Tag: news

After January’s unexpected plunge to multi-year lows, Chicago PMI rebounded in February (from 42.9 to 49.0), beating expectations of 46.0.

This is the eighth straight month of contraction (sub-50) for Chicago’s Business Barometer…

Source: Bloomberg

As the chart above shows, the soft survey picture cross regional surveys is extremely mixed to say the least.

5 components of the Chicago PMI rose vs last month:

• Prices paid rose at a slower pace, signaling expansion

• New orders fell at a slower pace, signaling contraction

• Employment fell at a faster pace, signaling contraction

• Inventories fell at a slower pace, signaling contraction

• Supplier deliveries rose at a faster pace, signaling expansion

• Production rose and the direction reversed, signaling expansion

• Order backlogs fell at a slower pace, signaling contraction

Once again we remind readers that this number is entirely irrelevant as it hit before the impact of Covid-19 and the stock market collapse.

In a somewhat shocking sounding move, given administration officials’ ongoing effort to calm the public fears over the spread of Covid-19, The New York Stock Exchange has announced it will commence disaster-recovery testing in its Cermak Data Center on March 7 amid coronavirus concern, Fox Business reports in a tweet, citing the exchange.

“During this test, NYSE will facilitate electronic Core Open and Closing Auctions as if the 11 Wall Street trading floor were unavailable,” Fox says.

To reiterate, the disaster recovery plan is to check the process that would occur if Covid-19 ‘public distancing’ proposals come into effect and effectively shut the trading floor?!

The test is reported to occur March 7 between 8:30 am-11 am.

Remember, do not panic!

Dip-buyers tried – and failed – yesterday to bring an end to the avalanche of stock market losses, but the moves in bonds, FX, and commodities are just as stunning and in an overnight note, Goldman Sachs explains how the cross-asset sell-off changed on Thursday… and what they are watching.

Via Goldman Sachs,

As we look across moves in equity, credit, rates, commodities, China equities, US Health Care and volatility, we believe the timing of moves in each asset helps us to estimate how sentiment has shifted. We believe that understanding these sentiment shifts has implications for asymmetric moves around upcoming political and macro catalysts as well as the steady stream of COVID-19 updates. We detail these shifts and our favorite options trades below.

Exhibit 1: How the sell-off developed and what we are watching now

Total return of FXI, SPX, CDX IG 5Y, VXX, TLT, USO

How the cross-asset selloff developed:

A. Early January: Treasuries rallied and oil declined as institutional investors used these assets to reduce the risk of multi-asset portfolios to a global growth slowdown.

B. Late January: China Equities began to decline in late January as COVID-19 cases increased in China. US Health Care stocks sold off more than SPX in anticipation of the Iowa Caucus (not shown).

C. Early February: Broad US equities rallied as individual investors bought ETFs and select Tech/Consumer stocks as the Iowa catalyst passed. China equities rallied as the rate of growth of COVID-19 cases in China seemed to plateau.

D. Monday-Wednesday of this week: US Equities, US Credit, Treasuries and Oil all declined in a correlated sell-off. This pushed Treasuries and Oil to even further extremes. US Health Care Equities sold off more than the SPX demonstrating that political risk was a significant driver of selling pressure.

E. Thursday of this week: The VIX spiked to its highest level since February 2018 and SPX futures liquidity dropped to near all-time lows. Low liquidity likely amplified the price impact of equity selling flow. This marked a significant change in the velocity of the sell-off.

What we are watching now:

F. China Equities were up 2% in the month of February as of yesterday’s close, outperforming the SPX by 9%. Some underperformance of the SPX vs FXI during a period when investors have become more concerned about the impact of COVID-19 on the broader global economy was understandable; however, the resilience of FXI in recent days seems inconsistent with a view that global growth risk has significantly accelerated. We will be closely watching equity performance in China looking for opportunities to buy puts on FXI or calls on US/European markets.

G. Treasuries and Oil prices were leading indicators heading into this broad equity decline; we will be closely watching these markets for evidence that investors are removing these hedges and positioning for a rebound in growth sentiment. We have yet to see investors reduce these hedges. This indicator is not yet supportive of buying calls on US equities. Buying TLT puts appears attractive for investors that expect global growth sentiment to improve.

