Category: zerohedge

Authored by Patrick Buchanan via Buchanan.org,

Dr. Brian Monahan, attending physician of Congress, told a closed meeting of Senate staffers this week that 70 million to 150 million Americans – a third of the nation – could contract the coronavirus. Dr. Anthony Fauci testified that the mortality rate for COVID-19 will likely run near 1%.

Translation: Between 750,000 and 1.1 million Americans may die of this disease before it runs its course. The latter figure is equal to all the U.S. dead in World War II and on both sides in the Civil War.

Chancellor Angela Merkel warns that 70% of Germany’s population — 58 million people — could contract the coronavirus. If she is right, and Fauci’s mortality rate holds for her country, that could mean more than half a million dead Germans.

Czech Prime Minister Andrej Babis called Merkel’s remark “unhelpful” and said it could cause panic. But Harvard epidemiologist Marc Lipsitch seemed to support Merkel, saying between 40% and 70% of the world’s population could become infected.

Again, if Fauci’s 1% mortality rate and Lipsitch’s estimate prove on target, between 3 billion and 5 billion people on earth will be infected, and 30 million to 50 million will die, a death toll greater than that of the Spanish Flu of 1918.

There is, however, some contradictory news.

China, with 81,000 cases, has noted a deceleration in new cases and South Korea appears to be gradually containing the spread of the virus.

Yet, Italy, with its large elderly population, may be a harbinger of what is to come in the West.

As of Thursday, Italy had reported 12,000 cases and 827 deaths, a mortality rate of nearly 7%. This suggests that the unreported and undetected infections in shutdown Italy are far more numerous.

In the U.S., the death toll at this writing is 39, a tiny fraction of the annual toll of tens of thousands who die of the flu.

But the problem is this: COVID-19 has not nearly run its course in the USA, while the reaction in society and the economy approaches what we might expect from a boiling national disaster.

The stock market has plunged further and faster than it did in the Great Crash of 1929. Trillions of dollars in wealth have vanished. If Sen. Bernie Sanders does not like “millionaires and billionaires,” he should be pleased. There are far fewer of them today than there were when he won the New Hampshire primary.

What does the future hold?

It may one day be said that the coronavirus delivered the deathblow to the New World Order, to a half-century of globalization, and to the era of interdependence of the world’s great nations.

Tourism, air travel, vacation cruises, international gatherings and festivals are already shutting down. Travel bans between countries and continents are being imposed. Conventions, concerts and sporting events are being canceled. Will the Tokyo Olympics go forward? If they do, will all the anticipated visitors from abroad come to Japan to enjoy the games?

Trump has issued a one-month travel ban on Europe.

As for the “open borders” crowd, do Democrats still believe that breaking into our country should no longer be a crime, and immigrants arriving illegally should be given free health care, a proposition to which all the Democratic debaters raised their hands?

The ideological roots of our free trade era can be traced to the mid-19th century when its great evangelist, Richard Cobden, rose at Free Trade Hall in Manchester on Jan. 15, 1846, and rhapsodized:

“I see in the Free Trade principle that which shall act on the moral world as the principle of gravitation in the universe — drawing men together, thrusting aside the antagonism of race, and creed, and language, and uniting us in the bonds of eternal peace.”

In the pre-Trump era, Republicans held hands with liberal Democrats in embracing NAFTA, GATT, the WTO and most-favored-nation trade privileges for China.

In retrospect, was it wise to have relied on China to produce essential parts for the supply chains of goods vital to our national security? Does it appear wise to have moved the production of pharmaceuticals and lifesaving drugs for heart disease, strokes and diabetes to China? Does it appear wise to have allowed China to develop a virtual monopoly on rare earth minerals crucial to the development of weapons for our defense?

In this coronavirus pandemic, people now seem to be looking for authoritative leaders and nations seem to be looking out for their own peoples first. Would Merkel, today, invite a million Syrian refugees into Germany no matter the conditions under which they were living in Syria and Turkey?

Is not the case now conclusive that we made a historic mistake when we outsourced our economic independence to rely for vital necessities upon nations that have never had America’s best interests at heart?

Which rings truer today? We are all part of mankind, all citizens of the world. Or that it’s time to put America and Americans first!

