Category: zerohedge

Was that if for the US Federal Reserve? After 107 years of Fed history, was Sunday, March 15th the date the Fed lost its last shred of credibility as it fired its last round of ammo… and sent futures crashing limit down?

To be sure, the Fed still has a few more tricks up its sleeve – getting Congressional approval to buy stocks, coordinating with the Treasury to launch helicopter money – but all but the dumbest and most inexperienced people on Wall Street – read Millennial traders who have no idea what is going on – realize that the launch of these measures means the monetary endgame has arrived, and the time to shift away from financial assets into “hard” assets has arrived.

For a confirmation that we may have indeed entered the endgame, here are hot takes of several Wall Street pros, who have seen more than just one buyback-funded market cycle, courtesy of Bloomberg:

Michael O’Rourke, chief market strategist at JonesTrading:

“They blew it. The Fed panicked and the market is spooked. The S&P 500 registered all time highs less than a month ago and the Fed has expended all its conventional and unconventional tools. The key takeaway will be that they have truly expended all of their ammunition and this is the action of a central bank that is scared.”

James McCormick, global head of desk strategy at NatWest Markets:

“The fact is global equities are still getting slammed. It shows markets worried more about infection rates and growth and need to see a large fiscal response. Monetary policy will not have the same potency for financial markets — it is not enough on its own and there isn’t much ammunition left. The theme has been clearly on display in markets since the Fed’s first rate cut two weeks back. But this is not the end of monetary policy, not by a long shot. Fiscal policy announcements will now be watched more closely and discounted more quickly by financial markets.”

Roberto Perli, partner at Cornerstone Macro LLC:

“Overall, I believe the package is robust, but it also left something to be desired in some areas, like the unclear forward guidance and the reliance on the heavily stigmatized discount window. Nonetheless, Powell was clear that the Fed reserves the right to use other tools if appropriate.”

Peter Mallouk, president of Creative Planning, which manages about $45 billion:

“It’s largely inconsequential. The bottom line is this is a health issue. People are going to be surprised how little the economic incentives and plans are going to help until we start to see a change in the infection and death rate and I would take a 5% improvement in the war against the coronavirus over a 100% move in terms of economic incentives and initiatives.”

Mark Haefele, CIO, UBS Global Wealth Management:

“Broad fiscal spending and rate cuts are blunt instruments for dealing with the short-term economic impact of the virus, but should provide investors with some confidence that growth can be strong once the recovery gets underway. We expect the market to end the year at much higher levels than today, with China’s economy leading the way to recovery and the U.S. and European economies rebounding in the third quarter.”

Jeff Mills, chief investment officer of Bryn Mawr Trust:

“They had no choice, but it won’t be enough in the grand scheme of things. We need large fiscal programs, which based on the recent communication from the Treasury secretary it seems clear we will be getting. If we get the fiscal stimulus side of the equation, the eventual recovery will likely be more robust than it would be otherwise.”

Alicia Levine, chief strategist, BNY Mellon Investment Management:

“The Fed is leading global central banks. The mixture of policy action exceeds market expectations and, importantly, will help corporate credit markets as it unleashes a flood of liquidity. The disquieting message from last week’s market moves in the credit and Treasury markets was the contraction of liquidity and this action should help calm that dislocation. Expect the Treasury yield curve to steepen on this action.”

Joachim Fels, global economic adviser at Pacific Investment Management Co.:

“A global recession in response to a combination of a supply disruptions and a sudden stop of demand for (mostly) services appears to be a foregone conclusion. The Fed’s actions will help to restore an orderly functioning of the very core of the U.S. financial markets: the Treasury  market and the U.S. mortgage market. All said, policy makers including the Fed are in the process of pulling all the stops to mitigate the severe economic and financial disruptions caused by the most severe global health crisis in more than a century. More will be needed and will likely be forthcoming over the next few weeks and months.”

