Agreement all round
Easter was a dull affair for those who had to substitute lamb and mint sauce with the family for a Zoom call. Out in the big wide world, however, interesting things were going on. EU leaders at last agreed a coronavirus relief package. OPEC agreed to reduce oil production. The Federal Reserve agreed to buy junk bonds.
On Thursday evening, after much haggling, EU finance ministers compromised on a €500 billion relief package for European countries hit hardest by the tragic Covid-19 pandemic. The plan involves tapping the European Stability Mechanism for about half the amount, the balance coming from the European Investment Bank and the European Commission. In some quarters there is disappointment that the Netherlands and others remain resistant to the notion of shared debt but at least they managed to get something down the ramp. The euro weakened by an average of 0.3% over the long weekend, giving up four fifths of a cent to sterling.
There was haggling elsewhere over the weekend as members of OPEC and its close allies struggled towards an agreement to cut oil production. They eventually settled on an output reduction of 9.7 million barrels per day. Analysts expect the cut to take oil prices up to the mid-$40s by the end of the year but the immediate effect varied from none to negative. WTI crude was listed at $22.66 per barrel this morning, down by an eighth from $25.90 on Thursday. Among the major currencies the Norwegian krone suffered most, falling 1.3%. The Canadian dollar was on average just about unchanged.
At the end of last week the US Federal Reserve broadened its asset purchase criteria to include instruments below “investment” grade, colloquially known as junk. Fed chairman Jay Powell later justified the move in a webcast, stressing that the money it will provide constitutes loans, not grants.
The purpose of buying junk bonds is to provide a safety net to previously healthy companies that have been downgraded as result of the pandemic. Sure enough, ailing firms seized the opportunity to go to the market with new bond issues. Some criticise the Fed for creating a new moral hazard.
Investors in general were not totally enamoured of the Fed’s decision. The dollar moved lower on the news and it was the weakest among the majors over the long weekend. It fell by an average of 1.1%, losing a cent and three quarters to sterling and three quarters of a cent to the euro.
In the three months to February UK imports fell £10.1 billion and exports were down by £3.5 billion. It created a £1.4 billion trade surplus, “the first… since comparable records began”. This morning China reported annual falls of 0.9% for imports and 6.6% for exports.
The British and Chinese figures were both better than expected. There was also some relief for sterling from better-than-forecast numbers for industrial and manufacturing production, though the relevance of the data – for February – is minimal.
The same cannot be said of the provisional Michigan index of consumer sentiment. As with most such barometers nowadays, it “plunged” 18.1 points in early April to 71, an eight-year low and the largest monthly decline ever recorded. There was a similar story from Australia’s NAB: “Business confidence saw its largest decline on record and is now at its weakest level in the history of the NAB Monthly Business Survey.”