Authored by Ian Lyngen, Ben Jeffery and Jon Hill, rates stretegists at BMO Capital Markets

A sense of uncomfortable calm has fallen on financial markets overnight following the Fed’s announcement of additional liquidity measures and the PBOC’s drop of the RRR. This isn’t to suggest the price action has been nil; in fact, the curve is steeper with 30-year yields bouncing as high at 1.788% in a sharp reversal of the long bond’s outperformance. Rather, the move might best be characterized as a continuation of the profit-taking and cash-raising trend which has emerged in recent days. In a return to the traditional response to an easing Fed, the steepening of the curve appears to finally be taking hold as 2s/10s reached 45.5 bp overnight and the technical profile shows ample room for further extension. With 10-year yields at 85 bp this morning, the disconnect between the massive selloff in domestic equities and incrementally bearish tone for Treasuries is one of the most widely debated topics at the moment.

It’s far too glib to conclude that ‘markets are broken’ despite how tempting such an observation may be; Treasuries are faced with constrained liquidity and an unwillingness on the part of market makers to step-up risk-taking. This is the exact type of environment in which one would expect investors to step back and allow the repricing to run its course. The anomaly is the magnitude of the dislocations; volatility has spiked as evidenced by the MOVE index which is once again above 150. In more liquid times, we would have anticipated the price discovery process to be more orderly and observe that the longer end of the curve (10s and 30s) has historically traded off global macro expectations of growth and inflation. Flows and supply have become uncharacteristically large drivers in determining the outright level of yields.

Our expectations are for the elevated relevance of positioning to ultimately prove a temporary nuance of a much larger overall repricing; however, for the moment it would be folly to dismiss the liquidity constraints recently revealed in Treasuries as simply noise. As with the movements in global equities, the price action in US rates could transition from ‘reflecting’ a change in investor sentiment to ‘causing’ a material adjustment of macro expectations. Said differently, enough carnage and uncertainty in markets will create the degree of financial losses that can materially define the banking sector – and not in a good way.

The Fed’s primary objective in easing monetary policy in response to the coronavirus was always to provide a bridge of accessible funding to banks and businesses during a period in which corporate profitability will undoubtedly be strained. By pushing down borrowing costs, the objective is to allow/incentivize firms to avoid layoffs as the go-to tool for shoring up the bottom line. This week’s price action has been especially concerning in the context of what it implies for the financial sector as a whole; there are only so many losses that can be papered-over by cheap funding. The labor force will sustain damage from the events of the first quarter, Powell’s objective now is surely to limit the fallout and avoid longer-lasting declines in consumer confidence.

The Fed funds futures market has convincingly priced in another 100 bp of FOMC cuts by next Wednesday’s meeting as the April 2020 contract is trading with an implied rate of 16.5 bp. Technically, this isn’t completely pricing in a 100 bp (that would require a 9 bp rate); nonetheless, it’s close enough for government bond work. There is a contingent in the market anticipating that yesterday’s drop in domestic equities will prove sufficient to warrant another intermeeting ease; this round a full point. This is a distinct possibility as concerns continue to migrate from stocks into credit products as the coronavirus leads to greater state and local government responses. We’re unwilling to dismiss the prospects for an emergency cut ahead of the weekend, after all it’s Friday the 13th, what could go wrong?

As of mid-week New York City Subway ridership sank about 20% over coronavirus fears, prompting the Metropolitan Transportation Authority to begin consider scaling back operations which see 5.5 million people ride each weekday. Depending on the potential extent, it would be a historic first: “Subway service in New York City could be scaled back as the novel coronavirus outbreak leads to falling ridership, a Metropolitan Transportation Authority official said Thursday,” WSJ reports.

Simultaneously cyclists and people walking to their jobs on foot have been on a noticeable rise though much of New York is grinding to a halt, with public event cancellations coming fast and furious on Thursday, after Gov. Andrew Cuomo issued an edict banning large gatherings across the state (of 500 people or more). And in NYC everything from Broadway to the Metropolitan Museum of Art and other frequented spots have been shuttered, though controversially most high schools remain open – with closures based on confirmed or suspected Covid-19 cases, after Mayor Bill de Blasio officially declared a state of emergency Thursday.

Currently, the subway system is running as normal, despite the mayor previously comparing the outbreak to a ‘war-time’ situation. “We are getting into a situation where the only analogy is war,” he said.

The mayor is reportedly committed to keeping public transit open, despite growing criticism over the choices being made:

New York will look to keep those vital institutions running at all costs, the mayor said, though he continues to face calls to shutter schools.

