BOE Emergency Cut – Lagarde Warns of Collapse-Risk Off Flows Reverse

Posted on

March 11, 2020
Equities rebound after a selloff in Asia
BOE cuts 50bp
Nikkei -2.27% Dax 2.20%
UST 10Y 0.72%
Oil $34/bbl
Gold $1658/oz
BTCUSD $7865

Europe and Asia:
GBP UK BOE cuts 50bp
GBP UK GDP 0.0% vs. 0.2%
GBP UK MP -3.6% vs.-3.5%

North America:
USD CPI 8:30

A big wave of newsflow from Asia and Europe today that involved failed promises from US, emergency rate cuts from BOE and dire warnings from ECB chief Lagarde but the overall impact on assets has been relatively muted with equity futures bouncing off the bottom but still more than 1.5% off on the day while USDJPY rebounded above the 105.00 figure.

The day started with a decidedly risk-off slant as markets were disappointed that President Trump did not show up at the press conference to address stimulus measures against the coronavirus slowdown. The absence of US leadership is creating a clear vacuum in the markets and other authorities are trying to step into the void to calm financial markets and restore a semblance of trust and confidence in a system that is quickly spinning out of control.

To that end, the Bank of England did an emergency rate cut of 50 basis points taking the benchmark rate to 25bps. In addition, the central bank announced a 100 billion pound lending facility that will be offered to banks so that they can, in turn, lend to small and medium enterprises.

The BoE is clearly trying to keep liquidity going as the UK negotiates the dual challenges of Brexit and coronavirus outbreak, but the situation across the channel appears to be even grimmer with ECB President Christine Legarde issuing a warning that the region could be facing a 2008 type of collapse if governments do not provide fiscal stimulus soon.

With Italy on lockdown, Germany, France, and Spain approaching 2000 cases of Covid-19 each the whole continent is quickly becoming economically paralyzed as authorities try to stem the tide of infection. Tomorrow Ms. Legarde will no doubt argue for fiscal action as monetary policy is quickly reaching the limit of its effectiveness.

All of this leaves the markets in a state of disarray as traders await policy responses to the unfolding financial disaster in front of them. For now, the panic has subsided but if the policymakers on both sides of the Atlantic do not act soon, the selling could resume with a vengeance.

Boris Schlossberg
Managing Director

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