Ian Lyngen, head of U.S. Rates strategy at BMO Capital Markets:

“The coordinated action between the Fed/BoE/BoJ/ECB/SNB/Bank of Canada to lower the price on the central bank swap lines should help ease overseas funding stress by both reducing the cost of dollars for foreign banks, but also by adding the 84-day maturity option — in addition to the 1-week currently. This should help reduce the probability of global funding squeeze — whether it will be enough will be determined in the coming days.”

Krishna Guha, head of central bank strategy at Evercore ISI:

“Equity market futures continued to tumble following the announcement as he spoke. This troubling reaction likely reflects some combination of buy the rumor/sell the news from Friday, concern that the Fed has fired its bazooka and fiscal needs to step up too if this is to work, and missing elements on the liquidity/credit front. The Fed cannot do a lot about the first two but it can and should address the third. In our view the absence of TAF cash auctions and emergency 13(3) lending programs to shore up the credit markets starting with a CPFF backstop for commercial paper leaves the powerful package incomplete.”

Jason Daw, a strategist at Societe Generale:

“In normal circumstances, a large policy response like this would put a floor under risk assets and support a recovery. However, the size of the growth shock is becoming exponential and markets are rightfully questioning what else monetary policy can do and discounting its effectiveness in mitigating coronavirus-induced downside risks.”

Source: Bloomberg

US equity markets are opening down extremely hard this morning after futures traded limit-down from shortly after last night’s open.

@GreekFire23 summed up the stock market today best so far:

• 9:30am : Ding Ding Ding! Trading open!

• 9:30:00001am: Halted

The 10% surge in stocks to end Friday and provide hope into the weekend has been decimated…

And with the S&P 500 opening worse than 7% lower, (below 2521), the first circuit-breaker has been hit and trading will pause for 15 min.

SPY shows the move more effectively…

As a reminder:

• If declines 13%, (to 2358) trading will again pause for 15 mins

• If falls 20%, (to 2168) the markets would close for the day.

Oh and then there’s this…

After the sales process for Italy’s struggling former flag carrier Alitalia yielded no buyers, the Italian government has decided to re-nationalize Alitalia, the bankrupt Italian carrier.

The confirmation of the takeover speculation followed reports that the government would pump as much as €600 million into the bankrupt airline over the next year.

The Italian Economic Development Ministry didn’t immediately respond to a request for comment on the news. The latest deadline for potential buyers to bid on the airline is March 18.  Of course, Italy must rely on EU rules relaxing state aid to gain approval after no buyers were found over several years in bankruptcy.

Lufthansa and Delta Air Lines, which had both considered offers in the past, are now seeking government aid to weather coronavirus crisis themselves, and most other airlines are barely hanging on amid the biggest unanticipated exogenous shock to their business in decades.

While the government should hopefully get a ‘good price’ on the bankrupt carrier since no buyers were found, it will need to rely on the EU excusing some rules about government aid to private companies.

To that end, one Twitter user in Italy summed up the faults inherent in the Italian government’s decision: It’s tantamount to throwing more good money after bad, at a time when that money could be put toward a more productive purpose.

Authored by Richard Breslow via Bloomberg,

This is going to take time. Sorry to have to say it, but patience will be required and undoubtedly tested. By far the best thing that central banks can do is keep the global financial and funding markets functioning and not especially worry about whether the stock market, within some reason, has a good or bad day. We need to keep our eye on the ball. Unfortunately, the reality is that, until the virus starts to visibly recede, the best we should plan for is getting by as best we can.

The worst mistake that was made up until now was trying to pretend that it was business as usual.

I was reading through my emails and IBs this morning and was really surprised how many people essentially asked whether I thought the Fed‘s move over the weekend would “solve” the problem. What an extraordinary example of how we have been conditioned. The Fed can’t fix this. They can just help us get through it. It also was striking, how few people brought up the coordinated actions by multiple central banks. This is a global problem. The Fed isn’t in this alone. To think that way, misses the whole point. And, not to beat a dead horse, there will have to be some action on the fiscal policy side. We’ve seen that global monetary policy can be somewhat synchronized. Now we will see if the politicians can do the same.

One thing you can be sure of is that trying to trade these markets is unlikely to be easy. Equities will most likely be heavy. They should be. The real economy is taking a hit. I am not sure whether it is optimistic thinking or smart analysis, but, with so many analysts calling for a sharp rebound come H2, traders will continue to look for the dips to buy. There are going to be a lot of head fakes. If you must play things from the long side, buy a little bit and see how it feels. This is not an all or nothing situation.

Currencies will behave idiosyncratically. Try to avoid making blanket statements about what is or is not a safe haven. It is going to change based on the medical news and how different economies weather the challenges facing them. And it is unlikely to be apparent in a straight line. Are events euro positive or negative? It will change with the news. Will there be dollar shortages or will the swap lines be sufficient? These are the sorts of questions that need to be asked over and over. Not whether interest rate differentials have changed. It is hard, however, to see how emerging markets can avoid staying under pressure. At least until there is greater clarity. Supply chains will be difficult to keep functioning as we know them.

The world has changed, for the foreseeable future. Before planning what and when to buy, or, perhaps sell, for that matter, think about what assumptions we usually rely upon are applicable in this situation. This really is a time to think before you leap. As we all should.

As Europe and the US wake up to a world in lockdown and Covid-19 cases and deaths surge, Deutsche Bank will operate globally in split teams on Monday to flatten the curve of the virus, an internal memo read, first viewed by Reuters.

Germany’s largest lender is now implementing social distancing policies, a move to prevent the further spread at its office after several employees were infected last week at its headquarters in Frankfurt and London.

“We too have seen an increasing number of confirmed infections in our operations and central areas in recent days,” the memo read.

The memo also said the bank would keep its branches open across Germany this week. A spokesperson said offices in Italy had been shuttered. 

CEO Christian Sewing told a German newspaper on Sunday that Deutsche Bank has a much more solid financial footing than a decade ago.

“Our balance sheet, I can say here, is more robust than I have ever experienced in my 30 years at Deutsche Bank,” he told the Frankfurter Allgemeine Zeitung.

Deutsche’s equity has lost more than half its value in the last month. 

We’ve noted in the last several weeks that America’s largest banks have gone in lockdown since cases and deaths surged in the US. Following JPMorgan’s decision to begin its resilience plan in the first week of March, a number of other banks have also started their own contingency plans:

• Citi is sending hundreds of traders and salespeople to its backup site in Rutherford, NJ starting Monday as part of its coronavirus planning, CNBC’s Hugh Son reported in tweet, citing a source. To view the source of this information click here To contact the reporter on this story

• Bank of America is splitting its trading force, sending some employees to its back-up office in Stamford, Connecticut, Business Insider reports, citing an internal memo.

• Morgan Stanley is moving about half of its institutional securities traders to its disaster recovery site in Westchester, New York, Business Insider reported, citing a memo it saw.

• Plans for trading desk came days after non-essential travel outside the U.S. was halted; additional changes may be made

• Additionally, Morgan Stanley is beginning to shift London-based sales and trading staff to Heathrow site as part of its coronavirus contingency plans, Reuters reports, citing sources.

Authored by Bloomberg macro commentator, Garfield Reynolds

The Federal Reserve just moved us toward a world where central banks hold so much of government bond markets that nothing else matters. That’s a world where yields will stay lower forever not just for longer.

The Fed pledged to add $700 billion of bond buying after cutting rates back to the zero bound, and market reaction that followed hinted toward QE ad-infinitum.

The ECB will likely have to continue with its re-energized balance-sheet expansion and the BOJ at the very least is stuck with gradually adding to an already impressive pile of JGBs.

New Zealand’s central bank stands ready to turn to QE, and Australia’s says it is ready to do so too. Soon there may be no corner of the developed world where bonds aren’t being bought by local monetary authorities. The G-3 central banks’ aggregate balance sheet peaked at about 42% of their combined government bond markets in March 2018, before dipping to 37% last September; now the figure is 40% with a breakout to fresh highs anticipated.

Whatever the economic justifications for central bank stimulus, the impact on markets has been a regime shift, with the U.S. now seen likely to join Germany and Japan with yields below zero sooner rather than later.

Meanwhile, the deeply negative term premium for U.S. 10-year notes emphasizes that bonds are being transformed into price instruments not yield ones, casting doubt on how accurate expected inflation gauges such as breakeven levels can be.

The more bonds central banks buy, the harder it becomes for them to walk away, particularly with fiscal stimulus looming.

With governments being encouraged to borrow more and central banks set to dominate the market, we can say goodbye to bond vigilantes when it comes to the developed world at least.

Central bankers will find it well-nigh impossible to riskWhat central banker is going to risk letting yields rise substantially in the future, when doing so would harm governments, creditors and risk-asset sentiment.

Yields look like staying lower forever, not just for longer, as central banks march toward a world where they hold more than half of all government bonds and are unable to let go.

 

Update: The faint trace of good news from today’s $500BN term repo carried over into the overnight repo, which just like the operation before it (see below), priced undersubscribed, with dealers submitting $129.6BN in securities for today’s $175BN operation.

In total, the Fed has injected $148BN in liquidity this morning, which however may be rather generous considering the Fed not only cut rates to zero but removed all reserve requirements. In any case, if this is indeed good news on the liquidity front it has yet to be noticed by risk markets, with the S&P now trading -11% premarket.

* * *

Heading into this morning’s market shitshow, with Emini futures frozen, the SPY trading down 10% and assuring an instant 15-minute trading halt, traders dumping gold, crude and crypto and anything else that isn’t halted, a sense of panic and foreboding has pervaded Wall Street’s trading desks, and heading into the results from today’s Fed term repo, there was angst that the panic would escalate materially if the Fed announced that today’s upsized $500 billion, 28-day repo facility was close to oversubscribed.

Luckily that did not happen, and in perhaps the first ray of hope that the S&P500 won’t just BATS IPO itself to 0 in 50 milliseconds when it reopens, dealers submitted only $18.45BN in securities to today’s massive repo operation, down from $24.1BN on Friday, suggesting that the liquidity clogs may be getting slightly smaller.

Translation: maybe, just maybe, the Fed’s massive liquidity injecting bazooka may have alleviated some dealers funding needs. Or maybe not: if on normalizes the FRA/OIS for Sunday’s rate cut, it emerges that dollar liquidity in the interbank market remains scarce and highly fragmented.

Keep an eye on today’s overnight repo facility for confirmation the funding squeeze may finally be normalizing.

After what appears now to be pure hope-driven rebound in February – despite all real world signals screaming otherwise – the Empire Fed’s Manufacturing Outlook survey just crashed by the most on record to its lowest since April 2009…

The Federal Reserve Bank of New York’s general business conditions index fell 34.4 points to -21.5…

Source: Bloomberg

The survey responses were collected between March 2 and March 10.

Manufacturers in New York expect a gloomier future too. The index of future business conditions also dropped to an 11-year low. A gauge of shipments fell to the weakest level since September 2016, and the index of the average employee workweek slumped to its lowest level since December 2015.

The Empire State survey is the first of several regional Fed manufacturing indexes to be released for the month. Others for areas including Philadelphia, Richmond and Dallas will be released throughout the month.

We suspect those rebounds will all be devastated.

Few are dealing with the economic and market turmoil with more chaos and less class and resolve than the expert “buy and hold” class over at CNBC, who shockingly never said one word of warning to their retail viewers when the market was doing nothing but going straight up for more than a decade, and instead were dragging mom and pop investors into massively overvalued stocks urging them to buy at all time highs, and who are now melting down before our eyes at the first sight of a substantial market pullback.

