Asia Wrap: Policy Skepticism Over Fed Decision, ECB Expected To Cut

Markets

Other than to sell USD, the markets will continue to struggle for direction as investors don’t seem to think the Fed knows more about the implications of the virus than they do. So at this early stage of the policy game, I think what we’re seeing is an unwinding of defensive hedges rather than a reversal of sentiment

The Fed cut was all about providing a backstop for the stock market and buying some time for the G-7 policy markets to better quantify the Virus effect before ballooning deficits, which are much harder to reduce than expand.

Skepticism

And while skeptical voices have been heard overnight regarding the lack of traction that monetary policy has at this stage (late in the policy cycle, this is all about supply so far, not demand.) It’s never a good idea to take on the Fed when they shift into easing mode.

ECB

The ECB is widely expected to cut rates by 10bps to -0.6% on 12 March – if not earlier -. The ECB action could include TLTRO lending as a sweetener to encourage lending to SMEs, while asset purchases could shift from sovereign to corporate bonds. Fiscal policy should also supplement and do the heavy lifting.

Oil markets

A meeting yesterday of OPEC’s Joint Technical Committee revised a recommended additional production cut upward from the OPEC+ group. In essence, the JTC is now calling for a supply reduction of between 600kb/d and 1mb/d, following an earlier recommendation for a 600kb/d cut. The problem facing the OPEC+ group is that the full impact of the Covid 19 is completely unquantifiable, and regardless of the depth of the cut, it won’t meet market expectations, especially with the market still very prone to sell off on secondary outbreak headlines.

But the collapse in oil prices and evidence that the virus is still spreading, the clock is ticking, so I’m assuming the depth of the production cut will come in at the midpoint of the JTC recommendation. I also think physical supply/demand balances have very little to do with movement in the oil price at the moment, so any bullish US inventory impulse will quickly fall between the cracks

Asia Wrap: Policy Skepticism Over Fed Decision, ECB Expected To Cut

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