Bernhard Eschweiler, PhD, Senior Economist QCAM Currency Asset Management AG
In our judgment, the balance is gradually tipping to- wards the second scenario. The situation is aggravat- ed by Saudi Arabia’s announced supply increase and the resulting collapse in oil prices. As bad as the market selloff has been, however, a systemic funding and liquidity crisis has not yet occurred. Credit spreads have increased but actual borrowing rates have hardly moved higher because of the drop in underlying government bond yields. Moreover and importantly, there are no signs of significant stress in the banking system, thanks also to the liquidity support by central banks.
Targeted help from policy is critical. The US Fed already cut interest rates by 50 bps and is expected to cut at least another 25 bps. Most other central banks are in the process or expected to ease policy in the form of additional liquidity support, interest rate cuts and special facilities to support firms struggling with temporary funding bottlenecks. Similar measures are coming from fiscal policy. The EU Commission allowed Italy to overstep the deficit target in order to combat the spreading of Covid-19 and other countries have announced labor market and financial support measures.
The full report is available at https://q-cam.com/wp-content/uploads/2020/03/QCAM-MONTHLY-March-2020.pdf