Tag: news

Given the Iranian regime’s recent history of brazenly lying to the public despite its obvious culpability, we were certainly intrigued when a local lawmaker in Qom told reporters that at least 50 people had died from the coronavirus in his city alone.

Iranian authorities denied these reports, claiming the lawmaker had no way to prove whether certain individuals had died of the virus, or some other cause.

Then on Friday, they raised the death toll to 34, which is slightly more modest, if still atrocious by international standards.

Now, a team of journalists working for BBC Persia (which we didn’t realize was a thing until now) have reportedly confirmed at least 210 virus-linked deaths in Iran after canvassing workers at dozens of hospitals around the country.

We at #BBC have learned from our sources in hospitals across #Iran that death tool due to #coronavirus is 210 so far. The official government number stands at 34. https://t.co/gpufaSPG4w

— Bahman Kalbasi (@BahmanKalbasi) February 28, 2020

The story is written in Farsi, and Google’s “translate” function isn’t super helpful in converting the script. But judging by the quantity of text, the report appears to be relatively short and too the point.

The outbreak is the latest in a series of disasters that the regime has been battling since President Trump reimposed sanctions on its oil trade. These include, but are not limited to: Accidentally shooting down a Ukrainian passenger plane, and allowing some of its top government officials to be exposed and infected by the coronavirus.

At least 210 #coronavirus patients have died in #Iran, sources in the health care system told @BBCNews Persian. The figure, as of Thu PM, is way above the official figure of 34. Iran has defended its response to the virus spread and denied it is withholding information.

— Eunice Yoon (@onlyyoontv) February 28, 2020

Cities across Iran cancelled Friday prayers this week, an extremely rare occurrence which rarely, if ever, happens. As Iran’s neighbors close their doors to the burgeoning outbreak, some experts are estimating that the total number of cases in the country could be closer to 10,000, much higher than the fewer than 400 cases on the ‘official’ rolls.

In the breathless words of Ron Burgundy, “well, that escalated quickly!” Amid all the calls for The Fed to rescue investors with 1, 2, 3, or even 4 rate-cuts…

The question many prefer to not ask – for fear of the answer – is: How did we get here!?

Nomura’s Charlie McElligott provides the details of what sparked the greatest drop from a peak into correction in the history of the stock market…

• Two “left tail” macro-catalysts surged into last week (Coronavirus “black swan” and the stunning ascent of Bernie Sanders as “candidate #1” acting as a clustered “negative growth shock” impulse) hit at the perfectly wrong time into US Equities – and US Rates – markets

• Into options expiries for both US Equities and USTs / Rates late last week, we had seen Dealers extraordinarily “Long Gamma” in each of these “ultimate” asset-classes thanks to recently placid “financial conditions” thanks to Fed “policy asymmetry” and a relatively “Goldilocks” US Economy which incentivized “vol selling” behavior from investors looking for “yield enhancement” / “income generation”—helping in-turn drive S&P and Nasdaq to hit their all-time highs just last Wednesday

• This (now ancient) Dealer “Long Gamma” choke-hold over prior months had acted as an insulating / vol suppressing flow that buffered against shock-moves and, generally speaking, had kept us in relatively tight directional “bands” (as Dealers short options need to “buy dips or “sell weakness,” especially as we neared expiry)

• However and following the large expiries late last wk (VIX last Weds, everything-else last Fri), these two “macro shock catalysts” created a profoundly negative price impulse which sent “spot” levels in Equities Index, Equities Vol and Rates deeply through prior ranges, which drove Dealers into “Short Gamma”  territory – meaning that instead of insulating market moves as they had been previously, that now Dealer hedging flows would see them pressing into the directional moves (in this case, shorting into the new lows in Equities index, or buying VIX- and USTs- / STIRS- the more they “rallied”)

