In lieu of anything from the countries themselves, at least the European Central bank are preparing to be as supportive as they can be: There’s a conference call today where the governing council are set to discuss whether they’ll change their rules to allow them to hold bonds with a junk rating as collateral against loans. The move would pre-empt potential downgrades of both corporate and sovereign debt that would ordinarily prevent the ECB from accepting their bonds as collateral from banks in exchange for cash. The green light in doing so might in fact become a self-fulfilling prophecy, that because companies and governments have better access to cheap credit, so their balance of payments remains affordable and therefore they don’t get a ratings downgrade – it’s a long shot, but one can hope and even if they do get the downgrade, if the ECB is your lender of last resort, then that shouldn’t affect your cost of credit too much.

Expect the ECB to be the ones to get the eurozone through this, as they’ll have to step up and deliver even bigger monetary policy experiments in the coming weeks and months, all the while the member states can’t agree on how best to help themselves and each other. The ECB’s position of having to act in the best interests of all of its members is the best card it can play right now and to be able to defend any actions that it takes that might upset some of the more reserved member nations. The ‘best interests’ statement is something everyone would struggle to argue with – and even if they did, what would they do about it? Leave the Euro and bring themselves even more chaos?! Unlikely.
So if coronabonds aren’t something these countries can stomach, then they risk the ECB solving the problem for them with actions that they might deem even more reckless than issuing joint debt. Furthermore, the unintended consequences of the ECB’s actions might manifest further down the line into bigger problems or necessary remedial measures that sit even more uncomfortably and less favourably. We’ll find out tomorrow which route the politicians prefer.

In the UK we saw testimony from Simon McDonald, a very senior civil servant, that contradicted the government’s claims that it was because of a communication error that we didn’t go in on the EU’s ventilator procurement scheme and it was in fact a political move to opt out. The testimony was initially damning towards the government, particularly as even if you wanted to go your own procurement way, there’d be little downside in hedging your bets. However Mr McDonald later retracted his testimony and said “the facts of the decision are as previously set out”. We’d imagine the opposition will have something to say about this and an enquiry into the enquiry is probably the order of the day.
Parliament will be sitting, of sorts, later today in the first parliamentary session since the lockdown. The virtual sitting will mean that a maximum of 50 MP’s can be present in the Commons, whilst another 120 can dial in on a Zoom conference. Questions will be submitted to the Speaker ahead of time and he will make the selection. The two hour sitting will now take place every Monday, Tuesday and Wednesday.
Bank of England governor Andrew Bailey has cautioned against removing the lockdown too swiftly, saying that opening up only to have to shut down again would be more economically damaging than prolonging the current shutdown and would also shatter the public’s confidence. Mr Bailey is hoping that the actions the Bank of England are taking along with the Treasury will mean the wounds the economy receives now won’t lead to “scarring” once this is all over.

The US political machine has finally agreed a further aid package. Of the agreed $484bn, the majority will go towards supporting small businesses and topping up the $350bn fund that was cleaned out within days of it being announced, whilst hospitals will also get direct cash injections too, with $75bn of the money allocated to them. $25bn will go towards a national testing strategy which is deemed as a key part of getting the country reopened.

Oil storage issues have hit the price of Brent crude hard overnight. Previously it was the WTI price that was taking the majority of the hammering, but storage data out of the rest of the world shows that just about everywhere is close to capacity. The May contract rolled off yesterday and immediately the June delivery contract was hammered by as much as 65% at various points within the day! OPEC+ had a conference call yesterday, but didn’t manage to make any firm commitments. There might be an ulterior motive there though, as these prices and storage problems do mean that the US is being forced to shut in oil wells at record pace which will reduce their supply in the long and might reposition their import/export balance.

In equities, Netflix has unsurprisingly had a storming quarter. They added almost 16 million new paying subscribers, their highest ever number. They’ve cautioned that they don’t know how long these people will stay around for once the lockdown eases, but it did see a brief spike in their share price of about 8%. The wider market had a sell-off yesterday and interestingly the tech end of the market got hit harder than just about anything else. Some of these stocks will be countercyclical in that as the lockdown ends, so our dependency on them decreases and we start to substitute virtual meetings for actual ones, or video games for actual games etc.

Today we’ll see how the Commons gets on with its virtual session and if the government give anything away about their lockdown plans, their handling of the early stages of the crisis and anymore areas where they might bolster support. With the PM still out of action it will Dominic Raab facing Sir Keir Starmer for PMQs. Data today is pretty light but we’ve got more oil inventory numbers out of the US this afternoon.

Be well

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