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We have spent much of the last week talking about the efforts coming out of the U.S., as the Federal Reserve and government leaders are working hard to offset the real economic damage being inflicted by the crisis. Other central banks have also been active: Japan, Canada, the UK and Switzerland all took steps in the last week. All that was well and good, but the market was waiting for a sizeable European Central Bank (ECB) response. That came today.

ECB takes action

Earlier today, ECB president Christine Lagarde announced the Pandemic Emergency Purchase Programme, aimed at directly buying up to €750 billion government and corporate bonds. This will be complementary to the existing purchase programs in place. In addition, she announced that the ECB is “fully prepared to increase the size of its asset purchase programmes and adjust their composition, by as much as necessary and for as long as needed.” Later in the day, Lagarde tweeted, “there are no limits to our commitment to the Euro.”

Yields on government bonds rise

We have seen a coordinated global effort on behalf of central banks to flood the markets with liquidity and assist struggling markets over the last five trading days. In that same timeframe, we have seen yields on government bonds rise. This is, perhaps, a sign that the government-bond side of the fear trade is lessening in its intensity. This move in yields also has been influenced by the fact that the market is expecting issuance to increase to fund all the fiscal stimulus measures in the pipeline. In addition, investors are likely also raising cash levels—meaning there are other factors behind the rate rise.

All that said, the fact that the market allowed rates to rise may be an indication that the fear trade is not driving all investment decisions. We will keep an eye on all this. Ultimately, there may be some hope in the fact that investors are no longer buying government bonds regardless of the price.

Fed launches Money Market Mutual Liquidity Fund

We are still waiting to see more of a fiscal response from the European Union nations, but we believe the ECB move is definitely one in the right direction. Additionally, in the U.S., the Fed rolled out yet another support program, Money Market Mutual Liquidity Fund. This one is designed to be a backstop to the prime money market fund industry, bringing back yet another tool from the Global Financial Crisis kit.

Volatility update

Volatility is still high in equity markets, but the downward trend line has become shallower. As an example, the S&P 500® Index has essentially traded in a channel between 2,300 and 2,500 points. While that’s a large 9% range, in a market that’s down almost 30%, it’s an improvement—although these trends may not hold.

This, and the rise of government bond yields, are not clear signs that sentiment is no longer exclusively driving the market. It is worth noting, however, that any meaningful improvement starts with a few tiny green shoots. That said, we are still likely very, very, very far from being out of the woods.

One indication of this can be found in this week’s U.S. initial jobless claims, which spiked to 281,000, up from 211,000 last week. Expect an even worse number next week. But, recognize the fact that this will just be data that confirms what the market already knew was happening. In other words, it isn’t really news if you’ve already expected it to happen. Today’s relatively muted market reaction to this number reinforces this point.


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