Four Notable Derivatives Market Developments:

1. SPX futures liquidity declined significantly on Thursday, reaching its lowest level since December 2018. 

This supports the idea that the sell-off accelerated due to a lack of liquidity rather than an increase in fundamental investors selling. Single stock liquidity also declined, but is at less extreme levels.

Exhibit 2 : S&P Futures liquidity declined to near all-time-lows yesterday

Daily median E-mini future bid-ask depth ($mm notional), based on 5-minute intraday snapshots

Exhibit 3 : Single Stock liquidity has declined, but is slightly above Dec-2018 lows

% of market cap tradable while only expecting to move the stock 10bps for Russell 3000 companies

2. Systematic Options selling flows: Rolling of short put positions likely exacerbated SPX moves on Thursday. 

As of Wednesday, the SPX broke out of the +/-3% range relative to its 1 month moving average. We estimate, there are over $100b of AUM in systematic SPX 1 month put and strangle selling strategies. These portfolio managers generally sell 1-month puts and strangles and only adjust positions if the options sold trade significantly in-the-money. We use the 1-month moving average of the SPX as a proxy for the SPX level when they initiated their positions. On Wednesday, the SPX traded to 5.7% below the 1-month moving average, likely beginning to trigger rolling activity (these investors would buy back their in-the-money-puts and sell new out-of-the-money puts). This activity is visible as excess selling pressure on SPX futures and pressure on SPX option put-call skew. On Thursday, we believe this rolling activity combined with lower SPX futures liquidity than in prior days, likely exacerbated price moves as the SPX declined to 9.5% below its 1-month moving average.

Exhibit 4 : Rolling of short options positions outsized underlying equity liquidity

SPX relative to its 1 month moving average

3. Investors have rushed to hedge single stocks, showing a fear of further sell-off acceleration. 

We find S&P 500 average stock put-call skew has been statistically more useful than index put-call skew as a contrarian indicator for predicting forward returns of the SPX over a two-month period (R-squared of 12% over the past 3 years). Ahead of earnings season, this signal suggested muted returns for stocks. Single stock skew is calculated using the volatility surfaces of all individual stocks in the S&P 500 and it is more likely to be indicative of broad positioning across the market and less likely to be influenced by a few large trades by macro investors in index options.

Exhibit 5 : Elevated concerns are priced into single stock options

S&P 500 average stock put-call skew

4. Healthcare stocks underperformed the SPX early this week showing that investor worries about political risk increased sharply following the results from Nevada on Saturday. 

Weakness in Health Care stocks as we approach Super Tuesday looks similar to the last week of January when political concerns led investors to reduce risk ahead of the Iowa Caucus. We see unusually high potential for a relief rally in Health Care stocks next week as investor concerns are likely to be relieved in the short term by the passing of Super Tuesday.

Exhibit 6: Options pricing suggests Health Care sentiment is at bearish extremes

XLV total return relative to the 1 year rolling percentile rank of 3 month implied volatility and put-call normalized skew

We believe that investors have reduced Health Care exposure and implemented hedges this week in anticipation of Super Tuesday as a catalyst and will see fewer near-term catalysts after we pass Super Tuesday. To be clear, we are not taking a view on the result of Super Tuesday as we believe a wide variety of potential outcomes are likely to lead to an improvement in sentiment for Health Care stocks.

However, amid all this chaos,  NorthmanTrader.com’s Sven Henrich, highlights the real tragedy in all this…

…the real message will likely get lost in all this. Most likely the popular narrative will be to blame the coronavirus as the unforeseen event, nobody could have seen this coming, this was not something anyone could have prepared for.

While that’s true on the surface it completely misses the larger point: The Fed, with it liquidity operations masked all the underlying issues in the markets over the past year. We had no earnings growth in 2019, we had multiple expansion. The bond market never confirmed the reflation trade, Gold had been rallying for months signaling something was amiss. And now the Fed left itself vulnerable to not being able to deal with a real crisis and basically openly invited people to TINA chase stocks into high valuations.

The Fed gave no warning to investors, instead it cheerlead investors off the cliff. Even last week Fed officials defended valuations and saw nothing wrong with anything adding to the atmosphere of complacency.

And now everyone will blame the virus, but not the reckless chase into stocks into historic valuations to begin with.