• And as we’ve stated in this note now for nearly a decade – in a market structure which is now built on “negative convexity” / “short vol” / “short gamma” strategies in order to generate “yield,” as you’ve been incentivized by the global central bank “put,” financial repression” and their complete submission to “financial conditions” (the politically correct form of saying that Central Banks are beholden to markets and the “wealth affect”), any spikes in volatility are to be “sold” and dips in equities are to be “bot,” while said vol / term premia suppression policies (rate cuts, large scale asset purchases, liquidity injections) too “green light” carry- and momentum- trades, especially with the cheap cost of leverage

• The problem is, the more something “trends” the more leverage you need to apply to maintain target exposures – which is the working definition of “stability breeding instability”

• So on that macro catalyst “shock down” which forced Dealers into “Short Gamma” territory then exacerbating the moves further at the “extremes” (selling lows in Equities to remain hedged, or buying Vol / USTs / ED$ at highs), we then exposed the MECHANICAL DELEVERAGING FLOWS of systematic “vol control” / “target volatility” universe which now need to gross-down—because VOLATILITY IS THE EXPOSURE “TOGGLE”

• And this isn’t just for “quants,” because anybody operating under a VaR risk management framework is also a de facto “vol control” fund, where these rolling “macro catalyst crises” blow-up accumulated leverage in previously “easy money” carry- and momentum- trades in turn driving shock “de-grossing” events that we come to expect now every few months

• And in peak perversity and after their forced “VaR-downs,” it’s the same “backtests” (which are a function of the “known phenomenon” of Central Bank interventions to yet-again “save the day”) which tell the models and condition the human behavior to again thereafter “short rich vol / premium” when it hits these high %iles

• Soon, S&P Puts are “bombed” and VIX Calls / futures sold, while systematic roll-down in VIX steps-in after inversions then normalize—and this normalization of vol then means that the “vol control” / “target vol” stuff then begins their mechanical “RE-leveraging,” forcing the “chase” too from fundamental investors back into the market who too have been conditioned to “buy the stock dip, sell the vol rip”

• “Crash-down, crash-up” – RINSE, REPEAT

Spot On! But if you really want to know how we got here, it’s a longer tale that for  former Dallas Fed’s Fisher noted yesterday:

“Does The Fed really want to have a put every time the market gets nervous? …Coming off all-time highs, does it make sense for The Fed to bail the markets out every single time… creating a trap?”

“The Fed has created this dependency and there’s an entire generation of money-managers who weren’t around in ’74, ’87, the end of the ’90s, anbd even 2007-2009.. and have only seen a one-way street… of course they’re nervous.“

“The question is – do you want to feed that hunger? Keep applying that opioid of cheap and abundant money?“

“the market is getting ahead of itself, because the market is dependent on Fed largesse… and we made it that way…

…but we have to consider, through a statement rather than an action, that we must wean the market off its dependency on a Fed put.”

It’s not the virus, it’s The Fed stupid!

With stocks crashing, yields plunging, supply-chains fraying, China’s economy freezing, junk bonds tumbling, credit and equity markets grinding to a halt, and the global economy on the verge of a crisis the likes of which it has not seen since Lehman, moments after both Goldman and Bank of America predicted the Fed would cut rates as soon as next month (and in the case of BofA, an emergency double cut could come any moment), in a shocking, rare admission that the Fed is “on top of thing”, Fed Chair Powell, aware that everyone was looking at the Fed for guidance on what happens next and whether it will conduct an emergency Sunday night global intervention in markets, at exactly 2:30pm on Friday with 90 minutes left until the close, Powell issued an unprecedented statement meant to do just one thing: calm markets and stop the selloff.

The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.

While Powell admitted what everyone knows, namely that the coronavirus “poses evolving risks” to U.S. growth and signaled the central bank is prepared to cut interest rates if necessary to support the expansion, what nobody still knows yet, is whether the current state of events is enough for the Fed to rush with a 25-50bps emergency rate cut as soon as Sunday.

Powell’s statement, which was posted on the Fed’s website 90 minutes before markets closed for the weekend comes as stocks were in their seventh-straight loss, prompting calls multiple rate cuts by Wall Street banks, and as markets expect more than 1 rate cut in March…

… yields on U.S. Treasuries are plunging to record lows.

