Weekly Market Insight

Latest Economic & Market Update 15th May 2020

15th May 2020

Good afternoon, it is 15th May 2020 and here is your economic and market update from BlackBee.

Today we are going to focus on:

  • FED Funds Rate Futures Contract Price in Negative Interest Rates – Graph of the Week
  • $65bn ESG bond market emerges in wake of Covid-19

Graph of the Week: FED Funds Rate Futures Contract Price in Negative Interest Rates

Source: Bloomberg, May 2020
Futures on the FED Funds rate have priced in negative interest rates as early as April 2021, despite FED chairman Jerome Powell continuously rebuffing the idea of negative interest rates. There is wide debate on the benefits vs the cost of the US adopting negative interest rates in response to the crisis. President Trump has also weighed in calling negative interest rates “a gift” that is helping other economies. Negative interest rates are used to encourage borrowing, spending and investment instead of saving cash since depositors will be charged to keep money in the bank. However, there is no significant evidence showing that negative interest rates have a positive effect on stimulating growth in the economies who have adopted them. In the Eurozone, where it adopted negative rates in 2014, negative interest rates have eaten into banks’ profit margins leaving them financially weaker, having paid over €25 billion in negative interest rate fees since 2014. Japan, where negative rates were introduced in 2016, has still seen no stimulation in the economy. Sweden adopted negative interest rates in 2015, but this has still not discouraged households from saving, and prior to the crisis Sweden had the third-highest household savings rate in the world. The 2 year US Treasury Yield has declined in recent weeks due to the FED reducing the Funds target to nearly 0%. In February, the yield was over 1.4%. However, in recent days the yield on 2 year Treasury bonds has been led by pricing in money markets and has fallen to 0.14%. Pricing in the futures contracts are being linked to a brief increase in hedging activity by banks to protect themselves from tail risk.

The Financial Times has reported that a new coronavirus bond market has raised $65bn in the wake of the Covid-19 pandemic in an attempt to ease the effects. According to the FT, “A combined $32bn of so-called “social” and “sustainability” bonds were issued this April, […], most of which were designated for Covid-19 response initiatives. This marked the first time that social and sustainability bonds eclipsed the issuance of green bonds in a single calendar month.” Read the full article here: https://www.ft.com/content/03dbe400-1bea-4475-bda7-2fbc1d9ce062 

Best & Worst Performers of Large Cap Stocks on Thursday
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Global Market Update
(as at close of markets 14/05/2020)