Huge US fiscal stimulus ahead, but markets still shaky

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European and US stock markets whipsawed yesterday, but remained off Monday's sell-off lows and eventually closed 3% (EU) to 6% (US) higher. Echoes resonated through WS on the compilation of a huge (>$1tn) US fiscal stimulus package. US Treasuries significantly underperformed German Bunds thanks to this expected growth booster. The US yield curve bear steepened with yields rising by 13.5 bps (2-yr) to 40.1 bps (30-yr). The German yield curve bear flattened with yields ending 4.3 bps (2-yr) to 2.3 bps (30-yr) higher. While obviously being a short term (risk) momentum generator, we hold a more cautious approach. New York City is rumoured to follow European lockdown procedures, money market rates continue to show signs of dollar scarcity and corporate/sovereign credit spreads remain elevated. The latter probably also partly explains the higher core bond yields: a return of credit risk premium even for German/US bonds.

Asian stock markets are back downhill this morning. They lose up to 6% with Australia (stricter measures) and South Korea (contagions not under control) underperforming. Core bonds face more selling pressure. They have been declining in lockstep with stocks as well with investors dumping everything in a dash for cash. Rumors on issuing joint EU debt to provide a coordinated European fiscal answer are an interesting lead, but not specific enough yet. We think we could compare them to the war bond principle. The bonds could be called "pandemic" bonds and might even end up being financed by the ECB (monetary policy sponsoring fiscal stimulus).

Today's scheduled Fed meeting is cancelled. The US central bank yesterday took additional action by allowing approved dealers in government debt to borrow cash against some stocks, municipal debt and higher-rated corporate bonds (primary dealer lending facility). It highlights the fact that liquidity problems aren't at all from the radar yet. We expect more volatility on markets this week, but the downside in core bond yields is probably limited in the short run.

From a technical point of view, both the German and US 10-yr yields significantly moved away from the early month lows. The German 10-yr yield returned to the lower half of the trading band since last Summer. The US 10-yr yield trades volatile, but still below the previous all-time low (2016), which is first resistance and probably a tough nut to crack. We fear that lockdown measures might be implemented longer than currently envisaged, with the economic impact deeper and taking longer to recover.

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