Yesterday evening is was the opportunity for the Federal Reserve to share its latest reflections on the US and the global economy in its delivery of its latest monetary policy decision. Federal Reserve Chairman Jay Powell met the expectation for rates to remain on hold at 0.00-0.25% but his comments regarding Coronavirus still undermined the US Dollar. Today is the turn of Christine Lagarde of the ECB who will deliver her Bank’s latest monetary policy decision. An inauspicious start for the President has undermined Euro support in the run up to the announcement. Meanwhile, yesterday’s corporate earnings announcements paint a gloomy picture for the real economy.
The US Dollar had been a relatively high yielding currency before the Coronavirus gripped markets. Over the last decade it has been one of few advanced economies to escape the crisis-era monetary backdrop that it imposed following the Great Recession. This has been one of the reasons for the greenback’s record breaking bull run. In emergency announcements the Federal Reserve slashed borrowing rates and introduced vast repurchase operations across the globe. The policies were adopted to shield the US economy from the downturn of Coronavirus. The spillover welcomed by many in the US economy was to stop the Dollar’s surge. Last night Jay Powel told markets how he expects the shock caused by the health crisis to last for some time. In response the bank said it will continue to adopt drastic measures until it is confident the US economy is back on track to achieve maximum employment and inflation goals. The comments extended the market’s expected duration for USD-devaluing policies and the Dollar took another leg lower.
Today it is the turn of the European Central Bank to publish its monetary policy decision. With tangible fiscal action not forthcoming at the European level it is important that the Bank takes serious action. Lagarde has come under pressure of late with questions of Eurozone breakup and contagion risk even making the agenda of many Euro discussions. Comments early in her tenure that it is not the Bank’s place to control yield spreads in the Eurozone rattled the market and the President would do well to avoid repeating such mistakes. With a tight mandate and overwhelming balance sheet, the market is concerned that Lagarde’s running out of ammunition and is not particularly intimidating wielding the limited policies she has at her disposal. Don’t forget, the Euro has been saved by creativity in the Bank once before.
A busy day for corporate earnings yesterday revealed the impact of Coronavirus on the real economy and businesses. Royal Dutch Shell, the biggest dividend payer in the FTSE100 cut its dividend for the first time since WW2. The company made a relatively small loss overall. There were limited diamonds in the rough from yesterday’s earnings and the glimpse into corporate balance sheets shows the impact global lockdowns are having on commerce.
Discussion and Analysis by Charles Porter