Aches Aplenty

Aches aplenty.  Stocks were hit hard yesterday after being disappointed by Wednesday night’s Oval Office speech and the ECB’s keeping rates steady. The Fed stepped in with a massive liquidity package which was only met by a brief applause before the selling intensified into the close.

 

N O T E W O R T H Y

 

The butcher bill.  For those of us who watched the screens through yesterday’s session… well, let’s just say that it was long day.  Non-Wall Streeters got the news on their commutes home from either the radio or their news apps.  The headlines all read something like: “Stocks had their worst day since the ’87 crash”.  While that is true, that day in 1987 was far worse, which I guess on some level, is comforting.  So what happened yesterday?  After a rough session on Wednesday, traders were hungry for some good news out of the Administration, which just a day before promised something big.  Unfortunately, expectations were far from met.  In the President’s speech, he offered vague details of stimulus and banned travel from Europe.  This sent stock futures to limit down on Wednesday evening.  When the European stock market opened it dropped as well due to the President’s travel ban.  Then came ECB President Christine Lagarde’s speech in which she announced that the Central Bank would increase their bond buying but would not lower key interest rates.  European stock selling intensified which ultimately resulted in their worst selloff on record.  That selling only added to the tension of US markets which opened down strongly, setting off circuit breakers within minutes. After the mandatory 15-minute pause the selling continued… and so did the stream of bad news. The NBA, the NHL, the MLB, the NCAA, even NYC’s Broadway theaters, and others announced sweeping cancellations reminding everyone how much of an impact the virus might have on businesses.  Still no positive news from the White House or Capitol Hill.  Around lunch time the New York Fed announced a $1.5 trillion emergency funding operation. Initially the details were not clear but the markets bounced on the news, though the bounce would be short-lived.  News that Italy’s death toll from the virus had reached 1,000 reminded traders that the virus is also a health crisis.  The Fed funding package, well… that didn’t go off as well as planned as it was met with minimal interest from the banks, who are the intended counter-parties.  When all was said and done, yesterday’s selloff was across all asset classes.  That mean’s bonds, commodities, and even gold sold off along with stocks.  When markets tumble the way they did yesterday all assets become temporarily correlated. There are two explanations for this.  The first is that traders in panic are selling everything to build cash reserves to prepare for a rocky road ahead.  The second explanation, which is more likely a bigger factor, is margin calls. When stock values go down as quickly as they did in the past several sessions, many margin accounts quickly went upside down requiring margin calls. