Chair Jerome Powell’s announcement this morning has spooked the US markets, with the futures price falling 5% and activating a trading halt.
The raft of announcements, which we have already covered has scared the markets, and it suggest a weak opening in the US later.
There are severe cracks opening up in the financial system, with treasury pricing haywire, the Feds initial massive repo sale under-subscribed, and direct liquidity support ineffective. Of course they want to shore up the financial markets, and he was at pains in the press conference (telephone) to underscore how well capitalised the banks are, and that negative rates are not coming.
Worth also noting the FED slashed the Interest on Excess Reserves that it pays the banks for parking their cash at the Fed to 0.10% effective Monday. Back in the heady days of 2019, the Fed paid the banks $34 billion in interest on reserves. This income just went away.
US Bank shares are under pressure. Here in Australia the Financials Sector Index is down around 4%, but rising from opening lows.
The market was 4% lower on opening today, despite the various actions from central banks and other regulatory agencies. We will see how things develop later as other markets open.
Jerome Powell Fed chair has been underscoring the resilience of the financial systems and the power of the tools available, though said the under-subscribed repo strategy they executed last week showed they needed to purchase securities direct but given the market reaction, they then needed to act aggressively to support liquidity beyond that. Hence the rate cut decision.
Australia’s
financial system is resilient and it is well placed to deal with the effects of
COVID-19. The banking system is well capitalised and is in a strong liquidity
position. Substantial financial buffers are available to be drawn down if
required to support the economy.
The
funding position of the banking system is strong. Australia’s financial
institutions, market participants and market infrastructure providers have
undertaken substantial investments in their operational capability to deal with
the effects of the virus. At the same time, trading liquidity has deteriorated
in some markets and financial institutions are having to adjust to a more
volatile environment. The financial regulators are in regular contact with
financial institutions, market participants and market infrastructure
providers.
The RBA is continuing to support the liquidity of the system. As part of this support it will be conducting one-month and three-month repurchase (repo) operations until further notice. In addition it will conduct repo operations of six-months maturity or longer at least weekly, as long as market conditions warrant. The Australian Prudential Regulation Authority (APRA) is ensuring banking institutions pre-position themselves to take advantage of the RBA’s supportive measures.
Given the
disruption being caused by COVID-19, Council members are examining how the
timing of regulatory initiatives might be adjusted to allow financial
institutions to concentrate on their businesses and assist their customers.
APRA and
ASIC acknowledge the importance of the continued flow of credit to affected
customers and industries in the current environment. Banks and other lenders
are therefore encouraged to work constructively with affected customers during
any period of disruption. For their part, APRA and ASIC will take account of
the circumstances in which lenders, acting reasonably, are currently operating
during the prevailing circumstances when administering their respective laws
and regulations. Both agencies also stand ready to deal with problems firms may
encounter in complying with the law due to the impact of COVID-19 through
a facilitative and constructive approach. In particular, each agency will,
where warranted, provide relief or waivers from regulatory requirements. This
includes requirements on listed companies associated with secondary capital
raisings, annual general meetings and audits. ASIC will also work with
financial institutions to further accelerate the payment of outstanding
remediation to customers as soon as possible.
The
Council is meeting with major lenders later this week to discuss how they can
best support households and businesses through this challenging period. The
Council will be emphasising the importance of a continuing supply of credit,
particularly to small businesses. It will be also discussing with the lenders
whether there are impediments to lending that Council members could help to
address.
The
members of the Council of Financial Regulators remain in close contact with one
another and with the Australian Government and their international peers. The
Council will have its regular quarterly meeting on Friday 20 March at
which the impact of COVID-19 on the financial system will be further
discussed. The Council and the Australian Treasurer are also holding
teleconferences at least weekly.
Council of Financial Regulators
The Council
of Financial Regulators (the Council) is the coordinating body for Australia’s
main financial regulatory agencies. There are four members: the Australian
Prudential Regulation Authority (APRA), the Australian Securities and
Investments Commission (ASIC), the Australian Treasury and the Reserve Bank of
Australia (RBA). The Reserve Bank Governor chairs the Council and the RBA
provides secretariat support. It is a non-statutory body, without regulatory or
policy decision-making powers. Those powers reside with its members. The
Council’s objectives are to promote stability of the Australian financial
system and support effective and efficient regulation by Australia’s financial
regulatory agencies. In doing so, the Council recognises the benefits of a competitive,
efficient and fair financial system. The Council operates as a forum for
cooperation and coordination among member agencies. It meets each quarter, or
more often if required.
