|Bid||39.04 x 1100|
|Ask||39.49 x 1200|
|Day's range||39.02 - 40.49|
|52-week range||33.74 - 59.55|
|Beta (5Y monthly)||0.92|
|PE ratio (TTM)||8.73|
|Forward dividend & yield||2.37 (5.89%)|
|Ex-dividend date||07 Apr 2020|
|1y target est||64.12|
(Bloomberg) -- In one fell swoop of regulatory relief, the Federal Reserve has put a massive distortion in the debt market on course to normalize after years of being turned upside down.At stake is a stubbornly illogical relationship between two of the world’s most important funding markets -- the $17 trillion of U.S. Treasuries and the $124 trillion world of interest rate swaps -- that’s persisted for more than a decade. Such swaps exchange fixed-rate payments for floating-rate ones, and are used by investors ranging from pension funds to insurers, as well as companies managing their future liabilities.But the relationship between swaps and Treasuries was turned upside down in the aftermath of the financial crisis, with so-called ‘swap spreads’ -- what should be a premium of swap rates over Treasury yields, to reflect the credit risk involved in dealing with a private counterparty -- turning negative.Taken at face value, negative swap spreads suggest that investors view private counterparties as less likely to default than the U.S. Treasury. In reality, market participants blamed capital constraints and supply and demand dynamics in Treasuries and corporate credit for the distortion.New Normalcy?With the Fed moving on Wednesday to allow banks to increase leverage in an effort to restore debt-market liquidity and get credit to consumers, the oddity of negative swap spreads is now expected to fade. It may also make disorderly leaps and plunges in Treasury yields less likely.The Fed exempted Treasuries and deposits from banks’ supplementary leverage ratio (SLR), and that’s set to stoke debt trading and make Treasuries more appealing versus derivatives -- a dynamic that would widen swap spreads and potentially turn them positive across maturities.“Positive swap spreads would mean the world is right side up again, with economics of investors driving the pricing of derivatives rather than regulatory and other practical constrains on dealers,” said Joshua Younger, head of U.S. interest rate derivatives strategy at JPMorgan Chase & Co. The regulatory “relief is targeted at reducing intermediation frictions more so than incentivizing banks to hold more Treasuries in their investment portfolio.”Rates on 30-year swaps have been lower than similar maturity Treasury yields for most of the time since October 2008. That anomaly -- which created the negative swap spread -- was once considered to be an impossibility in funding markets since swaps’ floating payments are based on the London interbank offered rate, which has embedded credit risk. The spread was at -40 basis points on Friday, compared to about -42 basis points Thursday and -52 basis points a week earlier.The Fed said on Wednesday that for one year, the biggest U.S. banks will no longer have to add their Treasuries and reserves into the basket of assets for which they’re required to maintain extra capital. It said the change was “to expand their balance sheets as appropriate to continue to serve as financial intermediaries” because “liquidity conditions in Treasury markets have deteriorated rapidly.”With the central bank’s balance sheet on course to top $10 trillion due to an array of debt-purchase programs to combat the economic effects of the virus, the regulatory roll-back also helps unlock more bank lending -- even given the resulting rise in reserves that will follow. Net net, it gives banks more space to use their balance sheets in ways that support the Treasury market.“The SLR had forced banks to really optimize the balance sheet, and in doing that they cut back on repo activity because it is a low-return business,” said Priya Misra, global head of interest rates strategy at TD Securities. “With the Fed’s action, there will be more repo activity and more demand for Treasuries -- both of which will widen swap spreads.”As always, supply and demand dynamics will impact swap spreads. Right now the U.S. Treasury is boosting issuance of government debt at a torrid pace to fund a $2 trillion fiscal stimulus program.Treasury Supply Surge Begins With Next Week’s Coupon AuctionsWhile an influx of Treasury supply would tend to narrow swap spreads as it pushes Treasury yields higher, strategists see the impact of the regulatory roll-back winning out, putting spreads on a path of expansion. The Fed is helping that dynamic by buying up lots of the Treasury’s debt -- thereby limiting the net supply to the private sector.It all adds up to a new world order, where the eerie past -- when swap spreads for nearly all maturities were negative -- is firmly in the rear view mirror. Strategists at banks including TD Securities and Societe Generale predict the Fed will ultimately keep the SLR tweak well beyond a year.A key gauge of Treasury liquidity known as market depth, or the ability to trade without substantially moving prices, plunged last month to levels last seen in the 2008 crisis, according to data compiled by JPMorgan.Treasuries Liquidity Drying Up Puts $50 Trillion in QuestionBoth dealers and commercial banks are bloated with debt, given the double whammy of them needing to meet regulatory mandates and outsize Treasury issuance.“Spread widening is going take place across the curve, with it especially strong in the long-end where dealers’ balance sheet constraints were most pronounced,” said Subadra Rajappa, head of U.S. rates strategy at Societe Generale. “The SLR change will bolster liquidity as well. The big move recently in 30-year bonds was really due to these constraints and because dealers’ holdings of Treasuries have surged.”(Adds strategist’s comments, updates prices)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg) -- Canadian equities jumped as a confluence of news sent oil and precious metals surging on Thursday.The S&P/TSX Composite Index closed 1.7% higher with energy companies leading the charge. U.S. President Donald Trump said Saudi Arabia and Russia would make major output cuts, though uncertainty swirled over the size of the curbs and whether reductions would be made at all. Western Canada Select crude oil traded at a $16 discount to West Texas Intermediate.Earlier Trump said in a couple of tweets that he expects Saudi Arabia and Russia to cut oil production by 10 million to 15 million barrels. His comments immediately triggered skepticism as the Kremlin said Russian President Vladimir Putin hadn’t agreed to a production cut to boost prices. Saudi Arabia also didn’t confirm the cuts, but called for an urgent meeting of the OPEC+ producer alliance.The Canadian dollar strengthened to C$1.4171 per U.S. dollar and the 10-year government bond yield climbed 5 basis points to 0.664%.Gold and silver miners were also among the best performers as record U.S. jobless claims spurred the flight to safe havens. The number of Americans applying for unemployment benefits soared to 6.65 million last week, a level unimaginable just a month ago. The spot price of gold rose 1.4% to $1,614.03 an ounce.As Canadian markets try to find some normalcy amid big volatility spikes, Toronto-Dominion Bank’s Chief Executive Officer Bharat Masrani said the nation’s central bank doesn’t need to buy up corporate bonds to boost liquidity because debt markets are returning to more normal conditions.The Bank of Canada launched a program to buy short-term commercial paper, but hasn’t yet ventured into buying longer-term company bonds. It began its first-ever foray into quantitative easing this week to reduce strains in the market brought on by Covid-19 shutdowns, buying C$1.8 billion ($1.27 billion) in government bonds.What was a roaring start to Canada’s spring house-hunting season has ended in a whimper. By the time the dust settles on what’s likely to be months of disruption, the nation could see resales plunge 30% to a 20-year low and the first nationwide drop in prices since 2009, according to Royal Bank of Canada.On the virus front, Covid-19 has now infected 1 million people across the world, a milestone reached just four months after it first surfaced in the Chinese city of Wuhan. More than 51,000 have died and 208,000 recovered in what has become the biggest global public health crisis of our time.For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg) -- TC Energy Corp. sold U.S. dollar-denominated bonds Thursday just as the company’s new loonie notes rally in their trading debut.The pipeline operator’s C$2 billion ($1.4 billion) 3.8% debt due 2027 is quoted at a spread of about 300 basis points over Canadian government bonds after pricing Wednesday at 325 basis points, according to Bloomberg Valuation bid prices. Meanwhile, the company’s TransCanada Pipelines Ltd. unit tapped the U.S. high-grade market for $1.25 billion of new 10-year notes at 350 basis points over Treasuries.“The investment-grade market has opened up. Yes, spreads are a little wider but they should be because of the environment,” Toronto-Dominion Bank Chief Executive Officer Bharat Masrani told reporters Thursday. “Banks are playing an important role here in channeling the liquidity to the right companies as well. So I think the market seems to have corrected itself, particularly the bond market.”Read more: TD CEO Doesn’t See Need for Bank of Canada to Buy Corporate DebtCurrently, investors demand 245 basis points over Canada’s government bond yield to hold corporate debt, according to Bloomberg Barclays indexes. That compares with as much as 274 basis points on March 25.Calgary-based TC Energy’s deal from yesterday is the biggest non-financial corporate bond in loonies so far this year. It boosted the year-to-date volume of widely-marketed corporate bond sales to nearly C$30 billion compared with C$27.2 billion for the same period last year, according to data compiled by Bloomberg. The Canadian corporate bond market has been stabilizing after the country’s central bank set an array of easing measures including cutting interest rates to the lowest since 2009, widening the collateral it takes in its liquidity mechanisms and buying debt securities, including at least C$5 billion per week of government bonds.Other energy names have joined TC Energy by raising fresh funds in the bond market this week. Ontario Power Generation priced C$400 million of five-year notes Thursday alongside C$800 million of 10-year green bonds while Brookfield Renewable Partners ULC sold C$350 million of new sustainable debt on Wednesday.For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg) -- The cost of Prime Minister Justin Trudeau’s fiscal package to protect the economy from the impact of Covid-19 has reached about C$250 billion ($176 billion) , according to the latest figures from the finance department.One of the flagship programs, a plan to subsidize 75% of wages for Canadian workers, will cost C$71 billion, Finance Minister Bill Morneau told reporters Wednesday in Ottawa. Along with other measures such as the monthly income replacement scheme, direct support for companies and households will run the government C$105 billion, Morneau said.On top of that, tax deferrals from delayed filings and sales-tax rebates will add a further C$85 billion to the total tab. There’s also C$25 billion earmarked for a credit program for small businesses, and C$40 billion in liquidity available through government lending agencies.Officials are rushing to stem the damage to the economy from pandemic-induced business closures and record-low oil prices. In the 10 days between through March 25, some 1.6 million Canadians applied for jobless benefits.