But, as Nomura’s Charlie McElligott warned, the fear of this potentially imminent – and likely coordinated – central bank “interventionary” response (let’s call it: this upcoming Sunday night, before the Asian open) will keep markets in a dangerous space, because strategies and traders which are potentially “pressing” shorts 1) either directionally (CTA model now “in play” of outright “short SPX”) or 2) pressing-shorts to managed “net exposures” or hedge long books, will be exposed to a surge squeeze higher, while investors who have been “grossed-down” by their risk management VaR models won’t be exposed to an “up-trade” in risk and likely feel obligated to “grab into” a short squeeze.

Trade accordingly.

As coronavirus ravages Iran and threatens to spread through the broader Middle East, potentially hitting refugee and war-torn populations hardest, it appears Erdogan is now making good on prior threats to “open the gates” of a flood of refugees on Europe. On Friday top Turkish officials were quoted as saying Turkey has no choice but to “loosen” its stance on the some 3.4 million refugees it is hosting.

This was the immediate, and perhaps predictable reaction, to Thursday’s dramatic escalation involving the deaths of some 33 Turkish soldiers in Idlib via airstrike, in the single deadliest day for Turkey in Syria throughout the entirety of the war. Widespread early reports said it was a Russian strike, but in a sign that Ankara doesn’t want to confront the more formidable Russian Air Force, it has blamed Syrian forces. 

Turkey has announced it has opened its until now sealed border with Idlib for at least 72 hours, and will allow unhindered passage of refugees to Europe. 

Turkish TVs broadcast footages showing migrants are boarding boats off Turkish coast, departing to Greek islands pic.twitter.com/YLMEM1lCMk

— Ragıp Soylu (@ragipsoylu) February 28, 2020

So it begins, as Middle East Eye reports: 

Turkey will open its southwestern border with Syria for 72 hours to allow Syrians fleeing the pro-government forces’ assault free passage to Europe, Turkish official sources have told Middle East Eye.

The decision came after a security meeting chaired by Turkish President Recep Tayyip Erdogan in Ankara late on Thursday after 33 Turkish soldiers were killed in Syria’s Idlib province.

A senior Turkish official said on Thursday that Syrian refugees headed towards Europe would not be stopped either on land or by sea.

The European Union is downplaying the fact that crowds of Syrian refugees have already been seen en route to Greece via land borders as well as the Aegean Sea.

Buses in Istanbul were filmed providing transport to refugees and migrants to the Bulgarian and Greek borders. 

Refugees gathered in Fatih, Istanbul, today after 5 buses brought by Turkey already left toward the Greek/Bulgarian border. Syrians know they are being used, but they don’t care. They want to live without fear. pic.twitter.com/0Z4CwrbKtc

— Elizabeth Tsurkov (@Elizrael) February 28, 2020

An EU spokesman was quoted in Reuters as downplaying the potential “flood” from Turkey coming: “I would like to stress that there was no official announcement from the Turkish side about any changes in their asylum seeker, refugee or migrant policy,” the spokesman for the EU’s executive said. “So from our point of view the EU-Turkey statement … still stands and we expect Turkey to uphold its commitments.”

But the reality on the ground may quickly prove these words moot: 

Al Jazeera’s John Psaropoulos, reporting from Athens, said the situation was “a European nightmare” as “the floodgates [are] being opened”.

As European officials mull whether this is but more of Erdogan’s threats or perhaps an early “taste” of what’s to come, or whether the flood has begun, Greece and Bulgaria have begun taking action, bolstering patrols along border areas with Turkey.

7/ If you are a refugee in Turkey, this is what you are watching the whole day on TV.

Live coverage with a clear message: borders are open to go to Europe. @akhbar pic.twitter.com/PmO7eMosCp

— Jenan Moussa (@jenanmoussa) February 28, 2020

“Hundreds of Syrian refugees in Turkey have begun preparing to travel towards the country’s borders with Greece and Bulgaria after Ankara’s sudden decision to no longer impede their passage to Europe,” The Guardian  reports early Friday.

“Turkish police, coastguard and border security officials were ordered to stand down overnight on Thursday, Turkish officials briefed reporters,” the report adds.

Greece appears to be responding by completely shutting any Turkish border access point to any and all traffic. 

And further, according to The Guardian: “Turkish news agency Demirören showed footage of what it said was 300 people, including women and children, walking on highways and through forested land in north-west Turkey towards the EU border early on Friday. Syrians, Iranians, Iraqis, Pakistanis and Moroccans were among those in the group, it said.”