Bank of America, Bank
of New York Mellon, Citigroup, Goldman Sachs, JP Morgan Chase, Morgan
Stanley, State Street, and Wells Fargo, in a statement via the Financial
Services Forum, agreed to temporarily suspend share buybacks for the remainder of 1Q and through 2Q 2020.
“The decision on
buybacks is consistent with our collective objective to use our
significant capital and liquidity to provide maximum support to
individuals, small businesses, and the broader economy through lending
and other important services,” the group wrote, citing the COVID-19
pandemic as an “unprecedented challenge”
Australian equity markets have seen record
trading volumes in the last two weeks. ASIC, along with the other
Council of Financial Regulators agencies, have been closely monitoring
financial markets to ensure they remain fair and orderly. Australian
markets have been strong and resilient over this period, and this action
is pre-emptive and intended to maintain those high standards.
In addition to increasing volumes,
Australia’s equity markets have seen exponential increases in the number
of trades executed, with a particularly large increase in trades last
Friday, 13 March. While there was no disruption to market operations on
Friday, there was a significant backlog of work required to be
undertaken over the weekend by the exchanges and trading participants.
If the number of trades executed continues to increase, it will put
strain on the processing and risk management capabilities of market
infrastructure and market participants.
Accordingly, ASIC has issued directions
under the ASIC Market Integrity Rules to a number of large equity market
participants, requiring those participants to limit the number of
trades executed each day until further notice. These directions require
those firms to reduce their number of executed trades by up to 25% from
the levels executed on Friday. This action will require high volume
participants and their clients to actively manage their volumes. We do
not expect these limits to impact the ability of retail consumers to
execute trades.
ASIC will continue to closely monitor market conditions and take action where needed to ensure markets remain fair and orderly.
In addition the Federal Reserve on Sunday announced it would purchases $700 billion in bonds and securities to stabilize financial markets and support the economy.
The emergency rate cut and push to flood the Treasury bond market with liquidity comes as the coronavirus pandemic forces businesses across the U.S. and world to shutter, likely plunging the global economy into a recession.
The Bank of Canada, the Bank of England,
the Bank of Japan, the European Central Bank, the Federal Reserve, and
the Swiss National Bank are today announcing a coordinated action to
enhance the provision of liquidity via the standing U.S. dollar
liquidity swap line arrangements.
These central banks have agreed to lower
the pricing on the standing U.S. dollar liquidity swap arrangements by
25 basis points, so that the new rate will be the U.S. dollar overnight
index swap (OIS) rate plus 25 basis points. To increase the swap lines’
effectiveness in providing term liquidity, the foreign central banks
with regular U.S. dollar liquidity operations have also agreed to begin
offering U.S. dollars weekly in each jurisdiction with an 84-day
maturity, in addition to the 1-week maturity operations currently
offered. These changes will take effect with the next scheduled
operations during the week of March 16.1
The new pricing and maturity offerings will remain in place as long as
appropriate to support the smooth functioning of U.S. dollar funding
markets.
The swap lines are available standing
facilities and serve as an important liquidity backstop to ease strains
in global funding markets, thereby helping to mitigate the effects of
such strains on the supply of credit to households and businesses, both
domestically and abroad.
The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States. Global financial conditions have also been significantly affected. Available economic data show that the U.S. economy came into this challenging period on a strong footing. Information received since the Federal Open Market Committee met in January indicates that the labor market remained strong through February and economic activity rose at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending rose at a moderate pace, business fixed investment and exports remained weak. More recently, the energy sector has come under stress. On a 12‑month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation have declined; survey-based measures of longer-term inflation expectations are little changed.
Consistent with its statutory mandate, the
Committee seeks to foster maximum employment and price stability. The
effects of the coronavirus will weigh on economic activity in the near
term and pose risks to the economic outlook. In light of these
developments, the Committee decided to lower the target range for the
federal funds rate to 0 to 1/4 percent. The Committee expects to
maintain this target range until it is confident that the economy has
weathered recent events and is on track to achieve its maximum
employment and price stability goals. This action will help support
economic activity, strong labor market conditions, and inflation
returning to the Committee’s symmetric 2 percent objective.