“We need to deal with the urgent and immediate issue around supporting Canadians,” Morneau said.When asked how the new measures would affect the government’s deficit, the finance minister declined to give a specific forecast. “Now in our estimation is not the time for us to be coming up with our estimates of where we’ll be in six months or twelve months,” he said.The cost of the fiscal package will push the federal government’s shortfall to a record C$180 billion in the 2020-21 fiscal year, or almost 8% of the total economy, Andrew Kelvin and Robert Both, strategists at TD Securities, wrote in a note to clients. They expect Government of Canada issuance to reach C$270 billion in the current fiscal year to help finance the measures.For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg) -- Indonesia has just raised the stakes for rupiah traders.The currency may slide as far as 20,000 per dollar if the worst materializes and the economy contracts under the weight of the virus pandemic, according to Finance Minister Sri Mulyani Indrawati. That level is more than 15% weaker than the all-time low of 16,950 reached during the Asian financial crisis.Whether the government is simply preparing markets for the worst or signaling that it’s preparing to scale down intervention, the prospect of a sharp fall has opened up the possibility of the currency reaching a level that was previously unthinkable.The Finance Ministry’s line in the sand could invite speculators targeting further weakness in the rupiah while others line up bets that the level will never will be reached. Options traders are pricing in a one-in-three chance that the rupiah will drop to 20,000 by year-end.“While it remains vulnerable on the external debt front, Bank Indonesia is still in a good position to lean against IDR weakness,” said Chang Wei Liang, a macro strategist at DBS Bank Ltd. in Singapore. “Indonesia’s import coverage ratio is comfortable. Its reserves to gross external financing ratio has also improved compared to the 2013 taper tantrum period.”The rupiah may fall to as low as 17,500 this year and 20,000 in the worst-case scenario, Indrawati said Wednesday, adding that the authorities will prevent the currency from sliding to 20,000.Bank Indonesia sees the current exchange level as appropriate and is committed to ensuring the rupiah’s stability, Governor Perry Warjiyo said. The finance ministry’s 17,500-20,000 rupiah range estimate is for the purpose of pre-emptive action, he added.After Indrawati’s comments, the currency tumbled to the day’s low of 16,458. It crashed to 16,625 last week, the weakest since June 1998.The rupiah’s decline may accelerate in the coming days if policy makers step back from supporting the currency to preserve their holdings of the dollar.“Policy makers are taking a realistic approach,” said Mitul Kotecha, senior emerging markets strategist at TD Securities in Singapore. “They do not want to expend all their ammunition and as with most central banks in Asia, have learned that it cannot be sustained against significant external pressures.”Foreign-exchange reserves data for March due next week may highlight the extent of the authorities’ intervention. Holdings stood at $130.4 billion in February, near the record high of $132 billion reached in January 2018 and 20% above the level deemed as appropriate by the International Monetary Fund.For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg) -- The Federal Reserve, in its latest response to strains caused by the coronavirus pandemic, has opened a temporary repurchase agreement facility for foreign central banks to support the smooth functioning of financial markets.The program will allow participants to temporarily exchange U.S. Treasuries for dollars, which can then be made available to institutions in their jurisdictions, the Fed said in a statement Tuesday.The program, available April 6, is a new weapon in the Fed’s arsenal to stabilize dollar funding markets as the U.S. and other major economies enter a virus-induced partial shutdown. It’s aimed at supporting the smooth functioning of the U.S. Treasury market by providing an alternative temporary source of U.S. dollars.“What we often see in a crisis is that there is a shortage of dollars globally,” Julia Coronado, founding partner of MacroPolicy Perspectives in New York, said in an interview on Bloomberg Radio. “This is what the Fed is trying to address. It’s trying to short circuit what is clearly going to be deep and painful recession from becoming a full-blown financial crisis.”The dollar pared its gains after the announcement, while short-end Treasury yields held steady and U.S. stock futures remained down on the day.Reduce SellingThe facility “reduces the need for central banks to sell their Treasury securities outright and into illiquid markets,” helping stabilize trading in the world’s most secure and important asset, the Fed said.The new repo facility may be especially intended to help smaller foreign central banks that don’t have access to the Fed’s existing dollar swap lines. Foreign entities hold about $6.86 trillion of Treasuries, Fed data show.Five major foreign central banks have permanent swap lines with the Fed and nine additional central banks established temporary programs with the Fed on March 19.Bolster Confidence“By allowing central banks to use their securities to raise dollars quickly and efficiently, the facility will also support local markets in U.S. dollars and bolster broader market confidence,” the Fed added. “Stabilizing foreign dollar markets, in turn, will support foreign economic conditions and thereby benefit the U.S. economy through many channels, including confidence and trade.”The facility was authorized by the Federal Open Market Committee, according to the statement.The Fed said the term of the repos will be overnight, but can be rolled over as needed. Transactions will be conducted at a rate of 25 basis points over the interest rate on excess reserves, which is currently set at 0.1%.Outstanding transaction totals will be made public in the Fed’s weekly balance sheet report.Central banks can “obtain cash instead of selling their Treasuries outright,” said Gennadiy Goldberg, a strategist at TD Securities. “This should 1) take some pressure off dealer balance sheets and 2) prevent foreign central banks from selling their Treasuries in large sizes, which can destabilize the market.”(Updates with analyst’s comment in fourth paragraph.)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg) -- The Federal Reserve will slow the pace at which it buys Treasuries under its unlimited quantitative easing program.The U.S. central bank, which has been aggressively purchasing Treasuries for the past two weeks in a bid to offset the economic and market fallout from the coronavirus pandemic, on Friday said that it would dial back the daily pace of buying to $60 billion next Thursday and Friday. It will continue purchasing at the existing pace of $75 billion a day for the first three days of next week.“This is a more nimble Fed, at least opposed to the earlier QE Fed, because they’re not operating off a rule book -- they’re trying to calibrate the amount needed and retaining flexibility,” said Priya Misra, global head of rates strategy at TD Securities. “The fact that they’re easing into it is a good sign, they’re trying to get more data, the fact they’re giving us a week notice, that’s good.” If $60 billion a day proves too little, Misra said she wouldn’t be surprised to see them increase the amount again.The central bank announced its return to quantitative easing earlier this month as virus concerns ripped through global markets and the prospects for the global economy cratered. And this past Monday it declared that it would purchase assets “in the amounts needed to support the smooth functioning of markets.” It has bought Treasuries at a steady clip of $75 billion a day since then, although there was some talk in the market that the monetary authority might look to ease back.They couldn’t buy $75 billion a day forever, so “stepping it back slowly” to $60 billion “makes sense,” said Thomas Simons, a money market economist at Jefferies LLC. “They’ve been having a few of the purchases under-subscribed so that’s a sign they don’t have to go full bore.”At this pace the Fed will have bought almost $1 trillion dollars of Treasuries by end of next week.For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg) -- Fears over the historic squeeze in the gold market showed signs of easing after some short sellers appeared to exit and investors rolled forward contracts.The bullion market was thrown into turmoil this week as logistical disruptions caused by the coronavirus pandemic led to a divergence of prices in New York and London and curbed supply. One issue was whether there would be enough gold in New York to deliver against futures contracts traded on the Comex.But open interest in the April contract dropped almost 30% on Wednesday, indicating a small amount of short-covering as investors rolled positions forward, according to David Govett, head of precious metals trading at Marex Spectron. The decline helped narrow the gap between the volume of gold that could be due to be delivered at expiry and how much sits in Comex warehouses.Banks and traders typically ship gold around the world on commercial flights, linking the trading hubs of London and New York with vaults and refineries in Switzerland, Hong Kong and Singapore. But as the virus grounds flights and refineries shut down, it’s becoming harder to trade between global markets.Adding to the squeeze: the larger spot market in London is dominated by 400-ounce bars of gold, but only 100-ounce and kilobars are deliverable on the Comex contract. Late on Tuesday, after New York futures shot to the highest premium to the spot price in four decades, CME Group said it would launch a new futures contract under which 400-ounce bars would also be deliverable, helping ease tightness.Open interest in April futures on Wednesday was the equivalent of about 10.8 million ounces, down from 19.6 million ounces on Monday. Total deliverable stocks in Comex warehouses were about 8.7 million ounces.In other signs that pressure may be easing, the premium of Comex futures over spot gold narrowed to about $26 on Thursday, from as high as $67.57 an ounce earlier this week.“Spreads are looking much better today,” Stephen Innes, chief global market strategist at AxiCorp Ltd., said in a note. “Lower spreads are always welcome in any market, especially in gold, when physical is especially tight with refiners shut down around the world.” Pressure should also ease as the market switches to the June contract as Swiss refineries should be up and running by the time that contract is settled, he said.Bid-ask spreads in the spot gold market have also come down in a sign that market tensions are easing, at least for now. Having been in excess of $20 an ounce on Tuesday, bid-ask spreads are now down to around $6 an ounce.Spot gold traded 0.6% higher at $1,627.05 an ounce as of 12:06 p.m. in New York. The precious metal dropped 0.9% on Wednesday.“Investors have taken a shine to the yellow metal once again as inflation expectations have lifted off the floor, sending real rates on a downward trajectory once again,” TD Securities analysts said in a note Thursday.Investors are weighing plans for massive stimulus worldwide, including unprecedented moves by the Federal Reserve to backstop large swaths of the U.S. financial system. Chairman Jerome Powell said the central bank will maintain its muscular efforts to support the flow of credit in the U.S. economy. Meanwhile, the U.S. Senate approved a historic $2 trillion rescue plan to respond to the economic and health crisis caused by the pandemic. The bill is being considered in the House.Among other precious metals, spot silver was down, while platinum and palladium also fell, after the latter saw a 21% jump on Wednesday. That was the metal’s biggest gain since 1997, as the prospect of mine shutdowns in South Africa raised concerns of a widening global deficit.For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg) -- The Bank of Canada has expanded its authority to buy and sell securities outright, according to a public notice by the central bank.The central bank added the right to buy and sell the debt of companies and municipalities, along with other instruments when it is “addressing a situation of financial system stress that could have material macroeconomic consequences,” according to the March 13 notice in the Canada Gazette issued by Governor Stephen Poloz. Those amendments add to the central bank’s power to conduct buybacks on various products, including corporate debt. “The ability to purchase securities outright is a crucial step in arresting the impairment in system-wide liquidity in Canada” Ian Pollick, Global Head of FICC Strategy at the Canadian Imperial Bank of Commerce, said by email. “Price-discovery has collapsed on the back of these stresses, so it is crucial for the Bank to respond in-kind with a program that targets both public and private sector assets.”Spokeswoman Louise Egan confirmed the amendments were made primarily to enable the central bank to conduct operations under its new Bankers’ Acceptance Purchasing Facility. The changes are significant because the central bank can now make outright purchases of securities that were previously only allowed to be acquired via term repo buybacks.The central bank has taken a series of measures to inject liquidity into the country’s financial system, to prevent funding markets from seizing up. Analysts say it may be forced to introduce a more formal quantitative easing program as the country contends with a dramatic rise in unemployment.Bank economists now expect the Canadian economy to shrink between 10% and 24% on an annualized basis, a recession deeper than the worst of the 2008-09 financial crisis. Many see it as inevitable that Poloz and his governing council will cut the overnight rate to near zero, then start rummaging deeper into their toolbox.