The WHO is especially concerned of an outbreak among refugee populations in war-torn regions of Iraq and Syria. 

“Refugees and internally displaced populations across Iraq and Syria have been identified as the most vulnerable groups in the region, should the spread of the virus become a pandemic,” The Guardian reports of recent statements. 

“Health officials in both countries remain under-equipped to deal with such a a reality that seems more possible with each passing day,” the report added.

Sprawling and densely packed “tent cities” of refugees along the border areas of Syria remain the most vulnerable. 

Needless to say, we now have a dual crisis unfolding that’s indeed even more of a “nightmare” for Europe and the world than many could have predicted: a refugee flood, borders being opened, and the global threat of Covid-19.

Authored by Michael Every via Rabobank,

So it was right not to “buy the dip”. 

Virus cases continue to escalate almost everywhere that already had them, despite government lockdowns, and nobody and nowhere is proving immune. Iran’s Vice-President is infected and their ambassador to the Vatican has just died from it; now the Pope is feeling ill, if not necessarily with COVID-19.

Nigeria has its first case, which could mean havoc for that economy with its lack of healthcare facilities. New Zealand has an Iran-linked case. Lithuania has a case. The Netherlands has its first case. Germany and Spain are seeing more and more cases, and Italy is up to 528 with 17 deaths. Even in South Korea, being held up as a benchmark of how a developed economy with full data transparency and rapid, wide virus testing can respond, the number of new cases continues to rise. It’s also worth noting that while China is seeing fewer new cases—apparently–it is also seeing dozens of deaths each day (now 2,788 with 44 just added). That makes COVID-19 look more and more deadly as the epidemic data move around. The WHO helpfully stress that this “could get out of control” but still isn’t a global pandemic…so closing down global travel is not a solution.

In hindsight, and not being the head of a World Health Organisation, might I ask if perhaps having done so a month ago might have done the trick?

But too late.

We now also see panic and confusion in parts of the US: dozens have now tested positive in California, with reports of potential virus patients being treated by staff without protective suits, while in Hawaii there has been panic buying reported. The new “Virus Czar” Mike Pence has also just appointed some very old faces, Treasury Secretary Mnuchin and Economic Advisor Larry “airtight” Kudlow, to help him out: because of their vast professional experience in epidemiology and virus science, obviously. As we see ever-increasing virus circles, does that ever-decreasing pool of White House talent inspire confidence? Not so much, despite President Trump’s confident assertion that he is doing an “incredible” job.

After all, even his Austin Powers Mojo (baby) of the stock market is voting with its feet. Stocks slumped once again yesterday, with the S&P -4.4% to mark another awful day in a terrible week, and the Dow down the same and a whole baseball cap lower at 25,767. Moreover, futures point to another large decline when the markets reopen today: the Nikkei was down -4.2% at time of writing, for example, with most of Asia deeply in the red. We are now past a mere 10% technical correction and seem to be heading for a bear market, which is only logical when one considers the global backdrop. Indeed, the worst week for equities since 2008 surely beckons. Do you want to be long going into the weekend, even at these lower prices, when any number of worrying headlines may potentially hit the screens?

At the same time, the 10-year US Treasury is now trading at 1.24%, a fresh record low. Let nobody say again that the US yield curve does not have predictive power: it clearly told us a killer virus pandemic was imminent. The market is now expecting Fed rate action as soon as next month. However, we have recently seen the Bank of Korea hold its ground on rates despite the far greater local crisis occurring there; and the ECB’s Lagarde came out to say she didn’t see any immediate need to act. (Europe being behind the curve is more of a dog bites man story, however; plus, the ECB has little left it can usefully do anyway.) Yet the US is an economy where that stock-market Mojo (baby) really seems to matter more than little things like wages – or so you would say looking at the collective policy actions taken by US authorities for decades. As such, the Fed must indeed be a good bet to start slashing rates *to no practical effect on the virus* soon.        