For now, MTA officials have simply urged subway commuters to avoid crowded cars and to stagger their rides. And yet with the plummeting numbers they could eventually be forced to begin reducing operations, facing greater pressure from the public.

At the start of the week Metropolitan Transportation Authority chairman and CEO Pat Foye said the trains “remain safe” but still recommended for those with underlying health issues, “If you can get around without riding the subway, do it.”

Tomorrow’s cover: De Blasio declares NYC state of emergency to stem coronavirus https://t.co/VlWiwU5FfH pic.twitter.com/Gm8vuLfzmt

— New York Post (@nypost) March 13, 2020

With the overall 20% drop in ridership, some lines have seen a staggering near half drop in riders, per the WSJ:

The spokesman said ridership on the MTA’s two commuter rail systems, the Long Island Rail Road and Metro-North Railroad, was down 31% and 48%, respectively, during Thursday morning’s rush hour, compared with a similar rush hour last year. The state had 328 confirmed cases of the virus as of Thursday afternoon, including 95 in the city, state officials said.

The MTA is considering service reductions for buses and some commuter railroads, however, to give an idea of just how monumental a subway closure or even reduction would be, it must be remembered that it hasn’t closed in over a century.

The WSJ points out: “The subway system has never shut down because of a health scare. But its 100-plus-year history is scattered with dayslong closures because of storms, labor strikes and blackouts.”

So if we do reach the point to where the MTA actually moves toward unprecedented reductions or even closure, this would most certainly be a ‘canary in the coal mine’ moment signalling to the rest of the country just how bad this could get – as in China and Italy levels of outbreak.

It’s official: Brazilian President Jair Bolsonaro has tested positive for coronavirus, making him the highest ranking political leader in the world to get Covid-19 thus far.

It was first reported Thursday that Bolsonaro was being monitored and tested, after his press secretary Fabio Wajngarten had tested positive for the virus.

Crucially Bolsonaro along with his aide met with Donald Trump when the Brazilian delegation traveled to Mar-a-Lago on 7 March, with Bolsonaro reportedly having more contact with Trump than this aide, including a Saturday evening dinner at the resort.

Local Brazilian media reports Bolsonaro will undergo a second COVID-19 test to confirm the first.

On Thursday some unconfirmed local reports began saying Bolsonaro had tested positive, but other sources denied what appeared premature speculation.

Journalist Glenn Greenwald writes of Friday’s breaking Brazilian newspaper reports: “A reasonably reliable Brazilian newspaper is reporting, based on sources with first-hand knowledge inside the presidential palace, that Bolsonaro’s first test was positive for COVID-19.” He added that “A second more reliable test was performed; results available today.”

BREAKING: #Brazil President Jair Bolsonaro Tests Positive for #CoronaVirus. He was in US and dined with Trump on Saturday, March 7.

He is highest ranking political leader to get COVID-19. https://t.co/1pm6YZ9wrT

— Joyce Karam (@Joyce_Karam) March 13, 2020

The Brazilian president’s office has yet to comment on or confirm the new reporting early Friday.

Likely this means the US president himself will now be closely monitored and tested, if not already.

developing…

Via GoldMoney.com,

The Germans – as always – have a word for it: Rohrkrepierer. Literally translated it means “[projectile] that explodes in the barrel before it exits the weapon”. This is a perfect analogy for what happened when the Fed took out what it felt was the financial Bazooka, just to see equities implode on the close (see Exhibit 1). More specifically, the NY fed today announced a massive expansion of its repo facility by a staggering 1.5 trillion $ over 2 days. The Fed also announced it would start purchasing coupon Treasuries as part of its POMO operations.

As of today, the S&P500 is down 26.7% from the peak, surpassing the -20% threshold that is usually associated with a bear market. What is staggering though, is the speed at which this happened. It took the S&P500 just 16 trading days to do so. The previous record was set by no other stock market crash than that of 1929 with 30 trading days. In other words, the current equity market crash has been twice as fast as the mother of all crashes in 1929.

The below chart shows the S&P500 performance of every bear market since 1929. There are three events that stand out: 1929, 1987 (the infamous Black Monday on 19 October 1987) and now 2020.

The chart is not exclusive to US equity markets, stock indices around the world are showing a similar picture. Asian markets have shown similar declines over the past 3 weeks, but because they have been in decline for a while, the peak to bottom time has been significantly increased.