“We think the bank will be forced to adopt QE and that they’ll look to ultimately buy up to C$150 billion in securities,” said TD Securities macro strategist Robert Both in an email. “We think it is a question of when and not if.”Sharp Economic SlideQuantitative easing, which sees central banks buy government bonds as part of an effort to keep borrowing costs low for a prolonged period of time, would be a first for the Bank of Canada, which didn’t follow its peers to such lengths during the 2008 crisis.The global outlook is deteriorating rapidly, forcing central banks into new territory. The Federal Reserve said Monday it will buy unlimited amounts of Treasury bonds and mortgage-backed securities to suppress borrowing costs and ease the flow of credit amid a historic economic shock.The Bank of Canada’s governing council often distances itself from monetary policy decisions south of the border. But the Fed’s move opens the door to a more robust response from Canadian policy makers.“The Bank of Canada doesn’t like being pushed by the Fed, but now it’s global,” said Benjamin Reitzes, an economist at Bank of Montreal, which sees an 80% chance the central bank will need to start quantitative easing.“The question is why they’d wait until April -- given the broad shutdowns it’s already clear that conditions have deteriorated sharply,” he said.While Poloz said last week that other options are on the table, he made it clear the measures the bank has taken so far -- including upping the purchases of mortgage-backed securities -- don’t constitute quantitative easing.“The programs the bank has introduced are very important in unlocking funding markets,” Pollick said. “The problem is, liquidity is so distressed that they are not working as planned. They need to bring out the Canadian bazooka,” adding that he’s certain the central bank will “imminently” launch QE.(A previous version of this story was corrected to remove reference to government granting BoC new authority.)(Updates with comments from analyst, spokeswoman from third paragraph.)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg) -- Oil clawed back some gains after plunging 29% last week as the U.S. signaled the possibility of a joint U.S.-Saudi Arabia alliance to stabilize prices.Futures in New York rose 3.2% Monday in a mixed day of trading. Prices initially bounced following a second wave of initiatives by the Federal Reserve to support a shuttered American economy. A rally in other risk assets such as equities was soured by a second failed effort by Congress to agree on a stimulus bill.“Almost hitting the lower trading bounds in the 20s has given some support for WTI and Brent,” said Ryan Mckay, commodities strategist at TD Securities. “Generally, the stimulus is helping sentiment, even if it’s not helping demand. Investors may be hanging on to a sliver of hope that an OPEC-Texas relationship may transpire.U.S. Energy Secretary Dan Brouillette said the possibility of a joint U.S.-Saudi oil alliance is one idea under consideration to stabilize prices after the worst crash in a generation.“As part of the public policy process, if you will, our interagency partners often get together and talk about a number of different items, but we’ve made no decision on this,” he said. “At some point we will engage in a diplomatic effort down the road. But no decisions have made on anything of that nature.”Oil has lost 48% in March alone as the coronavirus outbreak brings economies worldwide to a standstill. U.S. lawmakers failed to agree on a stimulus bill over the weekend and again fell short of the needed Senate votes on Monday.The severe demand shock has dimmed traders outlooks for consumption with some estimating a collapse of as much as 20 million barrels a day this year.At the same time, a price war between Saudi Arabia and Russia showed no signs of abating. Hopes for a production deal between OPEC and Texas faded amid mounting criticism by regulators and drillers in the biggest U.S. oil state.WTI for May delivery gained 73 cents to settle at $23.36 a barrel on the New York Mercantile Exchange.Brent for May settlement lost 5 cents to settle at $27.03 a barrel on the ICE Futures Europe Exchange after dropping to as low as $24.68 earlier. That’s less than the benchmark’s $24.88 a barrel close on Wednesday, which was the lowest since May 2003.Gasoline futures settled at the lowest level since 1999. U.S. cities are poised to see pump prices below $1 a gallon as the pandemic sharply curtails transportation amid widespread economic shutdowns.Even if crude demand recovers to normal levels by the middle of the year, 2020 is still on course to suffer the biggest decline in consumption since reliable records started in the mid-1960s. Until now, the biggest annual contraction was recorded in 1980, when it tumbled by 2.6 million barrels a day as the global economy reeled under the impact of the second oil crisis.For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg) -- The world’s biggest bond market started the week with more turbulence after a barrage of Federal Reserve measures to support the economy ran into the Treasury secretary’s promise of a flood of long-dated debt.Treasuries embarked on yet another dizzying round trip Monday, building on last week’s unprecedented swings. Yields plunged as much as 16 basis points to 0.68% on the latest raft of emergency interventions from the Fed -- which include support for corporate and municipal-bond markets and unlimited buying of Treasuries. The benchmark then vaulted higher on Treasury Secretary Steven Mnuchin’s pledge to issue a lot of long-term financing. The 10-year yield was last around 0.72%.Though demand for safe assets remains intense, capacity for a huge burst of supply is in question as primary dealers’ balance sheets are laden with government debt, including a record $62 billion maturing in more than 10 years. Some say they’re already hampered in their capacity to function as middle-men across stressed markets. In the meantime, however, the prospect of massive long-term borrowing, especially as Congress debates a fiscal package exceeding $1 trillion, is likely to support a steeper curve, said DWS Investment Management’s Gary Pollack.The stimulus “package that Congress is looking at will ultimately add a lot of Treasury debt to the market, so it will probably keep the curve pretty steep overall,” said Pollack, head of fixed income at DWS.The risk to the Treasury is that a surge of ultra-long supply overwhelms a part of the market that’s struggled with illiquidity in the past couple of weeks. Subadra Rajappa, head of U.S. rates strategy at Societe Generale, was skeptical that demand could hold up among the pension funds and insurers that are the typical customer base for this debt.“I am just not sure there is enough appetite” from asset-liability matching buyers, she said. She’s backing a further steepening of the five- to 30-year curve, from the current 100 basis points, which is just shy of the nearly three-year high it hit last week.Meanwhile, the Fed’s doing all it can to support markets, with programs aimed at the corporate sector and municipalities, as well as backstops for the banking sector. That helped to slightly ease pressures in funding markets Monday, judging by the modest pullback in rates on overnight bank lending relative to the risk-free rate. To be sure, the cost remains close to a post-crisis high.The task ahead remains daunting, as financial conditions -- a measure of strains across risk markets that is closely watched by the Fed -- are the tightest in over a decade.“This is the kitchen sink and more,” Priya Misra, global rates strategist at TD Securities, said of the Fed’s latest moves. “The credit measures help a lot. The Fed has done literally all they could,” and already more than it delivered in 2008-2009.Investors are still waiting on action from lawmakers on promised stimulus to support households and businesses devastated by what’s quickly becoming a nationwide shutdown. Forecasts for the coming quarters are alarming -- Goldman Sachs Group Inc. sees a “sudden stop for the U.S. economy” that will cause an unprecedented 24% contraction in annualized growth next quarter.“For the economy, we still need fiscal measures and Congress needs to get its act together,” Misra said.For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg) -- First they lost money. Now hedge funds want clients to risk even more cash on the bets that caused the pain.LMR Partners, Citadel, Baupost Group and Capital Four Management are trying to persuade clients to inject money into their funds after taking a hit in the coronavirus-fueled market turmoil. Capula Investment Management has had talks with some investors as it considers raising fresh capital, according to people familiar with the matter.Hedge funds are marketing this month’s sell-off as a once-in-a lifetime opportunity to take advantage of unprecedented price dislocations across stocks, bonds and commodities. Their success in luring investors to jump in amid the market collapse sparked by the deadly pandemic –- a shock some are calling a black swan event -- may depend on how well they have navigated the chaos so far. Some have barely lost money, while others have seen drops more in line with market sell-offs.“Liquidity and capital are king right now,” said Adam Blitz, chief investment officer of Evanston Capital Management. “Managers with capital to invest can play offense at a time when most are forced to play defense.”Several long-biased equity, credit and relative value hedge funds have opened mid-month to tap money from existing clients, UBS Group AG said in a note sent by its prime brokerage unit on Friday.Citadel, with about $30 billion in assets, is raising a new relative value fixed-income fund to target opportunities created by the recent surge in volatility. Trades in that strategy helped fuel losses of hundreds of millions of dollars earlier this month before the firm recovered, according to a person.Coatue Management is gathering money for a long-only fund, people with knowledge of the matter said, while D.E. Shaw & Co., which runs more than $50 billion, is opening its biggest hedge fund to fresh cash for the first time in seven years.Legendary fund manager Seth Klarman is also bargain hunting again. His Baupost Group invested about $1.5 billion in recent weeks and he’s seeking more commitments for his hedge fund for the first time since 2011.Managers are maneuvering to exploit the sell-off triggered by the virus, which has spread across continents, forced countries into lock-downs and killed more than 10,000 people. Fears that the pandemic will lead to a deep global recession have ended the longest-running bull market in equities. Firms from Millennium Management to Bridgewater Associates have suffered some of the worst losses in their history this month.There’s no guarantee that hedge funds will succeed in luring more cash. Investors have flooded relatively safe U.S. government money-market funds, pouring a record $249 billion into them in the latest week, according to Investment Company Institute data.“Within the investor community, there is cautious appetite,” said Mithra Warrier, head of U.S. prime brokerage sales at TD Securities. She has seen some large investors make allocations recently, mostly to existing managers to capitalize on specific trade opportunities.The fixed-income basis trade, designed to profit on the price dislocation between bonds and their futures, is one such bet.