The Association for Financial Markets in Europe (AFME) today released a report on the “Initial Impact of COVID-19 on European Capital Markets”, which found that markets “continued to play their role in providing liquidity, price formation, timely clearing and settlement procedures, capital allocation and helping investors manage their portfolios”.
Stating that FX spot trading rose 61% year-on-year in March, AFME attributes the large increase in FX turnover to several factors. Unsurprisingly, these include the rapid increase in market volatility, large cross-border monetary support, recent changes in central banks’ rates, abrupt changes in market yields and more broadly, the unexpected change in asset prices and the functioning of the real economy.
In addition to the 61% yoy FX spot gain, which AFME bases on the average daily traded volume submitted through settlement services facility CLS, the association points to increases in FX swaps of 4% yoy, and gains in outright forwards of 11. See chart 5.1.
Meanwhile, AFME notes that non-deliverable forwards (NDFs) cleared on LCH increased from 250,000 trades in February to 332,000 in March (or the equivalent of above 80,000 trades per week). Most recently, notes AFME, LCH data suggests normalisation in trading activity with an average of 40,000 trades cleared in the second week of April. See chart 5.2.
Additionally, AFME reports that swap clearing, including IRS, OIS and forward rate agreements, increased 43% between March and February, and 44% between March 2020 and March 2019. This is as corporates seek to manage their balance sheets risks and investors hedge their portfolios against expected changes in yield fluctuations, notes AFME.
Julio Suarez, director of research at AFME, says: “Overall, while prices and spreads have shifted considerably, European capital markets have continued to operate well following the outbreak of COVID-19, with liquidity ranging from very good to mixed, depending on the sector. In fact, there have been record volumes of new issuance in certain sectors. Our data also shows that banks operating in Europe are well-positioned from a solvency and liquidity perspective to support households and businesses during this period of abnormal economic pressure.”