(31 March 2020)DAILY MARKET BRIEF 2:Credit markets under the pressure of rating cuts.
The White House on the other hand is discussing additional fiscal aid measures worth $600 billion, on top of the historical $2 trillion rescue
package just signed a couple of days ago.
Huge amount of helicopter money sprayed on economies to put a floor under the growth slowdown will
have long-term implications for debt levels, not only in the US but everywhere in the world.
Now, many of us are wondering whether the
governments can extend their debt ad infinitum. The answer is tricky. The US is better positioned compared to most countries for doing so,
given that the US government bonds are considered as the ultimate safe haven and the activity on US treasuries prove that the appetite for the
US sovereigns remain solid even with the colossal new debt adding to the countries already high level of debt. The US 10-year yield remains a
touch below 0.70%, near historically low levels.
But not all countries are under lucky stars. In fact, the rating agencies have
already started downgrading countries’ and companies’ credit ratings last week. The UK saw its credit rating lowered at AA- at Fitch and
South Africa was cut to junk at Moody’s.
General Electric, British Airways and Lufthansa are among companies who saw their credit ratings
slashed due to coronavirus-led damages.
Lower credit ratings have a direct impact on governments’ and companies’ ability to contract debt.
Because they are considered riskier, the cost of issuing debt for countries and companies with lower credit ratings is more costly. The
lower the rating, the costlier the funding by debt. On top, the collateral value of lower grade debt is lessened, which is a major let down for
investors as they must decrease the total amount invested if they hold riskier bonds on their portfolios.
In the FX markets, the US
dollar index retreated below the 100 mark as stocks gained globally, but the increased anxiety in the credit markets should continue giving
some support to the greenback.
The EURUSD slipped below the 1.10 mark and is poised to extend losses as the preliminary inflation read
should confirm a decline to 0.8% y-o-y in March from 1.2% printed a month earlier. German import prices fell 0.9% m-o-m in February and worse
is yet to come. Eroding inflation could revive the European Central Bank (ECB) doves. Offers are eyed below the 200-day moving average,
1.1053.
Sterling remains offered below 1.25 against the greenback. The UK’s fourth quarter growth figures showed no surprise. The British
economy stagnated last quarter, and recession is knocking on the door amid the coronavirus outbreak will further hit the British economy
that has been already wrecked by Brexit uncertainties.
By Ipek Ozkardeskaya