Their solution: own the shorts by shutting down the market entirely. Because if one can’t BTFD, is it even a market?

As recently as Friday, when the Dow Jones posted a 2000 point gain on the back of a short squeeze that nearly doubled the indexes gains in the last 15 minutes of the day, there was no talk about markets being defective or needing to close. That was, of course, until the Fed’s $700 billion “quarantative easing” bazooka bailout of markets fizzled spectacularly on Sunday nights and futures promptly went limit down. When it appeared that this plan was failing, some of the industry’s finest began to panic visibly.

Prior to the Fed news, Halftime Report’s Scott Wapner had already called for blanket censorship of Twitter…

Then, after the Fed bazooka failed to calm markets, it sent the popular talking heads into a typing panic, as Wapner started tweeting wildly, criticizing NFL players for signing contracts, prodding the NYSE to “close the floor” and then begging for them to “close the whole thing up” so the market could “start again later”. Perhaps because when things don’t go your way, you can always beg for a reset in some imaginary world where the Fed still runs everything.

The chorus of CNBC anchors who never mentioned that investing includes risk in addition to return during the last 11 years continued, with David Faber joining his co-worker and also suggesting that markets should go on a “two week holiday”:

Meanwhile, Wapner had already shifted stages of grief from anger to bargaining, trying to project the image of markets slowly ramping back up, despite the fact that we were still nearly 13 hours away from the next cash open and likely haven’t come anywhere near feeling the full effect of the pain of the Fed’s panicked decision making:

But then it was clear the reality of the situation was finally starting to hit Wapner for the first time in weeks:

And at one point, Wapner finally appeared to just give up and literally tweeted “Help”:

Forget the idea that closing the markets when they don’t go your way is nothing but a temporary measure to pause price discovery that will eventually happen anyway, one way or another, but the anchors obviously never seemed to consider what the idea of closing the markets could project in term of further panic upon participants. 

Participants will find a way to hedge and trade in other markets. The logistical nightmare of expiring options and those needed to liquidate to deleverage as the market falls could cause serious unrest.

In other words, the thin skin of CNBC’s supposed “financial experts” is (yet again) exacerbating the problem instead of quelling it, as one Twitter user responded to Faber:

And other well known names in the Financial Twittersphere rung in, too. Short seller Marc Cohodes told Wapner to “grow up” after Wapner pressed for a market shut down:

Former CNBC anchor Jeff Macke implored regulators not to suspend the markets:

In response to Wapner’s meltdown about the nation being in “Uncharted Waters”, one Twitter user responded:

In response to Faber’s comment that “events” can change decisions, Stanphyl Capital’s Mark Spiegel cleared it up for him:

One Twitter user asked Wapner why he would want to close the markets now, with so many buying opportunities abound:

Finally, this blogger seemed to nail the overall essence of the situation:

The IMF has just fired off a trillion-dollar “bazooka” of its own Monday morning.

In a blog post published minutes ago, IMF Director Kristalina Georgieva issued three “policy prescriptions” that she said should define a “coordinated response” from the developed economies in Europe and the US. In addition to declaring that the IMF has $1 trillion in loan capacity ready to put to work to salve the economic damage caused by the outbreak, Georgieva encouraged governments to spend more, and asked the Fed to consider bulking up its dollar FX swap lines to emerging-market central banks. She also noted that the $42 billion that investors have pulled from EM markets is one of the biggest outflows in history, and will certainly ratchet up financial stressors.

Read the full post below:

*  *  *

Today, the IMF published a set of policy recommendations that can help guide countries in the difficult days ahead.

What more needs to be done?

Three action areas for the global economy:

First, fiscal. 

Additional fiscal stimulus will be necessary to prevent long-lasting economic damage.
Fiscal measures already announced are being deployed on a range of policies that immediately prioritize health spending and those in need. We know that comprehensive containment measures—combined with early monitoring—will slow the rate of infection and the spread of the virus.

