(23 April 2020)DAILY MARKET BRIEF 2:(ECB) having hit the limits of its stimulus capacity

In Europe, the future of the union is at stake. With the European Central Bank (ECB) having hit the limits of its stimulus capacity and Christine Lagarde’s firm push for fiscal stimulus, the European finance ministers are, this time, left to their selves to tackle the biggest ever recession that the bloc has known since its establishment. At today’s summit, investors are looking for the announcement of a 2-trillion-euro rescue plan to tackle the crisis. While we believe that a wide-ranging agreement is highly likely, the issuing of the so-called coronabonds is a faraway dream as wealthier, and less impacted nations aren’t convinced with the idea of issuing a joint debt, as they could finance their debt with relatively lower-yield bonds. And even their own debt to GDP ratio will explode as a result of weeks of economic shutdown. It is said that Germany’s debt to GDP ratio could rise to 10%, while Italy’s could reach the scary 150% level. So, it all comes down to how much the wealthier nations are ready to pay for keeping the union intact. The divergence between the core and peripheral bonds should continue widening and limit the upside potential of the euro. The EURUSD tests the 1.08 support. Any disappointment could send the single currency tumbling below the 1.08 level, while a satisfactory outcome from the EU summit could help bettering the euro appetite and encourage a renewed attempt toward the 1.10 resistance.

On the data deck, figures released yesterday confirmed that inflation in the UK eased to 1.5% in March from 1.7% matching market expectations. Further downside is likely on the back of anemic activity and ultra-low oil prices.

Due today, the flash manufacturing and services PMI should confirm a faster contraction in activity in April in the UK, Europe, and the US as the effect of broad-based economic shutdowns paralyzed businesses to an unprecedented extent in modern history.

Gold bounced back to $1720 an ounce, with a growing evidence of an established positive correlation with risk assets on daily basis.

On the earnings side, Delta airlines announced a sharper fall in Q1 earnings as the coronavirus-led grounding took a heavy toll on travels. Still, the cheap oil is a good reason to think that the airline companies could have a fast recovery once the air travel starts again.

Today, 130 more companies are due to announce earnings, among them Intel and Citrix Systems expected to have benefited from the coronavirus lock in that boosted demand in remote-working tools. The question is, will investors be impressed with the one-off coronavirus spike in activity?

By Ipek Ozkardeskaya