So why are we seeing such a rapid decline in stock prices? One could easily point to the Coronavirus outbreak and determine that this causes an unprecedented economic impact to a highly interlinked global economy. Ultimately, this may be true. We don’t know yet.

We would argue however, that equity markets have been ripe for a significant correction for a long time and that the Coronavirus is just the event that triggered it. We expect markets to continue to correct even if  the Coronavirus threat were to dissipate over the coming weeks, be it because lockdown measures globally show results, or be it because hotter summer temperatures mean that the spread of the virus is slowed down dramatically.

The root of the current market crash lies much deeper. Central bank interventions have propped up asset markets to record valuation, by almost any measure. At the same time, it has hollowed out the real economy. Artificially low interest rates have led to massive capital misallocation. The US shale oil industry is one such example, where producers with very high operating costs and no means of generating sustainable profits have been showered by inventors and banks with money, which kept them going for much longer than what should have been possible in a normal investment environment. With the oil market crash, this comes suddenly to an end. Investors and creditors will have to write down hundreds of billions of dollars over the coming months. We expect other industries to follow. There are serious consequences for credit markets on the horizon.

One thing we think is certain: Despite today’s misfire, central banks will continue to try to solve the problem by flooding the market with money. Interest rates will be slashed to even more negative territory. Quantitative easing will accelerate and central banks will likely come up with new ideas how to prevent a credit meltdown and stimulate demand. All that will be good for gold prices.

Fortunately, gold prices have been held back, by rapidly declining energy prices…

…rapidly declining inflation expectations…

…and what we believe is liquidation to cover margin calls on long asset positions. We say fortunately, because it allows savers around the world to still buy gold despite the asset meltdown over the past week. We expect much higher gold prices over the medium term and will write about this in an upcoming report.

Update (1030ET): A flashing-red headline from BBG just declared that Spain is announcing a national state of emergency over the outbreak, as the number of confirmed cases in Madrid soars amid a rash of deaths.

Socialist Spanish PM Pedro Sanchez said that he isn’t ruling out the possibility that there will be more than “100,000 cases of coronavirus in Spain” as early as next week.

Trudeau plans to address the nation at noon ET, presumably to discuss the situation with him and his wife. In the mean time, the Canadian Parliament has been suspended for the time being.

Brazil’s government denied these rumors last night, but reports have persisted, and now the Guardian is reporting that Brazilian President Jair Bolsonaro has tested positive for Covid-19. His communications secretary tested positive earlier this week, raising questions about whether President Trump and VP Pence were exposed.

Switzerland is reportedly planning to reintroduce “checks” at all borders, after blocking Italians from entering earlier this week, as infections inside the country has started to accelerate.

*  *  *

Update (1022ET): The most prestigious golf tournament in America has just postponed play because of the coronavirus outbreak.

The 2020 Masters Tournament has been postponed due to “ever-increasing risks associated with the widespread coronavirus,” Augusta National Golf Club announced.

“Respecting the health and well-being of everyone associated with these events and the citizens of the Augusta community, the 2020 Masters Tournament, the Augusta National Women’s Amateur and the Drive, Chip and Putt National Finals have been postponed,” Chairman Fred Ridley said in a statement.

Statement from Chairman Ridley:

“Considering the latest information and expert analysis, we have decided at this time to postpone @TheMasters, @anwagolf and @DriveChipPutt National Finals.”

Full details at https://t.co/FX2AN1MLsY pic.twitter.com/Z2DjS5TYdG

— The Masters (@TheMasters) March 13, 2020

The tournament was initially scheduled for April 9-12. It’s not clear when play will begin.

The Boston Marathon has also been postponed until Sept. 14, according to a statement from its organizers.

*  *  *

It’s been another crazy morning around the world as more sports leagues suspended play and governments – most notably Germany  – pledged to whip out their credit cards and spend whatever might be necessary to soften the economic blow, a chorus of reassurance that has helped to drive markets back to limit-up.

Following reports last night that Arsenal’s manager and a Chelsea player had both tested positive for the virus, the Premier League decided during an emergency meeting Friday morning that it would suspend play. Now, the Champions League, Premier League and Europa League have all been suspended because of the virus.

