a concerning lack of improvement considering the Fed’s steps were more aggressive than those taken during the 2008 financial crisis.
Elsewhere, progress towards a fiscal stimulus bill seemed to stall as Senate Democrats twice blocked votes to progress the $2 trillion Republican stimulus bill, and Nancy Pelosi unveiled a rival Democratic stimulus bill in the House. Donald Trump gave a press conference and continued to voice support for ending containment measures in the near future, following a series of tweets suggesting this idea throughout the day and on Sunday evening. Such a move would be inconsistent with prevailing medical advice, including the President’s own advisers.
The euro continues to bounce back from its 3 year low against the dollar yesterday and this morning as the Federal Reserve announced an unlimited QE program, taking some of the wind out of the greenback’s sails for now. Additionally, the number of reported coronavirus-related deaths in Italy had been falling for the second day in a row, suggesting that strict containment measures may finally be working. German officials signalled readiness to help Italy get through the pandemic and are willing to use the euro area’s bailout fund to grant an emergency loan. The euro came under pressure in the buildup to the purchasing managers’ indices releases for Germany, France and the eurozone as a whole today as market expectations did not augur well for the eurozone. French composite PMIs were dragged down by the disappointing performance in the service sector, which printed 29.0 compared to the 40.0 consensus. Manufacturing PMI surprised slightly to the upside with a 42.9 vs 40.6 consensus. For Germany, the services PMI fell to 34.5 vs a 43.0 consensus making it the largest under-performing sector, whereas manufacturing data for Germany also surprised to the upside, printing 45.7 compared to the 39.9 estimated value. Though the euro slightly sank in the buildup to the release, the actual releases left no impression with the single currency. It is safe to say that in the present climate of pandemic turmoil where aggressive surprise interest rate cuts and unlimited QE are no longer the exception, markets had braced for disappointing data.
Sterling continued to hover just above last week’s lows against the US dollar and euro, as the UK announced stringent nationwide lockdown members and the US Federal Reserve dramatically escalated easing measures. Speaking at a late press conference, Boris Johnson ordered an Italian-style lockdown which will be enforced by police, and the closure of non-essential businesses. News flow was once again dominated by variations on the coronavirus theme, including news that the number of available ventilators in the UK was rising rapidly, and that public authorities such as councils, schools, and government departments would keep paying suppliers even if their services had been reduced or discontinued.