While stocks may have been expecting a far more forceful statement from Powell, they took the rare communication from Powell in stride, and after spiking higher, then grinding lower upon realizing that Powell did not really commit to anything, stocks have continued to rise…

… with the dollar plunging…

… as traders are now indicating that this is a preview of what now appears an almost certain Sunday night central bank intervention, whether standalone or coordinated with other global central banks.

And yet, as we warned earlier, a Sunday emergency rate cut could be the worst possible outcome. As we noted earlier in our “Sunday night action” preview post, the danger is that after a coordinated central bank response, investors will be forced into chasing a move higher in equities out of fear that they “missed the lows,” but into that inevitable “cluster” report of confirmed cases in a global mega-city outside of China (see what’s happening in California now as prime target), “as the pandemic is now certainly “real”—which could drive another shock-down, but this time, without the hedges which, on the way down, can also act as “insulation” when monetized.”

In other words, if or rather when the corona pandemic gets even worse after central banks have fired their collective bazooka, the market’s response will be far more adverse as central banks will have staked their credibility on being able to offset the economic consequences of the pandemic (they can’t, unless they can print viral antibodies), while investors will now be looking into the abyss without any hedges left.

And that could be catastrophic.

When it comes to its market, rates and economic forecasts, Goldman has long been one of Wall Street’s favorite contrarian, Gartman-like indicators: i.e., always wrong. From its notoriously terrible FX predictions (which we so bad, two of its recent global FX strategists quit because they literally couldn’t get one call right), from its atrocious STIR predictions, expecting four rate hikes in 2019 back in December 2018 as the Fed was set to reverse its tightening bias, and not only cut rates 3 times but launch QE4, to its perpetually optimistic S&P and economic forecasts, and last but not least, always incorrectly calling for higher yields by year end (any year end), it was easy to forget that Goldman was once one of the most respected banks on Wall Street instead of a bunch of sellside clowns whose only job was to get clients to do the opposite of what its flow traders were doing.

Which is why we were somewhat conflicted by Goldman’s latest prediction, because one day after the bank admitted that there would be no earnings growth in 2020 (after there was no EPS growth in 2019), Goldman’s chief economist Jan Hatzius admitted his rosy US growth forecast was dead wrong, and in a note today he writes that just a few weeks ago, “we estimated that the coronavirus would subtract about 2% (annualized) from Q1 global GDP growth. Since then, our China economists have cut their growth forecast further, the risk of global supply chain disruptions has become more acute, and increasing reports of community spread have started to weigh on everyday consumer activity in some countries. These developments require a rethink of our analysis and a fuller consideration of the range of economic scenarios that could play out in coming weeks and months.“

Which brings us to the reason we are conflicted: as part of Hatzius’ “rethink” of the global economic rout, he has come to a conclusion which shockingly may be correct for once, to wit:

Our new baseline scenario involves a continued slowdown in infections in China that allows for a slow recovery in high-frequency indicators of economic activity. However, it also includes moderate supply chain disruptions in the global goods-producing sector, as well as a hit to consumer spending and business activity from national outbreaks that go well beyond China and the other countries (such as Korea and Italy) that have been affected so far.

Our analysis shows effects on quarter-on-quarter annualized global GDP growth of -5pp in Q1 and -2pp in Q2, followed by a rebound in the second half of 2020, leaving our full-year global growth forecast at about 2%.

Yet even if all this is correct (it will be), Hatzius will still be wrong because he refuses to “go there”, and despite now expecting the worst hit the global economy since the global financial crisis, he merely anticipates “a short-lived global contraction that stops short of an outright recession.”

Why no recession? Because the bank which until Friday expected no rate cuts in 2020, suddenly expects no less than three rate cuts, and all of them taking place in the next three months:

… we would expect some monetary easing from a number of the world’s major central banks, including 75bp of rate cuts by the Federal Reserve through June starting with a 25bp cut in March. Although moderate Fed rate cuts are unlikely to be very powerful, the committee will probably be reluctant to disappoint market expectations for substantial rate cuts for fear of tightening financial conditions further.