Underlining that negative economic scenario globally, in South Korea Hyundai is shuttering a plant in Ulsan: first there was a problem with Chinese inputs for Korean firms, and now the problems are local; in Japan, Tokyo Disneyland is closing; and in Hong Kong, a dog has been found to have a weak form of the virus, raising another potential channel of infection ahead if confirmed. Meanwhile, China is still trying to get back to business as usual and estimates say it is back at 60-70%. The problem remains how to do that without the virus erupting again – and all the more so now the rest of the world seems to be infected.

In terms of currencies, EUR is somehow still looking strong vs. USD, which is surely a technical correction and not a vote of confidence. Recall that in the virus background the UK and the EU are about to go over the trade cliff together based on their stated negotiated positions: the EU for years asked the UK what kind of deal they wanted and the UK would not commit; now the UK has said “Canada” and the EU has said “Sorry, we are out of Canadas.” This risks a WTO “Australia” as the only option left on the menu. But back to FX. China is still trying to send out a signal that all really is well with CNY at 7.01. However, AUD is at 0.6522, which screams the opposite in a market that is not used for virtue signalling. Meanwhile, JPY is under 109 even as nobody is going to school or Disneyland.

While all of this is happening nobody is really talking about the US-China Cold War, which COVID-19 is likely to freeze even further; or that 33 Turkish soldiers have just been killed in Syria in one day at the hands of Syrian (read Russian) forces. As we have already noted this week, this virus pandemic is an accelerant to the pre-existing global conditions we had of populism, deglobalization, concern for national security over economic “efficiency” (read corporate profits), and rawer real politik; with co-morbidity factors like that, it is likely to prove highly damaging to the health of the “global liberal order”, which is surely close to being moved to the ICU (if there are any beds available).

After all, the US is talking about forcing firms to produce masks and anti-virus clothing in the US via the sweeping Defence Production Act of 1950, i.e., dating back to the Korean War. The UK has only 15 specialist beds available for patients in the deepest need of respiratory assistance: you think that will do? Ex-Chancellor Sajid Javid can stomp Thatcherite-ly in Parliament all he wants about fiscal prudence and debt, but the tide–and the virus–is flowing in the opposite direction.

Happy Friday – and stay healthy!

Amid all the carnage, a sliver of good news is that incomes jumped more than expected in January (+0.6% MoM vs +0.4% MoM) and while economists will be gravely disappointed spending rose less than expected (+0.2% MoM vs +0.3% MoM) prompting a healthy rise in the savings rate from 7.5% to 7.9%…

This is the biggest jump in incomes since Dec 2018 and spending growth was the weakest since Feb 2019…

Source: Bloomberg

On a year-over-year basis, December saw a big surge (due to Dec 2018’s stocks-market-plunge-driven collapse in spending) and January saw that give back some as incomes grew at 4.0% YoY…

Source: Bloomberg

Under the hood, the picture was mixed with private workers wage growth slowing compared to rising government worker wage growth…

Finally, we note that The Fed’s favored inflation indicator – PCE Core Deflator – rose to +1.63% YoY (though less than expected)…

Source: Bloomberg

Of course, all of this data is ‘old’ and hit before the impacts of Covid-19 really started.

Authored by Patrick Buchanan via Buchanan.org,

Not until well into the Democratic debate Tuesday night did the COVID-19 coronavirus come up, and it was Mike Bloomberg, not a CBS moderator, who raised it:

“The president fired the pandemic specialist in this country two years ago,” the former New York mayor said.

“There’s nobody here to figure out what the hell we should be doing. And he’s defunded the CDC.”

Not 24 hours later, President Donald Trump, home from India, was in the White House briefing room, flanked by the nation’s foremost health experts, deputizing Vice President Mike Pence to head the task force to lead America’s battle against the spreading disease.

Yet, by Thursday noon, the Dow Jones average was down 3,000 points on the week, a 10% plunge from its recent all-time high.

Trillions of dollars in equity value had been wiped out.

The great bull market of the Trump presidency may be history.

Though only 60 Americans are known to have been infected, and none has yet died, fear has begun to grip the nation as well as the world. Yet, as of now, the numbers don’t justify the emotion.

The death toll as of Thursday was 2,800, out of 82,000 cases of coronavirus worldwide. The great majority of these are in China, where the virus originated, though the disease has spread to every continent, with Italy and South Korea the hardest hit outside of China.

Whatever happens medically – the mortality rate of the virus is between 2 and 3% – it’s hard to see how the world averts a recession if COVID-19 is not soon contained and controlled.