The Committee will continue to monitor the
implications of incoming information for the economic outlook,
including information related to public health, as well as global
developments and muted inflation pressures, and will use its tools and
act as appropriate to support the economy. In determining the timing and
size of future adjustments to the stance of monetary policy, the
Committee will assess realized and expected economic conditions relative
to its maximum employment objective and its symmetric 2 percent
inflation objective. This assessment will take into account a wide range
of information, including measures of labor market conditions,
indicators of inflation pressures and inflation expectations, and
readings on financial and international developments.
The Federal Reserve is prepared to use its
full range of tools to support the flow of credit to households and
businesses and thereby promote its maximum employment and price
stability goals. To support the smooth functioning of markets for
Treasury securities and agency mortgage-backed securities that are
central to the flow of credit to households and businesses, over coming
months the Committee will increase its holdings of Treasury securities
by at least $500 billion and its holdings of agency mortgage-backed
securities by at least $200 billion. The Committee will also reinvest
all principal payments from the Federal Reserve’s holdings of agency
debt and agency mortgage-backed securities in agency mortgage-backed
securities. In addition, the Open Market Desk has recently expanded its
overnight and term repurchase agreement operations. The Committee will
continue to closely monitor market conditions and is prepared to adjust
its plans as appropriate.
Voting for the monetary policy action were
Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W.
Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Robert S.
Kaplan; Neel Kashkari; and Randal K. Quarles. Voting against this action
was Loretta J. Mester, who was fully supportive of all of the actions
taken to promote the smooth functioning of markets and the flow of
credit to households and businesses but preferred to reduce the target
range for the federal funds rate to 1/2 to 3/4 percent at this meeting.
In a related set of actions to support the
credit needs of households and businesses, the Federal Reserve
announced measures related to the discount window, intraday credit, bank
capital and liquidity buffers, reserve requirements, and—in
coordination with other central banks—the U.S. dollar liquidity swap
line arrangements. More information can be found on the Federal Reserve
Board’s website.
In a statement, the Reserve Bank of New Zealand says New Zealand’s financial system is sound, with strong capital and liquidity buffers, but faces significant uncertainties from the impacts of COVID-19. The Reserve Bank is announcing additional measures to support the provision of credit and market functioning.
Reserve Bank Deputy Governor
Geoff Bascand says the situation around COVID-19 is evolving rapidly, and there
is much uncertainty.
“To support credit
availability, the Bank has decided to delay the start date of increased capital requirements for banks by 12 months –
to 1 July 2021. Should conditions warrant it next year, the Reserve Bank will
consider whether further delays are necessary.”
“We are taking this action
now to help support lending in the economy at time when there is a lot of
uncertainty. The Reserve Bank’s expectation is that banks will utilise this
flexibility to maintain lending to households and businesses. Banks have
significant buffers above current regulatory minimums, and we encourage them to
use them,” Mr Bascand said.
“Deferring the capital
framework implementation provides banks with significant capital headroom. We
estimate that this headroom will enable banks to supply up to around $47
billion more lending than would have been the case, had the decisions been
implemented as planned.”
Mr Bascand said the Reserve
Bank is currently identifying other regulatory initiatives that can be deferred,
to reduce the burden on financial institutions at this time of uncertainty.
These will be announced in coming days. The Reserve Bank is working closely
with the Council of Financial Regulators and international regulators.
Assistant Governor Christian
Hawkesby said the Bank is also ensuring there is sufficient liquidity in the
financial system, through regular market operations.
“The Bank has a number of
operational tools at its disposal to support liquidity and market functioning
in New Zealand. This has helped the domestic cash market and foreign exchange
swap market to continue to function effectively over recent weeks,” Mr Hawkesby
says.
“Banks currently have robust
liquidity and funding positions and can manage short-term disruptions to
offshore funding markets. We will continue to monitor developments closely and
engage regularly with market participants to ensure we are ready to provide
support if needed.”
The Reserve Bank also
announced the following changes to the pricing of its standing facilities and
ESAS accounts, in part to assist cash market functioning at a lower OCR:
Cash that ESAS account holders have on deposit at the Reserve Bank that is in excess of their allocated ESAS credit tier will be remunerated at the OCR less 25 basis points (from OCR less 75 basis points).