Of course, by now Hatzius must be surely getting tired of being called the macroeconomic “Thomas Stolper” (long-time readers know what that means), and as a result he has quietly inserted two additional scenarios just to cover all his bases. While the “upside” scenario is meaningless as it has no hope in hell of occurring, it’s the downside one that is more ominous:

We also consider two alternative scenarios. The upside scenario assumes that the global spread of the virus is brought under control quickly and supply chain disruptions remain mostly absent; if so, global GDP would rebound in Q2, risk asset markets would recover sharply, and central banks may stay on hold. The downside scenario assumes widespread supply chain disruptions as well as domestic demand weakness across the global economy. This would involve sharp sequential contraction in global GDP in Q1 and Q2—i.e., a global recession—and probably an aggressive monetary easing campaign, including a return to the near-zero funds rate of the post-crisis period.

Notably, not even the market expects a full 3 rate cuts by the end of June, which suggests that for all its cheerful optimism, Goldman is bracing for its “downside scenario” materializing.

All of this means that after taking a lot of criticism from the unemployed, basement-dwelling macrotourists, also known as fintwit, Rabobank’s forecast of 0% rates by the end of 2020, which was made all the way back in August 2019, will be spot on.

But wait there’s more.

Now that Goldman officially broke the seal on rate cut forecasts, early on Friday afternoon, BofA rushed to one-up Goldman, and in a note from the bank’s chief economist, Michelle Meyer, now expects all those who we yesterday said were betting on 2 rate cuts in March, to make a killing. Why? Because it is now BofA’s base case that the Fed will cut rates bv 50bps, or twice, “at the March meeting to stem the panic in markets and support economic sentiment” and not only that “an emergency cut by the Fed prior to the meeting is possible – it will depend on the extent of market dysfunction.”

Some more details from BofA:

The Fed is being called into action and we expect a 50bp cut at the upcoming March 18th meeting. An emergency cut by the Fed prior to the meeting is possible – it will depend on the extent of market dysfunction. We see three key reasons for the Fed to ease.

1. First, what looked like just a supply shock from COVID-19 as a result of broken supply chains is now also becoming a demand shock. An adverse feedback loop has developed between consumer sentiment and market participants. Fed cuts may be able break or slow that loop.
2. Second, market movements have been sharp with a risk of becoming disorderly. The Fed learned from the Great Financial Crisis, that they must be nimble when faced with such risks. The overarching goal is to maintain access to credit and funding.
3. And finally, remember that the Fed embraced “insurance” cuts last year, laying the groundwork for continued easy policy. They made it very clear last year that the intention is to be proactive instead of reactive, especially given the proximity to the zero lower bound and the limited toolkit.

While BofA is now “convinced of Fed action – the only debate is over the timing and magnitude” and “much will depend on the news of the virus over the next two weeks. The CDC has warned that it is only a matter of time before COVID-19 shows up in a more meaningful way in the US. If headlines remain alarming, it will fuel expectations for aggressive Fed easing. However, it is also possible that fear subsides and we enter the March meeting in a calmer state. The latter would prompt only a 25bp cut but we don’t think it will be calm enough to allow the Fed to sit on hold. In other words, good news means 25bp. Continuation of news like this week means 50bp. Worse news about the spread of the virus could prompt an emergency cut. The Fed will be nimble.”

As the chart below shows, this is more than even the market expects:

Of course it will be: it needs to do everything in its power to avoid a market crash which would not only undo 11 years of trillions in liquidity injections, but wipe out what little credibility the US central bank had, resulting in the biggest financial crisis – and market – crash in history. 

Authored by Bank of America’s Chief Investment Officer, Michael Hartnett

Key takeaways

• Market cap loss: $6tn in global stocks, $4tn in US stocks in just 6 trading days.
• Credit “ghost in the machine” remains biggest market risk.
• We say March will be policy panic month, risk to rally.