Already, Democrats are piling on Trump for cutting funding for the Centers for Disease Control and Prevention and failing to reflect the seriousness of the threat. And the issue does present a challenge to Trump’s presidency. His handling of it may determine his stature as chief executive.

Yet the issue is also tailor-made for Trump.

First, the disease comes out of Xi Jinping’s China, not Trump’s USA.

Second, the president occupies what Theodore Roosevelt called the “bully pulpit,” the White House. He can use that pulpit daily to command the airwaves and inform, lead, unite and direct the nation during what could be a months-long crisis. And Trump alone has the power to declare a national emergency, should that be needed.

If Trump acts as a leader, urging unity in the struggle to contain the virus and discover a vaccine, the hectoring from the Democratic left, already begun, can come to be seen as unpatriotic.

Also, Trump’s probable opponent this fall, who would be in charge of preventing the coronavirus from spreading like the Spanish Flu of 1918-19, is Bernie Sanders. And what are Sanders’ credentials and plans?

Under “Medicare for All,” Sanders intends to nationalize the entire U.S. heath care system and abolish the private health insurance plans of 140 million Americans who now depend on them.

As for the pharmaceutical industry, uniquely situated to assist in the crash effort to find a cure for the coronavirus, Sanders will confiscate its profits and put those profiteers out of business.

Still, given the alarming news coming from countries all over the globe, there is a risk that by November, the U.S. and the world may have tumbled into a recession. Airlines are already canceling flights to and from Asia. Cruise ships are pulling into ports and off-loading passengers. Travel and tourism are suffering terribly. Schools are closing.

Chinese factories that produce essential parts for factories and finished products in the U.S., Europe and Asia are shutting down. Supply chains are being severed. Shortages are cropping up.

The Japanese are talking of canceling the Olympics. If the virus spreads here, the question arises: Will our two parties still hold their nominating conventions this summer in Milwaukee and Charlotte?

The chickens of globalization are coming home to roost.

In recent decades, America’s economic and political elites of both parties surrendered America’s economic independence for globalism, a new interdependence of nations, where we Americans no longer rely on ourselves alone for the vital necessities of our national life.

That decision is now being exposed as the folly against which Hamilton and economic nationalists always warned.

According to The Washington Post, critical ingredients of medicines and drugs, upon which many American lives depend, are made in Chinese factories now in danger of being shut down.

In the ongoing struggle between nationalism and globalism, the globalists are taking a beating. Like the Chinese and Japanese and Koreans, Americans are not going to be looking to the WHO or U.N. to ensure their health, but to their own nation-states. And if a pandemic threatens, transnationalism’s “open borders” ideology is not a policy that will bring universal acclamation.

Like Trump’s America, all nations, in this crisis, are going to put their own people first. As they should.

The 90th edition of the Geneva Motor Show (March 5-15) has been canceled following the Swiss government’s ban on all public events that gather more than 1,000 people until March 15 due to new fears Covid-19 is rapidly spreading across Europe. 

Palexpo not yet officially confirming the cancellation of Geneva motor show “but we heard the announcement from the Federal Office and we know what that means”. IE the show’s off.

— Nick Gibbs (@NickGibbs) February 28, 2020

Maurice Turrettini, president of the Geneva International Motor Show Foundation, said: “We regret this situation, but the health of all participants is our and our exhibitors’ top priority. This is a case of force majeure and a tremendous loss for the manufacturers who have invested massively in their presence in Geneva. However, we are convinced that they will understand this decision.”

“A few days before the opening of the event, the construction of the stands was very nearly complete. A week ago, during the press conferences announcing the 2020 edition, there was nothing to suggest that such a measure was necessary. The situation changed with the appearance of the first confirmed coronavirus diseases in Switzerland and the injunction of the Federal Council on 28.02.2020. The event is canceled due to this decision. 

In the meantime, the dismantling of the event will now have to be organized. The financial consequences for all those involved in the event are significant and will need to be assessed over the coming weeks. One thing is certain: tickets already purchased for the event will be refunded. The organizers will communicate about this as soon as possible, via their website.”

The Geneva car show is one of the biggest in the world, so it’s a blow to automakers who were planning on debuting new models. 

This comes as Switzerland reported 15 confirmed virus cases. It borders northern Italy, which has the largest amount of cases and deaths in Europe.