Indian Public health authorities confirmed the first virus-related death in the world’s second-most populous country on Friday. Fewer than 100 cases have been confirmed across the country, and dozens who came into contact with the man have been quarantined. But the government’s inability to safely quarantine and treat the now-deceased patient was hardly encouraging.

After closing its border with Italy, Austria has cancelled international flights to/from Spain, France and Italy and is reportedly weighing a wider border closure. Nearby, the Czech Republic is planning to close its borders, and people won’t be allowed to leave the country. In the Balkans, Slovakia has closed its borders completely.

The FDA has launched a 24/7 hotline for patients worried about their infections status. In Washington, President Trump and VP Mike Pence have both decided not to be tested, in accordance with their physicians’ advice since neither are showing symptoms, despite both having come into contact with the infected or potentially infected.

After we reported yesterday that Trump shook hands and ate dinner with a Brazilian official who turned out to be infected, the Washington Post reports that an Australian government minister who just tested positive for the virus met with Ivanka Trump and AG William Barr, as well as a handful of other Washington officials.

In a statement, Aussie Minister Peter Dutton said that he woke up on Friday morning “with a temperature and sore throat” and was “subsequently tested for COVID-19.” Dutton was advised by Queensland Health that his tests returned positive on Friday afternoon. Dutton had met with Trump, Barr, Counselor to the President Kellyanne Conway and Director of the Domestic Policy Council Joe Grogan in Washington a week ago when Aussie PM Scott Morrison visited the White House for the first time.

As individuals try to gauge their infection risk, scientists have found that the coronavirus can stay infectious for days on some surfaces. Researchers have also now confirmed that the coronavirus can be contagious in the body before symptoms appear.

Across the US, nearly every state has diagnosed at least one case of the virus, while more than 1,600 cases of the virus are being treated across the US, including at least one patient in nearly every state and the District of Columbia. At least 41 deaths have been reported in the country as public life appears to be grinding to a halt.

WaPo

Washington DC has joined Seattle and Houston in closing its schools, while Michigan, Mexico and Oregon followed Maryland and Ohio by shuttering their schools. These closures will take effect Monday, and last until the end of March, or beginning on April.

“We are going to do what we have to do. We are in a crisis,” Ohio Gov. Mike DeWine said. Closures in Ohio will begin at the close of classes Monday and run through at least April 3, DeWine said. “It may be a lot longer.”

“This is a necessary step to protect our kids, our families, and our overall public health,” said Michigan Gov. Gretchen Whitmer in a statement released on Friday.

In New Mexico, Ryan Stewart, the state’s public education secretary, described the closures as a “proactive measure” to limit the potential community spread of the virus.

And while Oregon had worked hard to keep schools open, student absences and issues with staff have made it “impossible to functionally operate schools,” Gov. Kate Brown.

Kentucky stopped short of a mandatory order and “recommended” that schools should be closed. In California, Sacramento and San Francisco have also closed schools.

Meanwhile, back in China, all 42 Apple stores have reopened.

After Trump’s “misstatements” on Wednesday helped trigger one of the worst trading sessions on Wall Street since the crisis, the White House announced a series of steps on Friday aimed at boosting the availability of coronavirus testing, one of the most heavily-criticized aspects of the government’s response.

According to WSJ, a new, high-speed coronavirus test has been granted emergency approval by the FDA in a desperate attempt to expand testing capacity for the pathogen.

To facilitate testing, the FDA has created a 24-hour emergency hotline for laboratories having difficulty getting materials or finding other impediments to running tests, according to announcements early on Friday. The FDA has also authorized more private labs in NY State to conduct the tests, per CNN.

Officials also announced they would be doling out nearly $1.3 million in federal money to two companies trying to develop rapid Covid-19 tests that could have accurate results within an hour.

In Italy – not Iran – the president of the Medical Guild of Varese, Roberto Stella, has died of coronavirus at the age of 67. Stella died on Tuesday in Como, Italy, after being hospitalized following his diagnosis. He’s the first high-level public health official in Italy to succumb to the virus.

In a statement, Italy’s National Federation of Doctors and General Practitioners mourned Stella’s death. They added that they hope the government will take notice of the dangers Italian doctors and nurses are facing.

“He was the example of the capability and hard work of family doctors,” Silvestro Scotti, national secretary of the federation, said about Stella.

Spain has emerged as the strongest contender for 2nd-worst outbreak in Europe in what was until recently a three-way contest with France and Germany. Last week’s International Women’s Day March helped expedite the outbreak, according to city officials in Madrid, who are begging Spain’s federal government for some assistance.