Governments should continue and expand these efforts to reach the most-affected people and businesses—with policies including increased paid sick leave and targeted tax relief.

Beyond these positive individual country actions, as the virus spreads, the case for a coordinated and synchronized global fiscal stimulus is becoming stronger by the hour.

During the Global Financial Crisis (GFC), for example, fiscal stimulus by the G20 amounted to about 2 percent of GDP, or over $900 billion in today’s money, in 2009 alone. So, there is a lot more work to do.

Second, monetary policy. 

In advanced economies, central banks should continue to support demand and boost confidence by easing financial conditions and ensuring the flow of credit to the real economy. For example, the U.S. Federal Reserve just announced further interest rate cuts, asset purchases, forward guidance and a drop in reserve requirements.

Policy steps that we know have worked before—including during the GFC—are on the table. Yesterday, major central banks took decisive coordinated action on monetary easing and opening of swap lines to lessen global financial market stresses.
Going forward, there may be a need for swap lines to emerging market economies.

As the Institute for International Finance said last week, investors have removed nearly $42 billion from emerging markets since the beginning of the crisis. This is the largest outflow they have ever recorded.

So central banks’ policy action in emerging-market and developing economies will need to balance the especially difficult challenge of addressing capital flow reversals and commodity shocks. In times of crisis such as at present, foreign exchange interventions and capital flow management measures can usefully complement interest rate and other monetary policy actions.

Third, the regulatory response. 

Financial system supervisors should aim to maintain the balance between preserving financial stability, maintaining banking system soundness and sustaining economic activity.

This crisis will stress test whether the changes made in the wake of the financial crisis will serve their purpose.

Banks should be encouraged to use flexibility in existing regulations, for example by using their capital and liquidity buffers, and undertake renegotiation of loan terms for stressed borrowers. Risk disclosure and clear communication of supervisory expectations will also be essential for markets to function properly in the period ahead.

All this work—from monetary to fiscal to regulatory—is most effective when done cooperatively.

Indeed, IMF staff research shows that changes in spending, for example, have a multiplier effect when countries act together.

What the IMF can do

The IMF stands ready to mobilize its $1 trillion lending capacity to help our membership. As a first line of defense, the Fund can deploy its flexible and rapid-disbursing emergency response toolkit to help countries with urgent balance-of-payment needs.

These instruments could provide in the order of $50 billion to emerging and developing economies. Up to $10 billion could be made available to our low-income members through our concessional financing facilities, which carry zero interest rates.

The Fund already has 40 ongoing arrangements—both disbursing and precautionary—with combined commitments of about $200 billion. In many cases, these arrangements can provide another vehicle for the rapid disbursement of crisis financing. We also have received interest from about 20 more countries and will be following up with them in the coming days.

In addition, the Fund’s Catastrophe Containment and Relief Trust (CCRT) can help the poorest countries with immediate debt relief, which will free up vital resources for health spending, containment, and mitigation. In this regard, I commend United Kingdom’s recent pledge of $195 million, which means the CCRT now has about $400 million available for potential debt relief. Our aim, with the help of other donors, is to boost it to $1 billion.

In this way, the IMF can serve its 189 member countries and demonstrate the value of international cooperation. Because, in the end, our answers to this crisis will not come from one method, one region, or one country in isolation.

Only through sharing, coordination, and cooperation will we be able to stabilize the global economy and return it to full health.

*  *  *

The markets were clearly unimpressed with last night’s coordinated policy response from central banks, so how did the market react to the IMF’s call for coordinated fiscal and monetary action?

We saw a slight blip, that has already faded.

Despite throwing trillions at the market, nothing is stopping the freefall as it become clearer that what the market really wants is not a ‘loan’ to see it through but helicopter money…and once that has started, will it ever be allowed to stop?