Central Banks Battle to Gain Control of Wild Global Markets
(Bloomberg) -- Central banks from Asia-Pacific to Europe pledged to spend billions of dollars and implemented new policy steps to stem a global market rout.
U.K. debt rallied after the Bank of England cut interest rates and said it would restart asset purchases to mitigate the economic impact of the coronavirus pandemic. Hours earlier, the European Central Bank announced its own debt-buying program to keep borrowing costs in check, sending euro-area bonds higher. And in a sign of just how volatile markets have been, Australia’s central bank -- one of the last major holdouts against quantitative easing -- said it would buy government debt across the curve. The Bank of Japan and Bank of Korea made similar offers.
The central-bank action came after Asian bonds joined the wild sell-off seen in European debt markets Wednesday as funds liquidated assets to hoard the dollar. The Swiss National Bank accelerated currency interventions to curb the haven franc’s rise, and the Bank of Russia stepped in to slow the ruble’s drop. Norway, which saw its currency plummet by almost 20% this month, is thinking of doing the same.
“Interventions should help stabilize rates markets,” Mike Riddell, a money manager at Allianz Global Investors in London, said before the BOE’s move. “But it’s possible that stabilizing rates markets isn’t enough -- liquidations aren’t just in rates, they’re everywhere.”
In the U.K., the yield on two-year gilts headed for the biggest fall since the nation voted to leave the EU. Meanwhile, bond yields from Italy to France plummeted after the ECB’s announcement, with those on Greek five-year debt dropping more than 200 basis points.
The Reserve Bank of Australia’s historic announcement caused the nation’s curve to steepen, with the benchmark 10-year yield briefly surging by a record 128 basis points as the three-year slipped. Yields in New Zealand also jumped by more than 30 basis points after Wednesday’s meltdown in European debt on concern that governments will have to raise borrowing to fund stimulus measures to combat the virus fallout.
The Federal Reserve late Wednesday said it was launching a program to support money market mutual funds. It has already slashed rates twice and pledged to buy more bonds.
International easing will gradually reduce the overhang in most markets but it probably won’t return them to normality, said Peter Chatwell, head of multi-asset strategy at Mizuho International Plc in London.
“These are extremely abnormal times with risk takers working from home and schools being closed,” he said. “Euro fragmentation will materially reduce, the monetary transmission mechanism will start to normalize, but I don’t expect market liquidity to come back until next month at the earliest.”
The RBA cut the cash rate and said it would announce its intentions for debt purchases at 11:15 a.m. local time each day, and it would also buy semi-government debt to address market dislocations. It will also provide a term-funding facility of at least A$90 billion ($51 billion) for the banking system.
“The RBA will still have to do more -- the huge jump in bond yields in the long-end kind of reflected that,” said Diana Mousina, economist at AMP Capital Investors Ltd. in Sydney. “The market is signaling they want the RBA to move more like the Fed, including monthly targets for bond buying.”
The RBA’s QE approach differs from the Fed and ECB, which pledged to buy a certain amount of government securities to keep yields down. By directly targeting the yield instead, the RBA isn’t committed to any set amount of purchases -- an approach adopted by the BOJ in 2016.
A global liquidity crunch has made matters worse for investors and exacerbated market moves. Trading desks continue to speak of the mentality of “selling everything” except the U.S. dollar, with huge liquidations and de-leveraging taking place everywhere.
The demand for dollars, together with the plunge in oil prices, sent currencies worldwide into a tailspin. So much so that Russia’s central bank said it will begin additional foreign currency sales if the price of Urals crude is below $25 a barrel, a level it has already reached. And Norway’s Norges Bank said it’s ready to intervene in currency markets for the first time in more than two decades.
Meanwhile, the Swiss National Bank is grappling with a currency that continues to strengthen against the euro. It said the virus poses “exceptionally large challenges” and that the currency is “even more highly valued.”
That change to its wording on the franc is a warning to markets that it will push back more aggressively against unwarranted appreciation.
Read More: King Dollar Risks Verbal Intervention or a Mar-a-Lago Accord
The BOJ’s announcements were staggered over the day. Other than buying bonds up to 25 years in maturities, Japan’s central bank also offered to supply funds as markets will be shut for a local holiday on Friday.
“The longer that bond yields are not behaving the more likely we are to get bigger and bigger central bank responses,” said James Athey, a money manager at Aberdeen Standard Investments in London. “Potentially we should expect some bigger fiscal responses, which if not matched with large QE programs might start to be a big problem for bond yields.”
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