In Boston, the JFK Presidential Library and Museum is closing immediately after two employees attended a conference last week where other attendees had confirmed cases of coronavirus, it said in a statement.

One of the largest livestock exhibitions and rodeos in the world will close early due to novel coronavirus fears, according to Houston city officials, who announced Friday that the city’s major Livestock Show and Rodeo will close earlier. It had been scheduled to run until March 22.

US Treasury yields are plunging after The Fed announced what amounts to ‘Emergency QE’ to buy $33 billion in bonds at maturities up to 30 Years…

10Y yields have plunged 16bps on the headline…

And 30Y yields are now down 3bps on the day, after being up 35bps overnight…

FRBNY Statement Details:

The Desk will conduct purchases in each of five maturity sectors below at the times indicated, subject to reasonable prices. 

• 20 to 30 year sector at 10:30 – 10:45 am and 2:15 to 2:45 pm for around $4 billion each

• 7 to 20 year sector at 11:15 – 11:30 am  for around $5 billion

• 4.5 to 7 year sector at 12:00 – 12:15 pm for around $8 billion

• 2.25 to 4.5 year sector at 12:45 – 1:00 pm for around $8 billion

• 0 to 2.25 year sector at 1:30 – 1:45 pm for around $8 billion

These purchases are intended to address highly unusual disruptions in the market for Treasury securities associated with the coronavirus outbreak.  These purchases are part of the $80 billion of planned monthly purchases, including both $60 billion of reserve management purchases and $20 billion of reinvestments of principal payments received from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities.

The House is expected to vote on an aid package in response to the Wuhan coronavirus outbreak after a deal was struck with congressional Republicans and Treasury Secretary Stephen Mnuchin, according to National Review.

The package will include guaranteed free testing and 14 days of paid sick-leave for patients, along with food assistance and Medicaid programs, unemployment benefits, and tax credits for small and medium-sized businesses affected by COVID-19. That said, “Democrats do not think payroll tax relief is an appropriate response,” according to House Majority Leader Steny Hoyer (D-MD).

Republicans initially were skeptical of the legislation due to provisions they feared would permanently increase paid leave entitlements, while Democrats did not want to include language explicitly prohibiting funding for abortions in the bill.

“We’ve resolved most of our differences, and [for] those we haven’t we’ll continue the conversation, because there will obviously be other bills,” Pelosi told reporters on Thursday. –National Review

“It’s fair to say we’re close to an agreement, subject to the exchange of paper, and hope to have an agreement tomorrow,” said Pelosi, adding in a letter to lawmakers that the bill “will take further effective action that protects the health, economic security and well-being of the American people.”

Pelosi also wrote that this won’t be the last coronavirus aid package – and that Congress would “get to work on a third emergency response package that will take further effective action that protects the health, economic security and well-being of the American people.”

NR also reports that Senate Majority Leader Mitch McConnell (R-KY) on Thursday announced that the Senate would skip recess this coming week in order to tackle coronavirus legislation.

“I am glad talks are ongoing between the Administration and Speaker Pelosi,” McConnell tweeted. “I hope Congress can pass bipartisan legislation to continue combating the coronavirus and keep our economy strong.”

Notwithstanding the scheduled state work period, the Senate will be in session next week. I am glad talks are ongoing between the Administration and Speaker Pelosi. I hope Congress can pass bipartisan legislation to continue combating the coronavirus and keep our economy strong.

— Leader McConnell (@senatemajldr) March 12, 2020

That said, there may be some friction between the Democratic-controlled House’s solution and the GOP-controlled Senate’s.

Fortunately, we do not need to choose between Speaker Pelosi’s first draft and doing nothing. I am glad the Administration is continuing talks. The Senate is ready to consider a bipartisan, bicameral package if House Democrats return to the table & work with the President’s team.

— Leader McConnell (@senatemajldr) March 12, 2020

 

As we have been detailing all week, this has been the worst period for Risk-Parity (or vol-targeting) funds in history, with a massive breakdown in the stock-bond correlation from historical ‘norms’…

Causing Risk Parity funds in particular are to suffer the worst 4 day period on record.