“There are great investment opportunities right now and some might not play out next week, but will in a year or two,” said Blitz of Evanston Capital, which invests in hedge funds. “But you don’t want the fund to be forced out of compelling positions by margin calls or redemptions, so it’s important that they have a locked-in investor base.”Kite Lake Capital Management and Melqart Asset Management are two London-based investment firms that specialize in merger arbitrage, which involves betting on the success and failure of announced deals. Both are deploying capital and in talks to raise more money to take advantage of plummeting share prices that have caused deal spreads to widen sharply, according to people with knowledge of the matter.Losses at firms raising capital have ranged from a few percent to double digits in the first two weeks of March. LMR Partners fell 12.5% in its main pool while Baupost sunk about 8%. Capital Four Credit Opportunities Fund lost 6.9%, Capula’s relative value fund dropped 5.2% and Citadel fell about 3% in that time.“Raising assets today is like calling the bottom, which seems to be quite a strong statement that very few investors will have what it takes to follow,” said Nicolas Roth, head of alternative assets at Geneva-based private bank Reyl & Cie.For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg) -- The Canadian dollar has looked over the abyss and stepped back, pulled between an historic drop in oil prices and the possibility of an economic rebound later in the year.The coronavirus pandemic, a collapse in Canadian crude to a record low and the rush to U.S. dollars sent the loonie tumbling; at one point this week, it was more than 10% down for the year.While the currency has snapped back some of those losses after oil bounced Thursday, support is key around C$1.455 per U.S. dollar, or 68.59 U.S. cents. That’s about where the loonie bottomed out in early 2016, the last time oil was tanking.Still, the loonie is doing better than the British pound, Norwegian krone, Swedish krona and the currencies of Australia and New Zealand, which all have exposure to oil or natural resources.One theory is that Canada’s economy might be able to bounce back quickly when the pandemic is under control, business resumes and borders reopen.“Conditions could rebound quite aggressively in Canada,” said Simon Harvey, a London-based market analyst at Monex Europe Ltd. and Monex Canada Inc. “If they need to invest in government spending, they will. On top of that, the Bank of Canada has plenty of room to cut rates and stimulate the economy, the same can’t be said for other developed countries’ central banks.”Prime Minister Justin Trudeau announced plans to roll out a fiscal package worth 3% of Canada’s economy as it grapples with fallout from Covid-19 outbreak. At a separate press conference, Finance Minister Bill Morneau called the government’s measures the “first phase” of the response and said the government is prepared to do more if needed.The Bank of Canada’s benchmark overnight lending rate stands at 0.75%, the highest in the Group of Seven, even after emergency cuts of a full percentage point in the past month.“The Canadian economy is much more diversified than some of the other oil producers globally,” Bipan Rai, North American head of foreign exchange strategy at Canadian Imperial Bank of Commerce said by phone.Harvey said the 2016 level remains a “big psychological support.” The currency tested that level on Wednesday and Thursday morning but it has so far hung in. The loonie was trading at C$1.4275 per U.S. dollar on Friday morning. Oil has extended its huge rally from Thursday on President Donald Trump’s vow to get involved in the price war between Saudi Arabia and Russia.Mazen Issa, senior FX strategist at TD Securities, sees grimmer times ahead with auto plant closures, the trade shock, depressed oil prices all hindering Canada’s growth. That, together with heavy consumer debt levels, will hit the nation’s economy from all sides and put further pressure on the loonie.“We may see a bit more consolidation near that C$1.45, C$1.47 area but the reality is this is not an environment where the Canadian dollar will perform well and I don’t think there is any circumstance where markets are going to go long the Canadian dollar,” he said.“If anything, the economy is probably in dire straits now more so than we’ve seen the past simply because the consumer is unable to bail the economy out,” Mazen added. “That C$1.50 to C$1.60 range, I think, shouldn’t be dismissed.”For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg) -- The U.S. dollar tumbled from a record high, suffering its worst fall in more than four years, after a California stay-in-place order curbed greenback buying amid fears the world’s largest economy is headed for a recession.The Bloomberg Dollar Spot Index slipped as much as 1.8%, pushed lower by California Governor Gavin Newsom ordering all of the state’s 40 million residents to go into home isolation starting Thursday evening. That marked the most stringent U.S. effort yet to curb the spread of the coronavirus, raising the likelihood of an economic shutdown akin to those seen in Asia and Europe.It comes on the back of repeated efforts by global policy makers to stem the previously rampant dollar’s advance, with options pricing still indicating bullish sentiment among traders for the currency. The Federal Reserve established temporary liquidity-swap lines with nine additional central banks, including Australia’s and South Korea’s, to ease the dash for dollars.“The dollar is getting sold partly on concern that if California and some other big states follow, unemployment would rise dramatically and push the U.S. into some place between a recession and a depression,” said Mark Grant, chief global strategist at B. Riley FBR Inc. “It’s a knee-jerk reaction of people thinking ‘gee, we didn’t think the U.S. could get into this kind of trouble -- but perhaps they can’.”The dollar gauge slumped from a record high after it rallied more than 8% over the last eight sessions. Demand for the world’s reserve currency had jumped amid a rush for cash in anticipation of a prolonged pandemic, with there being a substantial liquidity mismatch between global demand for U.S. dollars and those on offer.The Australian dollar rose as much as 4.2% to lead Group-of-10 currency gains against the greenback, while the pound climbed 3.4% in its biggest advance since October 2008. The Bloomberg dollar gauge recovered some ground to be 1% lower by 8:30 a.m. in New York.“The softer dollar tone is giving some respite to many badly beaten-up currencies,” said Mitul Kotecha, senior emerging-markets strategist at TD Securities. “It’s early days to say this is a more pronounced dollar reversal,” he said, adding that demand for the greenback remains high.Options prices suggest the dollar could get back on track in the months ahead. Shorter and longer-term risk reversals, a barometer of market sentiment, are bullish on the greenback against most of its major peers, apart from havens the yen and Swiss franc.“While markets have stabilized and some oversold currencies like the pound are recovering, we advise caution given that next week’s global PMIs could underwhelm the already gloomy market expectations,” said Valentin Marinov, head of G-10 currency strategy at Credit Agricole SA in London. “The Covid-19 pandemic is not yet under control. The mad dash for dollar cash could therefore resume.”Unemployment ConcernsThe dollar weakening came as Treasuries rallied following a New York Times report that the Trump administration is asking state labor officials to hold off on releasing precise figures for unemployment until the federal government issues national totals. The report added to speculation of a sharp increase in U.S. unemployment benefits.Goldman Sachs Group Inc. estimates such claims are poised to surge to a record 2.25 million this week, according to an analysis of preliminary reports across 30 states. That is more than triple the prior peak of 695,000 in 1982.“We feel that we are now largely transitioning beyond the shock and denial phases of the cycle,” said Mark Dowding, chief investment officer at BlueBay Asset Management in London. “There may be a sense that in the U.S. attitudes still have further to go in order to adjust, but across Europe it seems like society is now quickly coming to terms with the unfolding crisis.”(Updates prices, comment in final paragraph.)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg) -- Oil surged the most ever in New York as the U.S. president said he could get involved in the standoff between Saudi Arabia and Russia that has rocked crude markets.U.S. futures rose 24% on Thursday, the most since trading began in 1983. Prices are still down almost 60% this year, with the slide accelerating following a failed OPEC+ meeting in early March, after which major producers pledged to pump more in a battle for market share just as the coronavirus crisis crushes demand.U.S. President Donald Trump said he was searching for “medium ground” in the impasse.“It’s very devastating to Russia, because the whole economy is based on that, and they have the lowest prices in decades,” he said. “I would say it’s very bad for Saudi Arabia. But they’re in a fight, they’re in a fight on price, they’re in a fight on output. At the appropriate time I’ll get involved.”“Trump getting involved was bound to happen with the existential threat to the oil industry,” said Walter Zimmermann, chief technical strategist at ICAP Technical Analysis. “This rebound may not have a future though unless Saudi and Russia stop digging their heels in.”Earlier, the U.S. said it would kick off its commitment to fill its Strategic Petroleum Reserve by buying 30 million barrels of American oil.Signs of stress due to the oil crash are also being revealed in the Middle East and other parts of the world. Canadian oil at a record low and some North Sea fields are becoming uneconomic.Meanwhile, policy makers across the globe are trying to strengthen economies against the impact of the coronavirus pandemic. The European Central Bank has unleashed an emergency bond-buying program, and the U.S. Senate cleared the second major bill responding to the outbreak in an attempt to kickstart the economy.White House economic adviser Larry Kudlow said the government might take equity positions as part of corporate rescues.Countries are ramping up measures as the global spread of the virus continues to gather pace with the number of confirmed cases in Europe now exceeding China. Italy’s death count has surged to almost 3,000, while the U.K. imposed tighter controls on movement of people including closing all schools.The Saudis ordered state-run Aramco to keep output at a record high of 12.3 million barrels a day over the coming months. But in a surprise move Thursday, both the kingdom and Iraq cut the rebates on freight costs they give to customers, effectively lifting prices.Despite the prospect of the U.S. intervening in Riyadh and Moscow’s price battle, fears of severe virus-induced demand destruction loom. “I don’t think this is over yet,” said Bart Melek, head of commodity strategy at TD Securities. “Even if the Saudis cut here, it doesn’t matter much. We still have some very bad demand numbers because of Covid 19. Demand could fall 10 to 11 million barrels a day.”See also: Some Oil in Canada Has Already Tumbled Below $10 a BarrelThe higher supply is increasingly taking its toll on the oil market’s structure. Brent’s six-month timespread went to its most bearish since 2009, indicating a big glut. As a result, traders are eyeing lucrative opportunities from storing oil on tankers and hoping to sell it at a profit later.With crude’s price weakness getting more entrenched, traders are increasingly trying to assess the impact on U.S. production this year. On Thursday, a barrel of Permian oil was cheaper than a meal at a steakhouse in the region’s Midland heartland, a sign that producers are struggling to cover their operating costs.For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg) -- Gold investors appear to be bowing out of an increasingly erratic market.Open interest in the precious metal, a tally of outstanding futures contracts, has plunged to the lowest in more than seven months. The drop comes as volatility measures for bullion surge to multi-year highs.Gold futures swung between gains and losses Thursday, dropping as much as 1.2% as the dollar advanced. Pressure to dump bullion to raise cash and cover losses in other markets has sent the metal tumbling this month, blunting the boost from easier monetary policy worldwide, which is a usually boon to the non-interest-bearing metal.