ith Italy in lockdown and much of Europe putting in place containment measures designed to prevent the spread of the virus, the bloc’s economy is on an incredibly fragile footing and almost destined for a recession. We’ve not yet heard anything yet from the ECB, unlike both the Fed and BoE that have cut rates at unscheduled meetings in the past week or so. Given the severity of the situation, which has seen President Trump slap a travel ban on European visitors, we think that sweeping easing measures will be announced by the bank today.

We are pencilling in the following to be announced this afternoon:
– A 10 basis point cut in the ECB’s deposit rate to -0.6%
– An increase in the QE programme by 10 billion euros to 30 billion euros a month.
– An expansion in the TLTRO programme, with a special focus on providing ample liquidity for small and medium-sized enterprises (SMEs). This would be similar in nature to that announced by the Bank of England yesterday.
– Increased calls for European government to ramp up fiscal spending.

We are, however, of the view that policymakers will aim to not over-deliver. They are likely to instead do the minimum amount possible to meet market expectations, particularly given the lack of tools available at the bank’s disposal. Unlike the Fed, the ECB does not have the luxury to aggressively cut its main interest rate and will therefore need to use more unconventional methods.

Sterling slides despite Sunak’s budget pledges

Recently appointed chancellor Rishi Sunak delivered a show-stealing budget announcement in the UK on Wednesday, much of it aimed at easing the impact of the COVID-19 virus.

Among other measures, including new rules on statutory sick pay and a £500 million ‘hardship fund’ for local authorities, a £1.2 billion ‘business interruption’ loan scheme was announced aimed at supporting small business in the UK. We think this could act as a crucial source of funding for UK SMEs during a period in which they are likely to be among the companies hardest hit from the virus disruption. Overall, £30bn worth of fiscal stimulus was announced, £12bn specifically set aside to allay the impact of the virus (£7bn for businesses and £5bn for the NHS).

The reaction in the pound was, however, to send it lower. There was no real catalyst or rationale for this move, particularly given the stimulus measures were relatively larger in size and more thorough than we have seen almost everywhere else. It may just be a result of investors once again favouring the safe-havens – the USD/JPY cross fell back below the 104 level this morning.

Trump underwhelms, market braces for more Fed cuts

The aforementioned travel restrictions slapped on Europe by President Trump underwhelmed the market this morning, sending the dollar around 0.5% lower versus the euro. The travel ban itself was not necessarily the reason for the market’s disappointment, more so the lack of additional details on how the US was planning to combat the outbreak. Public health measures, including sick pay and testing methods, were conspicuously absent.

Given the lack of action from the White House, investors are putting all the emphasis on additional policy measures from the Federal Reserve. Following its hefty 50bp interest rate reduction last week, the market is bracing for more cuts at its scheduled meeting next Wednesday. Futures markets are now already pricing in a further 0.75% cut, which would take the main Fed funds rate almost the zero.