Bonds lent through the Bond Lending Facility well be lent at the OCR less 50 basis points (from OCR less 75 basis points).
A maximum rate will be set for bonds lent through the Repo Facility at the OCR less 50 basis points (from OCR less 75 basis points).
Cash will continue to be lent via the Overnight Reverse Repo Facility at the OCR plus 25 basis points until further notice.
The Reserve Bank has a
number of tools to provide additional liquidity, and support to market
functioning, should these be required in the future:
The ability to provide term funding through a Term Auction Facility (TAF) which can provide collateralised loans out to 12 months. This facility was previously provided from 2008 to 2010.
The Bank has an established role to provide liquidity in the New Zealand dollar foreign exchange market in periods of illiquidity or dysfunction, and is operationally ready to undertake this role if required.
The ability to provide liquidity to the NZ government bond market to support market functioning.
Mr Hawkesby says the Reserve
Bank continues to monitor developments, and is ready to act to ensure markets
and the financial system operate in a stable and efficient manner.
The Reserve Bank New Zealand announced today that following an emergency meeting yesterday, the Official Cash Rate (OCR) is 0.25 percent, reduced from 1.0 percent, and will remain at this level for at least the next 12 months. The also signalled the likelihood of QE to follow.
The negative economic
implications of the COVID-19 virus continue to rise warranting further monetary
stimulus.
Since the outbreak of the
virus, global trade, travel, and business and consumer spending have been
curtailed significantly. Increasingly, governments internationally have imposed
a variety of restraints on people movement within and across national borders
in order to mitigate the virus transmission.
Financial market pricing has
responded to these events with declining global equity prices and increased
interest rate spreads on traditionally riskier asset classes.
The negative impact on the
New Zealand economy is, and will continue to be, significant. Demand for New
Zealand’s goods and services will be constrained, as will domestic production.
Spending and investment will be subdued for an extended period while the
responses to the COVID-19 virus evolve.
Several factors will
continue to assist and support economic activity in New Zealand.
New Zealand’s financial
system remains sound and our major financial institutions are well capitalised
and liquid. The Reserve Bank is also ensuring that the banking system continues
to function normally.
The Government is operating
an expansionary fiscal policy and has imminent intentions to increase its
support with a fiscal package to provide both targeted and broad-based economic
stimulus.
The New Zealand dollar
exchange rate has also depreciated against our trading partners acting as a
partial buffer for export earnings.
And, the Monetary Policy
Committee agreed to provide further support with the OCR now at 0.25 percent.
The Committee agreed unanimously to keep the OCR at this level for at least 12
months.
The Committee also agreed that should further stimulus be required, a Large Scale Asset Purchase programme of New Zealand government bonds would be preferable to further OCR reductions.
The members discussed the broad range of Official Cash Rate (OCR)
settings that would be suitable. Staff briefed the Committee on the scale of
policy stimulus required given deteriorating global conditions and the impact
of travel restrictions. The Committee discussed the relative contributions of
planned fiscal and financial stability measures in consideration of the
monetary policy response. Staff also advised that an OCR of 0.25 percent was
currently the lower limit, given the operational readiness of the financial
system for very low or negative interest rates.
Subsequent Committee
discussion focused on two scenarios:
a 0.5 percentage point cut in the OCR to 0.5 percent, followed by an assessment of the rapidly developing COVID-19 situation, with the ability to follow up with more stimulus as needed at the scheduled March OCR review
A 0.75 percentage point reduction in the OCR to 0.25 percent.
Members noted that lower
interest rates would likely support the soundness of the financial system – in
the context of the Committee’s Remit.
Given views on the required
level of stimulus given the economic impact of COVID-19, the committee agreed a
0.75 percentage point reduction in the OCR would be a more suitable option.
The results today are pretty strong compared with a year ago, so the virus has yet to hit (but Melbourne is stronger following last weeks long weekend).
Canberra listed 51 auctions, reported 30 and sold 23, with 1 withdrawn and 7 passed in to give a Domain clearance of 74%
Brisbane listed 74 auctions, reported 38 and sold 26 with 6 withdrawn and 12 passed in to give a Domain clearance of 59%.
Adelaide listed 62 auctions, reported 40 results with 27 sold, 3 with drawn and 13 passed in to give a Domain clearance of 63%.