However, as Nomura’s Charlie McElligott believes, vol-targeting funds have essentially nothing left to sell in the Equities-space, “only” -$7.4B sold yday in US Eq, as the aggregate Equities $exposure is currently “0 %ile” since 2000

CTAs are almost entirely -100% Short across the Global Equities futures strip with the exception of Nasdaq (“just” -64% Short), and have added leverage into the move lower in recent days.

However it is actually possible that further extension of today’s violent rally is at risk of triggering “mechanical” covering, with levels to buy “feasibly” within range over coming days, and in light of this “realized vol” environment making such moves possible

• NASDAQ 100, currently -63.6% short, [7215.25 close], more selling under 7223.33 (+0.11%) to get to -82% , max short under 7222.61 (+0.10%), buying over 7771.75 (+7.71%) to get to -25% , more buying over 8275.57 (+14.70%) to get to 56% , flip to long over 7772.48 (+7.72%), max long over 8276.29 (+14.71%)

• HangSeng CH, currently -100.0% short, [9644.0], buying over 10561.43 (+9.51%) to get to -56% , more buying over 10649.88 (+10.43%) to get to 25% , flip to long over 10649.88 (+10.43%), max long over 11103.68 (+15.14%)

• Nikkei 225, currently -100.0% short, [18360.0], buying over 20496.43 (+11.64%) to get to -82% , more buying over 21271.86 (+15.86%) to get to -25% , flip to long over 21273.7 (+15.87%), max long over 22649.68 (+23.36%)

• S&P 500, currently -100.0% short, [2468.9], buying over 2759.71 (+11.78%) to get to -82% , more buying over 2918.04 (+18.19%) to get to -25% , flip to long over 2918.28 (+18.20%), max long over 3048.26 (+23.47%)

• Euro Stoxx 50, currently -100.0% short, [2567.0], buying over 3128.74 (+21.88%) to get to -82% , more buying over 3337.62 (+30.02%) to get to -25% , flip to long over 3337.87 (+30.03%), max long over 3463.44 (+34.92%)

• Russell 2000, currently -100.0% short, [1109.9], buying over 1462.0 (+31.72%) to get to -82% , more buying over 1484.17 (+33.72%) to get to -25% , flip to long over 1484.28 (+33.73%), max long over 1529.24 (+37.78%)

Risk Parity however was the story yesterday however, “by far” the largest culprit in the cross-asset deleveraging purge, with our model estimates showing aggregated gross-exposure slashed from 450% (61st %ile since ’11) down to 305% (2.9%ile) on the session—see below for a scale of the deleveraging on the asset-level:

So, is the worst over? Or is that just the end of the mechanical, forced-deleveraging selling and now comes the real action?

We do note that this morning’s open has seen more bond-AND-stock selling…

Having rebounded dramatically for the last six months, University of Michigan’s consumer sentiment index was expected to tumble notably in preliminary March data.

The headline UMich sentiment index was near its highest since 2000 in February, and has tumbled to 95.9 in flash March data (slightly better than the 95.0 exp) – the lowest since October, but ‘hope’ plunged:

• Current economic conditions index fell to 112.5 vs. 114.8 last month

• Expectations index fell to 85.3 vs. 92.1 last month

Source: Bloomberg

Buying Conditions, interestingly, improved across all areas…

Source: Bloomberg

65% of respondents believed the stock market will be higher in 12 months in February – near record highs – but that confidence crashed in March, tumbling 6.9 points to 58.7 – the biggest sentiment slump since August 2011 whenb S&P downgraded USA’s credit…

Source: Bloomberg

The survey conducted from Feb. 26 through late Wednesday evening captures a period that started with the virus beginning to spread across the country and culminated with the Dow Jones Industrial Average plunging into a bear market, the World Health Organization declaring a pandemic and President Donald Trump restricting travel from Europe.

“The initial response to the pandemic has not generated the type of economic panic among consumers that was present in the runup to the Great Recession,” , Richard Curtin, director of the University of Michigan consumer surveysaid in a statement.

“Nonetheless, the data suggest that additional declines in confidence are still likely to occur as the spread of the virus continues to accelerate.”

Curtin added that the figures suggest Americans’ early reaction to the public health crisis reflected a perception of the pandemic “as a temporary event.”

And as Rosenberg Research’s David Rosenberg warns, sentiment is about to get a lot worse:

“The big death rate headlines will likely hit consumer confidence very hard indeed and deepen an already likely deep recession and equity market collapse, potentially causing a significant backlash against the current U.S. administration.”