“Gold is not really managing to hold its own in the current market environment,” Daniel Briesemann, an analyst at Commerzbank AG, said in a note.Gold futures for April delivery rose 0.1% to settle at $1,479.30 an ounce at 1:30 p.m. on the Comex in New York.Bart Melek, head of commodity strategy at TD Securities, said surging volatility has prompted momentum-tracking commodity trading advisors to exit gold.On Wednesday, the Senate cleared the second major bill responding to the coronavirus pandemic and White House economic adviser Larry Kudlow said the government might take equity positions as part of an aid package. The European Central Bank launched an extra emergency bond-buying program worth 750 billion euros ($811 billion).Haven-seeking investors have turned from gold to the U.S. dollar instead, which soared to a record Thursday.“While stimulus measures/rate cuts -- including the ECB emergency bond-buying program -- are usually positive for gold, we think any support will be short-lived,” said Vivek Dhar, an analyst at Commonwealth Bank of Australia. “There is a clear preference for the U.S. dollar over gold as global market risks intensify, and that should pressure gold prices lower in the near term.”In other precious metals, silver rose on the Comex, while platinum fell and palladium rallied on the New York Mercantile Exchange.For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg) -- The Federal Reserve late Wednesday said it was launching a program to support money market mutual funds as alarm over the coronavirus continues to cause strains in short-term funding markets.The Money Market Mutual Fund Liquidity Facility, established under the Fed’s emergency authority, echoes a version that was set up during the global financial crisis. The Treasury Department will provide $10 billion of credit protection.U.S. Treasury Secretary Steven Mnuchin said in a statement the fund would “enhance the liquidity and smooth functioning of money markets, support the flow of credit to hard working Americans, and help stabilize the broader financial system.”Earlier Wednesday, the Treasury Department had proposed to temporarily guarantee money market mutual funds with taxpayer dollars as part of its coronavirus stimulus plan, according to a document obtained by Bloomberg News.“Money market funds are common investment tools for families, businesses, and a range of companies,” the Fed said in its statement. “The MMLF will assist money market funds in meeting demands for redemptions by households and other investors, enhancing overall market functioning and credit provision to the broader economy.”The Fed’s action comes hours after the European Central Bank’s late-night emergency decision to launch an extra emergency bond-buying program worth 750 billion euros ($820 billion) to calm markets and protect the euro-area economy. Also, at the same time as the Fed announcement, the Reserve Bank of Australia said it was cutting its benchmark rate by a quarter point to 0.25%.Emergency ActionsThe dramatic late-night step was the central bank’s third emergency lending facility in two days, after the Fed on Tuesday unleashed measures to support the commercial paper market and primary dealers to ensure credit keeps flowing in the U.S. economy. It slashed interest rates nearly to zero on Sunday and said it would buy at least $700 billion in securities to soften the blow from the virus that has Americans hunkered down to avoid infection.Money market funds essentially provide credit to everything from banks through repurchase agreements to corporations through purchases of commercial paper. They are a critical link the chain of short-term finance where companies borrow and lend outside the formal banking system.The launch of the Fed’s program to support money-market funds is a “game-changer,” said Priya Misra, global head of interest rates strategy at TD Securities.The facility “couldn’t come a moment sooner,” she said. “It provides a much-needed outlet to money funds to get liquidity.”Carve a FirebreakWith Wednesday night’s action, the central bank is trying to carve a firebreak around this financing and the vehicle is somewhat complimentary to the Commercial Paper Funding Facility, which also aims to protect non-bank short-term funding.It will be administered by the Federal Reserve Bank of Boston.In the U.S., money funds have been under stress as investors have rushed into cash. Households, businesses and other institutions use money funds to park cash they may need in the short term. Reforms to the industry passed in 2016 forced a tiering of investments into funds with differing levels of safety and segregated retail customers from institutional.Break the BuckSimilar steps were taken during the global financial crisis to shore up money funds when a run on them helped cripple credit markets. Under Treasury Secretary Henry Paulson, the department guaranteed more than $3 trillion of fund holdings against losses for almost a year using its Exchange Stabilization Fund.Money market mutual funds proved a crucial weak spot in 2008 after the industry’s largest fund, the Reserve Primary Fund, suffered losses on debt issued by investment bank Lehman Brothers. When its share price fell below the stable $1 promised to customers, investors began scrambling out of most other money funds, forcing their managers into a fire sale of assets.(Adds analyst comment in ninth paragraph.)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg) -- The fallout from the worst rout in credit markets since the global financial crisis is spreading, threatening everything from mortgage debt in Australia to local government bond markets in the U.S.As the deadly coronavirus pandemic brought more grim headlines Wednesday, risk gauges in the U.S. and Europe pushed out further in another volatile session. The crisis has also closed in on Japan’s $650 billion local credit market, which had been an oasis of calm.In the U.S., even the $3.9 trillion state and local government bond market, which usually functions as a haven, has seen yields surge as investors pull out their cash, triggering waves of forced selling by fund managers who need to raise money. That has saddled investors with their biggest losses since 1987 and effectively locked states and cities at least temporarily out of the bond market, with all the big sales planned for this week on hold.Treasuries and other sovereign bond yields have marched higher ahead of trillions of dollars in expected stimulus globally. The U.S. Senate passed a second major relief bill, separate from an additional economic rescue package that President Donald Trump’s administration estimates will cost $1.3 trillion. The European Central Bank launched an extra emergency bond-buying program worth 750 billion euros ($820 billion) to calm the worsening financial crisis.“You can’t buy risk,” said Mark Nash, head of fixed income at Merian Global Investors in London. “We need easier financial conditions and some virus light at the end of the tunnel, and we are seeing neither at the moment.”U.S.CDX is approaching financial crisis levels as traders weigh the efficacy of fiscal and monetary stimulus to counter the effect of the coronavirus. That kept borrowers at bay, a stark contrast to Tuesday’s onslaught.Investment-grade bond spreads rose 30 basis points to 285 basis points, the widest level since July 2009, while high yield widened 58 basis points to 904 basis pointsYields on top-rated 10-year municipal bonds have more than doubled since March 9 to 1.86%, according to Bloomberg’s benchmark index. For debt that’s due in three months -- which is among the easiest for fund managers to sell in a hurry -- the yields have more than tripled to 1.6%JetBlue was cut one notch to BB- by S&P and may still be cut further, while Delta’s bonds fellMallinckrodt failed to line up funding for a loan deal designed to ease its debt load and help settle massive legal claims tied to its alleged role in the nation’s opioid crisisMoody’s followed S&P in downgrading Hertz, cutting the company one level to B3, with a negative outlookMoody’s also cut Occidental Petroleum Corp.’s credit rating cut to junk, saying its purchase of Anadarko “continues to burden the company’s balance sheet”The leveraged loan market has plunged to levels not seen since the financial crisis, signaling higher default rates and a potential funding crunch aheadThere’s still plenty of pent-up issuance in the investment-grade market, where borrowers have come forward opportunistically mostly to refinance commercial paper and other debtU.S. investment-grade bonds in the aircraft leasing industry are trading at distressed levelsThe front-end is especially feeling the pain, as pressure builds on companies to meet near-term obligations. Just 72% of short-dated debt now trades above par, versus 99% 10 days ago, according to Deutsche Bank strategist Craig NicolOaktree Capital Management is planning a new distressed debt fund, co-founder Howard Marks said in a note to clientsHere’s how cash-hungry companies could bite $700 billion out of banksEuropeFrance’s financial regulators helped banks including Societe Generale and Credit Agricole respond to the growing coronavirus crisis by eliminating a key capital requirement to keep credit flowingItaly’s Prime Minister Giuseppe Conte has proposed joint EU debt issuance, with German chancellor Angela Merkel saying she’s happy for her finance chief to explore the proposal with other ministersWhile joint EU debt remained a taboo for Germany even at the height of the financial crisis after 2008, Merkel said there are “no conclusions” at this stagePoland and the Czech Republic both announced fiscal stimulus packages aimed at shielding their economies from the impact of the virus. They offered holidays in debt repayments, loan guarantees and co-financing of workers’ wagesThe doors to Europe’s primary bond market slammed shut again on Wednesday, after a trio of borrowers attempted to get deals done a day earlier with mixed success. Toronto Dominion bank halted a sale of pound-denominated covered bonds, citing “adverse market conditions,” while Royal Bank of Canada failed to tighten pricing on a euro-denominated sale of covered notesRegular primary sales will only resume once virus-fueled volatility comes to an end, according to market participants interviewed by Bloomberg News, yet they have no idea when this might beMeasures of credit risk are climbing, with default swaps protecting high-grade European firms jumping as much as 10% today to the highest since June 2013Euro IG bond spreads ended Wednesday at 231 bpsCitigroup has more than doubled its forecasts for euro investment-grade and high-yield bond spreads this year; it now sees euro IG spreads versus swaps at 140 bps, and euro HY spreads ending the year above 600 bpsAsiaGlobal airlines have $29 billion of outstanding debt coming due by the end of the year, with most coming from China Southern and China EasternSpreads on Asian dollar bonds were 5-15 basis points wider, according to traders. That leaves them at their highest in about a decade, according to a Bloomberg Barclays indexThe Markit iTraxx Asia ex-Japan index of credit-default swaps was indicated about 2 basis points wider, according to trader pricesIn Australia, the mortgage-backed security market is “effectively closed” as yields on senior bank debt are up as much as 160 basis points in two weeks, according to Robert Camilleri, co-founder and head of structured credit at Realm Investment HouseIn Japan, S&P cut its outlook on SoftBank to negative late Tuesday, citing the broad market declines and the conglomerate’s plans for a share buybackIn India, the extra yield investors demand to own three-year top-rated corporate bonds over sovereign notes has jumped to a more than four-month high of 109 basis points. Here’s a chart showing that:(Updates U.S. details throughout)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg) -- The Federal Reserve unleashed two emergency lending programs on Tuesday to help keep credit flowing to the U.S. economy amid strain in financial markets that it blamed on the coronavirus pandemic.The central bank is using emergency authorities to establish a Commercial Paper Funding Facility with the approval of the Treasury secretary, according to a Fed statement on Tuesday. The Treasury will provide $10 billion of credit protection from its Exchange Stabilization Fund. Later in the day it announced a Primary Dealer Credit Facility, also with backing from Treasury.The moves follow mounting pressure to act after the Fed’s Sunday evening emergency interest-rate cut to nearly zero and other measures failed to stem market stress as investors reacted to the risk that the virus will tip the U.S. and global economy into a recession.Help Businesses“We heard loud and clear there were liquidity issues,” Treasury Secretary Steven Mnuchin told a White House press conference, referring to the commercial paper facility. “This is critical to American business.”The Fed said it will provide financing to a special-purpose vehicle that will purchase A1/P1 rated commercial paper from eligible companies, and purchases will last for one year unless the Fed extends the program.Its primary dealer credit facility will offer overnight and term funding with maturities up to 90 days. It will be available for at least six months from March 20, at an interest rate equal to the discount rate, which was lowered to 0.25% on Sunday as part of the central bank’s emergency action.