Uncertainty Pushes Rates To Unknown Limits

The coronavirus threatens Stoxx600; index could drop by -15%Performance of European Stoxx600

BBVA Research | Financial markets remain volatile with the concerns about the virus spillover effect being the main market driver. After yesterday’s equity rebound, declines in the equity markets have resumed today, with market risk measures such as VIX soaring to 37, although moderated afterwards but remains above 30.

Although the U.S. and IMF approved additional aid to cope with the Covid-19 health  crisis, concerns about investors remain, as companies continue dissuing profit and revenues warnings due to the impact of Covid-19, while California declares a state of emergency over the coronavirus. Moreover, Petrochina declares forcé majeure on natural gas imports, requesting some cargoes be deferred to Q3.

Economic data were weak today. The U.S. Initial Jobless Claims decreased slightly less than expected (216k, consensus 215k, previous 219k) while U.S. Factory Orders dropped sharply in February (-0.5%, consensus: -0.1%, previous:1.8%), mainly caused by the fall in both durable orders and nondurable shipments. Finally, U.S. Durable Goods Orders maintain previous levels in line with expectations, -0.2%.

Bond markets continued to attract fresh demand due to the risk-off mood, with the U.S.10Y yield continuing to trade below 1%, while the10Y German yield is approaching its December lows. Market’s expectations for further interest cuts continue to increase. Currently, the market is penciling in another 25bps Fed interest cut in March, and  the odds of a 50 bps cut in March are also high (91%). For the ECB, the OIS futures prices in a 85% probability of a 10bps ECB interest rate cut next week.

FX markets were mixed today, as the dollar was impacted by worries about the virus spread in the U.S., while the risk-on mood intensified on safe havens as the JPY and CHF out performed their G10 pairs. The lower U.S. yield and U.S. dollar depreciation helped the euro to gain some ground, while commodity-linked currencies depreciated across the board. Despite the decline in the U.S.dollar, EM currencies depreciated across the board.

In commodities, the Organization of Petroleum Exporting Countries (OPEC) has finally reached an agreement to propose to non-cartel producing countries, led by Russia, an additional adjustment of crude oil production of 1.5 million barrels per day in response to lessen the impact of the virus on oil demand. Nonetheless, Brentoil prices remain on a downward trend.

Risky assets slumped, with equities declining across the board due to government declarations to contain the coronavirus. Meanwhile, Asian equities improved, with the CSI300 and the Hang Seng index advancing around 2%. In this context, volatility remained at high levels (VIX36,+4points).