The bad news…

Credit event: risk of credit event surging…extreme bond ETF volumes (e.g. HYG), ominous breakdown in levered loan ETF BKLN (Chart 2), CDS widening; exogenous shocks often expose bad leverage (e.g. Kobe earthquake led to Barings, Asia crisis… LTCM); liquidation of $1tn annualized bond inflows exposing systemic “ghost in the machine” remains biggest 2020 market risk (catalyst for policy response).

Macro: risk of global recession rising…BofA economists cut 2020 global growth to 2.8%, lowest since 2009 (link); BofA global 2020 EPS model forecasts -3.5% (vs. flat consensus)…model inputs (global PMIs, Asian exports) deteriorating (Chart 3).

Peak globalization: COVID-19 reminder that US/China tension, bifurcated global supply chains, competing technology standards…all negative for corporate profits in 2020s.

Politics: Oddschecker.com shows probability of Sanders victory in Nov’20 election @ 26%, up from 3% Oct’19 (Chart 4); US political risk hitting US$, helps explain surprise YTD outperformance of China stocks (A-shares) vs. S&P500.

Big Top: we had it coming…SPX highs, gigantic bond inflows, record low IG default risk, Microsoft, Apple, Google, Amazon all >$1tn, “toppy” corporate behavior; new lows in bond yields popped “irrational bubble” (we thought it would be Q2); “Showtime” for markets…big secular monthly floors for stocks (SPX 3000, NYA 12000, MXWD 500) must hold to prevent “Big Top”, end of bull market narrative (credit signals poor – Chart 5).

The good news…

Policy: “markets stop panicking when policy-makers start panicking”; March = policy panic month; policy-makers behind-curve, have 3/4 weeks to prevent small businesses cutting employment US & EU; Fed cuts 25/50 bps + China/Europe fiscal stimulus + semblance of global policy coordination = calmer “animal spirits” + risk rally; yield curve steeper this week, and fears of policy impotence, ironically, will boost easing impact.

Bigger Picture…YCC+MMT: crash/ recession worries accelerates Fed shift to Yield Curve Control (YCC – heavily hinted last Friday by Fed Governor Brainard) and “fixed” low rates; also accelerates shift from QE to Modern Monetary Theory (MMT) to finance fiscal spending frenzy in coming quarters…will mark crucial low in inflation expectations.

Price: BofA CTIs models today show US & EU stocks extremely oversold, US Treasuries extremely overbought; BofA Global Breadth Rule closed at 62%, could imminently hit “buy signal” of 88% (of MSCI country indices <50- & 200dma); classic crash barometers (e.g. Swiss franc vs. Brazilian real - Chart 6) ripe for reversal.

Positioning: BofA Bull & Bear Indicator peaked @ 7.1 Jan 22nd; now 4.6 (Chart 1); $20bn equity outflows this week = 19th largest past 15 years & 3rd biggest week HY bond outflow ever ($6.9bn) signal capitulation begins; record week of tech fund inflow ($2.6bn) & 7th most into IG bond funds ($11.8bn) shows capitulation incomplete.

What to do

Watch: decline in gold & Treasuries to signal panic over; decline in US IG bonds to signal its just beginning; key monthly floors of SPX 3000, NYA 12000, MXWD 500.

Buy stocks: we adjust 2020 EPS of $175 to $160 (as a 40% probability of recession means 8% EPS haircut) and apply policy reaction/yield collapse PE of 17-18X…says SPX 2880-3040 good entry point back into S&P500 (Chart 7).

Barbell stocks: 1998 analog (policy panic leads to upside) says own barbell of extreme growth and extreme value…long US Tech/FAANG and long “value ghettos” of Asia cyclicals/FTSE/oil.

Sell Treasuries: Fed panic to steepen yield curve; Treasury ETF TLT currently 2SD overbought (Chart 8).

Diversify via commodities & cash: use rally to position for rise of stagflation (demand-led lower growth, supply-led higher inflation; note in stagflation shock of Dec’68 to Sept’74 portfolio 60-40 stock-bonds dropped 5.5%, while portfolio of a 25-25-25-25 stock-bonds-commodities-cash rose 31.4% over period (Chart 9).