The Day at a Glance | March 18 2020

Fiscal stimulus measures put pressure on rates

Commitments around the world to carry out fiscal stimulus have increased the risk of greater fiscal deficits in governments, which has increased interest rates regarding long-term sovereign bonds. The most notable of these rises was observed this morning in Europe, with Italian BTP´s up 64 bps, 30-year German debt over 0% again, and the 10-year Treasury reaching 1.2%. Similar effects are happening in 30-year instruments in Spain, the UK and France. Fiscal stimuli around the world now adds up to $1.14 trillion dollars in attempts to reduce the virus´s negative impacts on the global economy. However, great stimulus brings with it larger debt and greater deficits in government balances, which decreases investors´ incentives to lend to these countries. What stands out about this is the fact that this is occurring in a heightened risk aversion environment, in which demand for these instruments is usually high. The reduction in long-term bond prices (and the increase in their yield) plays into today´s session, along drops in almost all kinds of assets: From stock markets to (high and low quality) corporate debt, commodities and precious metals. Safeguard currencies such as the Japanese Yen and the Swiss franc are also falling back, with the dollar (DXY) being the most demanded currency and reaching peak levels since 2017, a sign of a possible lack of liquidity in markets, despite central bank actions.

Oil at a 17 year minimum; Mexico under pressure

International oil prices have maintained their downward trend and dropped under $24 dollars per barrel in the last few hours, amidst a price war between the resource´s producers. Saudi Arabia has reaffirmed it will maintain record levels of production (close to 12 million barrels per day) for the following months as emergency measures being taken to contain COVID-19 significantly reduce the demand for crude oil. With this, international prices have fallen close to 45% since OPEC´s failure to reach an agreement, putting pressure on exporting countries. Mexico is no exception, as the drop in oil prices put the federal government´s strategy regarding the energy sector at risk and PEMEX could damage public finances. This, combined with a scarcity of dollars in global markets because of global investors´ need for liquidity in light of a probable recession unleashed by COVID-19 have led the dollar to reach new all-time highs against the Mexican peso. Moreover, Mexico´s growth estimates have started being cut aggressively, putting more pressure on the country´s fiscal and financial situation; due to the US´s slowdown because of COVID-19 alone, a 0.3%-0.5% contraction is expected to hit Mexico´s economy in 2020. However, if this is added to Mexico´s shock due to the measures taken to contain the virus, the contraction could be even greater, between (-) 2% and (-) 4%.