“They are doing everything within their powers,” said Jim O’Sullivan, chief U.S. macro strategist at TD Securities. “There is a lot of stress in the market and this should help to alleviate that stress. This is a huge shock to the system. More broadly, we are heading into a sharp slowdown in the economy.”Market ReliefThe S&P 500 index, rebounding from the steepest losses since 1987 the day before, closed 6% higher as investors digested the moves as well as bold fiscal stimulus proposals from the Trump administration for as much as $1.2 trillion.Still, strains remain. Three-month euro cross-currency basis swaps have been notably wider than they have been on average this year. Stress was also evident earlier Tuesday when the three-month London interbank offered rate for dollars, a benchmark set daily that underpins swaths of global financial products, recorded its biggest one day jump in over a decade.The steps comes as central banks and governments around the world roll out emergency liquidity measures for markets and economic stimulus programs designed to soften the impact of the spreading coronavirus. A number of economists have said virus-triggered closures and national lock-downs are making a global recession increasingly likely.The Fed on Sunday also announced enhanced dollar swap lines with other central banks and said it would buy at least $700 billion in Treasuries and mortgage backed securities to ensure market functioning and keep credit flowing.“At this point the Fed has dusted off and rolled out the facilities at its fingertips from the 2008 crisis: a backstop for CP and effective access to discount window funding for primary dealers,” economist Julia Coronado, president of MacroPolicy Perspectives LLC, wrote in a tweet.Flight to SafetyIn financial markets, the rush of investors into cash and other safe havens has threatened to deny companies a crucial source of short-term lending. Firms frequently issue commercial paper -- IOUs that generally mature in fewer than 270 days -- to fund everyday expenses, like rent and payroll.The cost of borrowing in the commercial paper market for 90 days spiked an additional 1 percentage point Monday to reach more than 3%, according to Federal Reserve data.Companies that have sought to issue commercial paper in recent days have still been able to, according to a person familiar with the matter who asked not to be named because the transactions are private. But secondary-market trading has been weak, a sign that some dealers may be pulling back, the person added.Crisis-Era Play BookThe new facilities reprise programs the Fed rolled out in the depths of the financial crisis in October 2008 as global credit markets seized up. At the time, companies were even more reliant on short-term lending and the crisis left several industrial giants, including General Electric Co., scrambling for cash.The controversy that surrounded that commercial paper program, and several other facilities implemented during the crisis, however, spurred lawmakers to put greater restrictions on the Fed’s use of emergency lending.Under changes created by the Dodd-Frank Act, the Fed has to secure permission from the U.S. Treasury to purchase commercial paper, and must also report to Congress on the program’s recipients and the collateral that is offered to secure the loans.Despite clearing those hurdles, the step could prove controversial again, with some Democrats likely to call it a bailout for corporations and banks while Americans struggle to pay bills. Some Republicans may also attack it as unnecessary government intervention in the market.For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg) -- With the market for short-term corporate debt seizing up in the U.S., some of the world’s biggest companies, including Exxon Mobil Corp. and PepsiCo Inc., turned back to the bond market to raise cash on Tuesday.In a sign of just how badly financial markets have been thrown out of whack by the coronavirus outbreak, yields on normally ultra-safe corporate debt maturing in as little as 30 days -- known as commercial paper -- have been surging faster than yields on bonds maturing in 10 years or more.The Federal Reserve announced steps to try to unlock the commercial paper market, but some borrowers opted not to wait for that to happen. Exxon led the day with an $8.5 billion sale, while Pepsi borrowed $6.5 billion.Many of the issuers Tuesday were planning to use the debt proceeds to refinance their commercial paper, which companies rely on to cover short-term financing needs like payroll.Read more: Fed Restarts Commercial Paper Facility to Ease Market StrainUsually it’s cheaper for companies to borrow in short-term markets rather than issuing longer-maturity bonds. But the nearer-term risk of recession and rising defaults have cast doubt on some companies’ ability to finance day-to-day operations. Companies have issued less commercial paper as a result and have often resorted to drawing down credit lines instead.“There’s definitely issues in the commercial paper market, and these companies are going to hit the bond market to shore up their financing,” said Daniel Oh, a portfolio manager at Osterweis Capital Management.The Fed will reintroduce the Commercial Paper Funding Facility, a measure from the financial crisis to shore up short-term funding markets, according to a statement Tuesday. The Treasury will provide $10 billion of credit protection from its Exchange Stabilization Fund. The Fed rolled out the facility in 2008 as global credit markets seized up.“By providing short-term credit, the CPFF will help American businesses manage their finances through this challenging period,” Treasury Secretary Steven Mnuchin said in a separate statement.Verizon Communications Inc. led the charge of almost a dozen frequent and high-quality U.S. investment-grade issuers Tuesday that managed to sell $27.6 billion of debt. They were the first to do so since Friday.Read more: IG ANALYSIS US: Exxon, Verizon, PepsiCo Lead Biggest Day of 2020Europe’s market also rebooted, starting with three covered deals, among the safest of offerings due to their asset coverage. However, one of the initial borrowers later chose to stand down, citing “adverse market conditions.”Primary markets have been mostly shut in the last few weeks as the coronavirus outbreak has amplified risk premiums and tips the economy closer to recession. In the U.S., investment-grade spreads have nearly doubled in less than two weeks, and the high-yield market hasn’t had a deal price since March 4.Elsewhere in global credit markets today:U.S.Investment-grade and high-yield credit-default swaps indexes improved as Wall Street stocks rallied after the U.S. government stepped up its efforts to offset the financial damage caused by the coronavirus. Treasuries slumped.Investment-grade bond spreads ended the day at the highest since 2009 at 255 basis points, versus 242 basis points Monday despite the risk-on rally in other assets, while high-yield spreads are now at the widest since 2011 at 846 basis points, up from 827 basis points yesterdayHigh-yield bond spreads have to blow through 1,000 basis points before there’s a buying opportunity, according to Oksana Aronov, head of market strategy for absolute return fixed income at JPMorgan Asset ManagementThe cost to protect against a default by Boeing surged to the highest level on record as the planemaker was said to have asked White House and Congressional officials for short-term aid for itself, suppliers and airlinesS&P says the default rate on non-financial corporates in the U.S. may rise above 10% and into the high single digits in Europe over the next 12 monthsMore than 30 power and energy companies are in talks with banks to discuss raising new financing or drawing down on their existing loan facilitiesEuropeThe earlier positive tone was enough to tempt a trio of borrowers to open sales of new top-rated covered bonds, which are among the safest of debt securities because they’re backed by ring-fenced assets, usually mortgages. However, TD Bank later stood down, citing market conditions.Royal Bank of Canada offered 1 billion euros ($1.1 billion) of covered bonds due in five years at 40 basis points above midswaps after failing to tighten pricing from an opening targetTD Bank and Canadian Imperial Bank of Commerce had both opened books on floating-rate sterling sales, with TD eventually deciding to postpone its sterling saleThe coronavirus is putting Europe’s banks under the kind of systemic pressure last seen during the 2012 euro zone debt crisisEuro high-grade bond spreads closed 10bps higher Monday at 191 and the highest since September 2012Almost three-quarters of euro IG company bonds are indicated at their lowest level in a year, data compiled by Bloomberg showEuro high-grade company bond yields have nearly quadrupled in three weeks and now stand at about 1.26% and the most since January 2019AsiaCurrency declines are exacerbating problems for lower-rated companies, with a 4% drop in the Indian rupee versus the dollar in the last month threatening to increase debt servicing costs for companies that face a record $7.5 billion of overseas bonds and loan repayments from April-June.Spreads on Asia dollar bonds were about 5-20 basis points wider on Tuesday morning, with wide bid-offer spreads, according to a trader. That leaves spreads set to reach their highest in more than eight years, according to a Bloomberg Barclays indexStill, the Markit iTraxx Asia ex-Japan index of credit-default swaps fell about 6.5 basis points to about 137, according to traders, easing from its highest level since 2016, according to data compiled by BloombergKorea Development Bank extended funds to three low-cost carriers: Tway Air, Air Seoul and Air BusanAustralian funding markets remain stressed even as the country’s central bank pours record amounts of liquidity into the system. The three-month bank bill-OIS spread is holding at levels last seen a year ago amid the trade warFor more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg) -- After twice seeing stocks on Wall Street tumble by the most since 1987 in recent days, market participants are largely averse to calling a bottom to the rout in global equities.Investors are grappling in the dark on earnings estimates as authorities around the world shut down economic activity in an effort to avert a humanitarian disaster caused by the coronavirus. That’s overshadowing moves by economic policy makers to cushion the impact. With volatility expected to remain high, traders are on the lookout for more fiscal stimulus and, most importantly, evidence the outbreak is on the wane.Here are some of the views of investors and strategists:UninvestibleNadine Terman, chief executive officer of Solstein Capital LLC:“When VIX is above 31, we call it uninvestible. The issue is that safe havens like gold or Treasuries can go down just with everything else. What you have to do is be very cautious about going into longs.”Room for De-RatingJPMorgan Chase & Co. strategists including Mislav Matejka:“In order for a more lasting market rally, we believe that we need to see either an exceptional policy response, which has not happened yet, or more directly, we would need to become comfortable that the peaking out in the virus outbreak is at hand. This still seems to be quite far away, and things could get a lot worse before they get better.”On stocks, “we note that markets lost more than half of their initial value during the last two recessions, versus