Trump Fails Miserably; What Can ECB Do?

Posted on

March 12, 2020
Trump fails to calm markets – futs off by 4%
All eyes on ECB
Nikkei -4.41% Dax -6.56%
UST 10Y 0.74%
Oil $31/bbl
Gold $1642/oz
BTCUSD $7433

Europe and Asia:
No Data

North America:
USD PPI 8:30
ECB Presser 8:30

Markets were sharply lower in Asian and early European sessions today with stock futures pointing to nearly -5% down open after President Trump failed to calm and may have actually exacerbated investors’ fears after addressing the nation on the coronavirus news.

Trump announced a 30-day ban on travel from EU Schengen zone that was initially interpreted as a ban on trade as well but later corrected by White House to mean only the movement of people not goods. Regardless, Mr. Trump offered no healthcare protections for the US populace at large. Provided no information on any virus testing facilities or the availability of the test itself and instead focused attention on a hodgepodge of half baked ideas of tax relief that will do nothing to stimulate the economy and appear to have little chance of passing Congress in their current form.

It was truly his worst performance ever on the national stage and it took markets little time to start selling assets as the US policy appears to be one of just wishing the virus away while vast swaths of the economy are now moving to voluntary lockdowns including the sports sector with NBA announcing that it will suspend all play indefinitely after one of its star players tested positive for the virus and the NCAA stating that it will play all games in front of empty arenas. With the virus just beginning to take hold in the US the economic ramifications are just beginning.

Meanwhile, all eyes will turn to Christine Legarde as faces the press later today after the monthly ECB meeting. The situation in Europe is even more troubling as Italy remains on countrywide lockdown and economic impact grows worse by the day.

With its benchmark rates already negative, the markets are uncertain as to what ECB can do but there are two proposals that appear to be gaining consensus approval. One, cap rates for sovereigns especially Italian BTPs thus allowing the Italian government to borrow at will and expand fiscal stimulus without any concern for debt service costs. Two create a lending facility to one proposed by the BoE for SMEs that would offer credit at negative rates. While this may not stimulate much fresh borrowing under the current conditions it would allow many small and medium businesses to refinance their debts and create cash flow positive streams on those liabilities.

There is no doubt that the market is looking for dramatic measures from Ms. Legarde and calls for more fiscal spend simply won’t cut it. The EURUSD was down to 1.1265 in morning European dealing and could drift to 1.1200 figure if Ms. Legarde offers nothing more than rhetoric.

Boris Schlossberg
Managing Director

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