current 20%. In addition, the last three recessions saw P/E multiples of 10.1x, 13.8x, and 10.2x at the low, while current P/E stands at 15.2x, and 14.5x at the recent trough on 12 March. There could be room for more de-rating from here.”Encouraging SignsJean Boivin, Head of BlackRock Investment Institute:“What will it take to stabilize markets? A decisive, preemptive and coordinated policy response is key, in our view. We see encouraging signs on both sides of the Atlantic that such a monetary and fiscal response is underway. The sharper the containment measures taken and the deeper the economic hit in the near-term, the more confident we should be about the rebound after such measures are lifted. We see the shock as akin to a large-scale natural disaster that severely disrupts activity for one or two quarters, but eventually results in a sharp economic recovery.”Mind the CP GapNed Rumpeltin, European head of currency strategy, Toronto Dominion:“The Fed is doing a lot but it has a bit more to do. The dislocations we are seeing in commercial paper markets, for example, is an area that needs to be addressed. That will help ease pressures elsewhere, as we still have plenty of signs of stress, illiquidity, and wide spreads. Beyond the Fed, we are encouraged to see policy responses accumulating. The G7 pledged to cooperate on the virus response while the EU finance ministers are moving clearer in the direction of a stronger fiscal response. There is still some distance to travel, but we are at least on the right track. It may be very difficult to begin pricing in any sort of real recovery until the pace of contagion starts to slow.”Impossible to PredictJon Hill, U.S. rates strategist at BMO Capital Markets:“That the VIX closed above 80 for only the third time in history is deeply concerning. The other two instances were during the global financial crisis in the fourth quarter of 2008. It’s now apparent that we’re in the depths of the Covid-19 financial crisis of 2020, with much left to be written. What comes next is nearly impossible to predict, but escalating fiscal injections and a commercial paper funding facility look to be the proximate policy steps.”Government ActionMark Haefele, chief investment officer at UBS Global Wealth Management:“Governments have started to announce the sort of targeted fiscal policies that the market is looking for -- aimed at helping viable businesses survive the crisis. But to reassure markets in the absence of better news on the spread of the virus, we may need to see a more open-ended commitment from governments to assist companies and individuals facing cash flow problems arising from the Covid-19 outbreak.”Still TemporaryJim Paulsen, chief investment strategist at the Leuthold Group:“Beginning this week, economic reports will most likely start reflecting the negative impacts of the recent virus-related shutdowns. No doubt, the news will get worse, but at least investors will finally be reconnected with fundamental information flow. The fear of bad data is often worse than its reality.”“The essential premise widely believed when this crisis began -- that it would be temporary -- still appears to be its most likely outcome. Markets will still be apt to look beyond the current economic hit if a consensus develops that it is indeed temporary, and the economy will recover. And, stock prices and bond yields will not only increase to reflect a pending recovery but will rise because of a reversal of fears.”Wait it OutEleanor Creagh, market strategist at Saxo Capital Markets:“It is too early to tell whether the health crisis will develop into a more serious and lasting global solvency crisis, or how deep and dark a recession would be. Confidence is frail and the fear of the unknown and prospect of continued aggressive economic shutdowns is enough to keep risk assets under pressure. There will come a time for bargain hunting, but we are inclined to wait it out. Plan for the best and prepare for the worst.”Correlation PanicAltaf Kassam, EMEA Head of Investment Strategy & Research at State Street Global Advisors:“What makes for a panic feel is the speed and broad-based nature of the sell-off, not the absolute levels we have: We’ve seen a higher VIX, a lower oil price, and steeper credit spreads in the recent past, but not all at the same time, and together with the lowest rates ever.”“The more the coronavirus spreads, the more financial markets will continue to sell off. The question now is what more aggressive, coordinated responses policy makers can offer to further support markets considering the underwhelming response to policy action so far.”Peak UncertaintyManishi Raychaudhuri, head of Asia Pacific equity research at BNP Paribas SA in Hong Kong:“Investors don’t have a sense of where the earnings are likely to be -- in fact, those are the most basic variables.”“Possibly we’re living in an environment of peak uncertainty.”Generational MovesJohn Woods, chief Asia-Pacific investment officer at Credit Suisse Group AG:“For as long as we see concern over the policy reaction, it’s far too soon to call an end to this crisis.” Even so, “increasingly I’m of the view that the worst of the damage is behind us.”“The volatility that we have seen in the markets over the last week or so happens only once or twice in a generation.”Confidence CrisisOlivier d’Assier, head of APAC applied research at analytics firm Qontigo:“While it is not yet a financial crisis, it is already a crisis of confidence. When confidence goes, everything goes. It does not matter what ‘rational’ monetary or fiscal measures are hastily put in place, investors simply do not have enough confidence to make a forecast of return and therefore only focus on the risk side of the equation.”No Sign of BottomMark Galasiewski, chief Asia-Pacific analyst at Elliott Wave International:“Before you see a bottom you want to see markets returns diverge across asset classes. Right now, everything seems to be correlated, falling uniformly so there’s no sign of a bottom yet.”(Adds BlackRock Investment, Toronto Dominion)\--With assistance from Cormac Mullen, Shery Ahn, Matthew Burgess, Gregor Stuart Hunter, Abhishek Vishnoi, Ishika Mookerjee, Lilian Karunungan, Cecile Gutscher and Anchalee Worrachate.To contact the reporters on this story: Andreea Papuc in Sydney at email@example.com;Joanna Ossinger in Singapore at firstname.lastname@example.orgTo contact the editors responsible for this story: Christopher Anstey at email@example.com, Cecile Gutscher, Sid VermaFor more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg) -- If traders hoped Friday’s turnaround would prove more than a moment of relief for the world’s shell-shocked markets, an emergency interest-rate cut by the Federal Reserve and coordinated steps by other central banks failed to bring any lasting sense of stability.The dollar fell across the board as the U.S. central bank lowered rates to 0%-0.25%, a level last seen in the wake of the 2008 financial crisis. The yen climbed more than 1% and the euro erased losses to add 0.7%. The currency market was the only one active among major markets when the Fed measures were announced. S&P 500 futures tumbled more than 4% as trading began at 6 p.m. in New York, tripping exchange trading curbs, as contracts on Treasuries surged. Rates strategists warned that part of the U.S. yield curve could soon turn negative.Traders were pricing in another steep rate reduction to address the fallout from coronavirus at the Fed’s March 17-18 meeting but the timing and extent of Sunday’s announcement still came as a shock. Beyond the rate cut, the Fed promised to boost its bond holdings by at least $700 billion and said it would allow banks to borrow from the discount window for as long as 90 days and reduce reserve requirement ratios to 0%.“It’s pulling Wednesday’s meeting forward -- a rate cut, QE and swap lines to make sure the market plumbing is working sufficiently,” said Mark McCormick, global head of FX strategy at Toronto Dominion Bank. “The knee-jerk is negative for the U.S. dollar given the Fed has now slashed the cost of selling it.”Fed Chairman Jerome Powell will hold a press conference at 6 p.m. Washington time to discuss the actions. The Fed also united with five counterparts to ensure dollars are available around the world via swap lines, the statement aid.The options market signaled that currency volatility remains elevated after one of the most turbulent weeks since 2008 amid funding concerns that stoke demand for the greenback.“The USD should absolutely be sold,” Bipan Rai, North American head of foreign exchange strategy at Canadian Imperial Bank of Commerce, wrote in a message. “The Fed just implemented emergency measures and cut rates to zero while expanding its balance sheet by 16%. That’s a bad concoction for the greenback.”Earlier, the Reserve Bank of New Zealand set the tone for what promises to be another busy week for monetary policy, cutting its key rate to 0.25% from 1% in an emergency decision in Wellington.The nation’s currency plunged to its lowest since May 2009 in early trading Monday after the decision, before erasing that loss when the Fed followed with its own unexpected cut. Australia’s currency -- which tends to rise and fall with risk appetite -- swung to a gain after touching its weakest since 2008 and the Norwegian krone bounced back from a fresh record low versus the greenback.While governments and central banks around the world announce unprecedented economic-stimulus measures -- indicating a growing willingness to coordinate their actions -- economists say virus-triggered closures and national lockdowns are making a global recession all but unavoidable. That means further market gyrations in the week ahead, gains for havens such as U.S. Treasuries, and more nervousness in stocks, commodities and emerging markets.“While the drop in rates to zero was priced in for the Fed this week, the timing of the rate cut itself has taken many by surprise,” said Simon Harvey, an FX analyst at Monex Europe. “Markets have already bullied the Fed into cutting rates to zero, but the associated liquidity package all in one day dwarfs what was seen after 2008.”Here are more comments, made before the Fed’s action, on what to expect as markets open Monday:Andrew Sheets, Morgan Stanley’s chief cross-asset strategist:“Global markets are facing their gravest challenge since the Great Recession”“COVID-19 will have a dramatic impact on the global economy and has raised the risk of a U.S. and global recession. It is a negative shock to both supply and demand, one that is uniquely difficult for policy makers to ‘fix”’“Given the speed and one-way nature of the current sell-off, we think that the probability of a reversal, at least temporarily, has increased”“The catalyst, we think, will be market weakness helping to elicit a more aggressive policy response”“The start of QE by the Fed, last week’s expansion of QE by the ECB and the Bank of Japan’s acceleration of ETF purchases are starting to look more and more like a coordinated policy response”“Strategically, we’ve closed our cautious position in U.S. equities, and are gradually closing a cautious position in U.S. credit.”James Reeve, the chief economist at Samba Financial Group in Riyadh:Recent government measures “are very welcome, and the market is responding positively to them. Whether or not is going to be enough to go beyond and calm financial markets dislocations we have seen in different segments and to lift the economy back into growth, I’m not so sure”“There still is an awful large overhang of debt in the U.S. corporate sector, and if high-yield continues to spike, then you have got a problem. Even if high-yield comes back down, it is a consumption-based economy, and people are staying at home, and that is the real worry. Corporate profits are just going to fall”The Federal Reserve is right “to target those sectors of the credit market that are distressed. I think most people are expecting a further 50 basis-point cut this week, which is positive”“Bond markets will be looking beyond fiscal stimulus and what it means for debt loads.”Ryan Lemand, the senior executive officer at ADS Investment Solutions Limited in Abu Dhabi:“This is the time of central banks and, unfortunately, they lost very, very valuable ammunition over the past few years trying to avoid the recessions”“We are still rolling into Chinese assets, where we see bargains”“We are also advising clients to look into” assets in the nations of the Gulf Cooperation Council“The GCC, in our opinion, has taken the right stance for very strict containment and they are taking commensurate actions from the central banks to go hand in hand with the legacy policies, such as relaxing loans.”Edward Bell, senior director for market economics at Emirates NBD PJSC in Dubai:“At the moment, uncertainty in markets is paramount and the modest rally we saw on Friday for both Brent and WTI, amid a surge in equity prices too, probably reflects positioning more than fundamentals.”“As global travel comes as close to an abrupt halt as is seemingly possible and major economies hit the pause button the impact on oil demand going forward will most likely be worse than the IEA’s recent downside risk projections.”D’Ambrosio, the Malta-based chief executive officer at Axiory Global.“In this situation and in absence of further shocks as the coronavirus epidemic unfolds, the stock market might regain some more terrain in the coming week, with bond yields rising, especially in the U.S., and gold possibly further shedding some more of the gains posted earlier this year. Such a scenario might be reinforced by the coronavirus situation in China normalizing, as seems to be the case”“The FOMC meeting will be crucial to set the mood for the entire week. As a cut of at least 50 basis points is almost certain, the focus will be on the other measures that will be announced in order to support the financial markets and avoid, or at least limit, the extreme volatility we have experienced last week”“A monster $1.5 trillion plan has already been announced and implemented and the result has been the stock market surge on Friday. But still, every word of the Fed chairman statement will be weighed to understand what the Fed outlook and future moves are”“The coronavirus impacted on a situation that was already signaling stress, with the slowdown in global demand which started in 2018, along with the trade wars and the stock-market valuations, which have become dependent on external stimulus pumped in by central banks.”(Updates with currency moves from second paragraph.)\--With assistance from Filipe Pacheco, Michael G. Wilson and Vassilis Karamanis.To contact the reporters on this story: Susanne Barton in New York at firstname.lastname@example.org;Jack Pitcher in New York at email@example.com;Justin Carrigan in London at firstname.lastname@example.orgTo contact the editors responsible for this story: Jenny Paris at email@example.com, Rachel EvansFor more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg) -- As investors try to make sense of one of the swiftest downward spirals in market history, some of Canada’s biggest money managers are advising clients to hold their nerve.After a wild week, the S&P/TSX Composite index staged a late comeback on Friday after U.S. President Donald Trump and other leaders said they would boost their efforts to help the economy. Trump instructed Energy Secretary Dan Brouillette to buy “large quantities of crude oil” for the U.S. strategic reserves, boosting crude prices.The Bank of Canada cut interest rates by half a percentage point to buffer the nation’s economy, while Finance Minister Bill Morneau also announced moves to help small- and medium-sized businesses get credit.Still, the Canadian benchmark closed a whopping 15% lower at the end of the week -- its biggest weekly drop since 2008 with investors assessing the likelihood of a global recession as the coronavirus pandemic and oil price war pummeled markets. Earlier in the week, it plunged 10% and on Thursday it nosedived 12%. The loonie has weakened about 3% this week against the greenback and government bond yields have flirted with record low levels.Read more: Historic Stock Market Drop Exposes Canada’s Economic Fault LinesSince its Feb. 20 peak, Canada’s stock index has tumbled 24% in three weeks. That’s about twice the 15% slump in the three weeks after Lehman Brothers Holdings Inc. collapsed during the 2008 financial crisis.On Thursday, Bloomberg gathered with three top investors to discuss where we go from here. Around the table were Lesley Marks, chief investment strategist at BMO Private Wealth, which has C$210 billion ($152 billion) of assets; Rob Vanderhooft, chief investment officer of TD Asset Management, which manages C$394 billion; and Kevin McCreadie, CEO and CIO of AGF Management Ltd., who sets the direction for about C$37.4 billion in assets.Here’s a synopsis of the discussion.Market Structure TestFinancial markets are experiencing extreme movements not seen since the 2008 financial crisis. But the structure of the market has changed since then and that’s a factor in the volatility, said Marks.Exchange-traded funds are now an easier way for investors to move money quickly. “Historically, it may have taken a longer period of time to move money in and out of asset classes versus using an ETF,” she said.ETF assets had grown to more than $5 trillion globally this year compared with about $700 billion when the financial crisis first started, according to Bloomberg Intelligence.Program trading may be another reason that activity is frantic in the first and last 30 minutes of any trading day and quieter in between.Vanderhooft at TD said a dramatic drop in liquidity is also contributing to the downturn. “Liquidity is a coward and it disappears at times of market disruptions and that’s certainly what we’re seeing right now.”Either way the market is a different beast, the strategists said.“They are not traditional market makers any longer,” said McCreadie. “I think in this period of volatility, we will see how the market structure has evolved and will it hold up.”Oil And TroubleThe hit to oil prices is compounding the damage from the virus pandemic in Canada, where 15% of the TSX index is made up of energy stocks. The breakup of the OPEC+ alliance led to swift price war on crude, with catastrophic consequence for the oil patch. The country’s benchmark crude, Western Canadian Select, is at $18.74 a barrel.“If you look at the impact on the oil market, it’s very, very negative for Western Canada,” Vanderhooft said. “As bad as $31 WTI is, $20 WCS is a lot worse. A lot of companies that were already teetering will go under.”Smaller producers may have a harder time surviving the current crash in prices than during the 2014 crisis because banks are less inclined to prop them up, added McCreadie.“This time around a lot of these smaller players aren’t going to make it,” he said. “I think you’re going to be dealing with bankruptcies.”Read more: Recession Calls Mount in Canada on Double Hit from Virus and OilThe increased focus on climate change and sustainability may be factoring into banks’ thinking more now, said Marks. “You already had that major headwind without the latest crisis, without a price war, without the situation between the Saudis and the Russians. We think this will just fuel the fire.”Vanderhooft said that his firm has moved to a “more negative position” on the Canadian dollar as a result of the oil-price hit. The loonie hit fresh four-year lows at one point on Thursday.Read more: No Respite Seen for Loonie With Oil War, Pandemic Raging OnCarry OnAll three strategists say the markets will come back. McCreadie and Vanderhooft see the current turmoil as different than 2008.“2008 was a true credit crunch, people didn’t trust each other, banks stopped lending, there was no repo. The world stopped,” McCreadie said, adding there’s unlikely to be “system failure” now.As coronavirus cases start to ebb, as they have in China, that will likely be when the market begins to turn back up, especially if governments get their act together with fiscal stimulus to aid the economy.“We’re not playing this as a multi-year bear market,” he said, though odds of a recession in North America have clearly risen. “I think it could be the pause that resets the cycle.”Marks said BMO hasn’t seen any substantial fear when it comes to asset outflows, with much of the money shifting to bonds from equities. “In conversations with clients, we haven’t seen that sense, that pervasive sense of panicking, that ‘Get me out of the market’ across the board.’”“We will get through this event,” McCreadie said. “We always do.”Next Steps“You talk about fully balanced portfolios, that’s where clients need to be,” said Vanderhooft. “At times of stress like this, you kind of figure out why that’s the case.”McCreadie’s team at AGF will be looking at paring back investments that have generated double-digit returns and add some of its cash back into markets over the next few weeks.Marks said she is standing pat after BMO Private Wealth’s Investment Counsel Business reduced its equity exposure in November. While stocks have become cheaper, the lack of visibility makes it “hard to have conviction to step in,” she said.\--With assistance from Danielle Bochove.To contact the reporters on this story: Jacqueline Thorpe in Toronto at firstname.lastname@example.org;Divya Balji in Toronto at email@example.comTo contact the editors responsible for this story: Derek Decloet at firstname.lastname@example.org;Kyung Bok Cho at email@example.comFor more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg) -- The Bank of Canada is acting to inject liquidity into the country’s funding markets in a bid to bolster financial stability, following similar efforts by the Federal Reserve.The bank will “proactively” support interbank funding by increasing the frequency with which it purchases Canadian government bonds to weekly, from every two weeks, and widening the terms to include six-month and 12-month operations, it said Thursday in a statement.“The Bank of Canada continues to closely monitor global market developments and remains committed to providing liquidity as required to support the functioning of the Canadian financial system,” it said in statement.The bank, which hasn’t done one-year repo in a decade, will start with C$7 billion ($5 billion) of purchases on March 17.The move comes the same day the Federal Reserve took aggressive steps to ease what it called “temporary disruptions” in Treasuries, promising a cumulative $5 trillion in liquidity and widening its purchases of U.S. government bonds.For the Canadians, the plan to boost liquidity follows the biggest plunge in Canadian stock prices in eight decades on mounting concern about the scale of the economic hit from the coronavirus pandemic.Policy makers already slashed the bank’s benchmark interest rate by half a percentage point this month amid concern about the widening fallout. Since then, oil prices have plunged, adding another shock to an already faltering economy and raising the likelihood of more rate cuts.Swaps trading suggests investors are expecting another 75 basis points in cuts by mid April.“In addition to using just the blunt tool of lowering interest rates, they’re trying to help with liquidity in the market,” said Ian Pollick, head of rates strategy at Canadian Imperial Bank of Commerce in Toronto. “They’re just liquefying the system. It’s consistent with moves we saw earlier today with the Fed.”On top of the repo operations, the bank will expand the scope of a bond buyback program in which it sells newer bonds for older issues in a bid to “add market liquidity and support price discovery.”These buybacks will now take place at least weekly and go beyond the typical 30-year maturity, with the first “switch” of C$500 million taking place on March 16.Currently, the Bank of Canada only purchases securities every other week through one-month and three-month repos, in the range of C$3 billion to C$6 billion -- a practice that will continue. The sale of six-month and 12-month repos will take place in alternating weeks.”We don’t expect today’s announcement to have a material impact on the overall level of rates; the cash management buybacks may take some bonds out of the market on net, which would be supportive for fixed income, but that impact will likely be marginal,” Andrew Kelvin, senior Canada rates strategist at Toronto-Dominion Bank, wrote in a note to clients. “Today’s announcement should help promote liquidity however, by offering dealers more funding and an outlet to sell less liquid GoCs.”\--With assistance from Divya Balji, Michael Bellusci and Erik Hertzberg.To contact the reporter on this story: Shelly Hagan in ottawa at firstname.lastname@example.orgTo contact the editors responsible for this story: Theophilos Argitis at email@example.com, Chris Fournier, Carlos CaminadaFor more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.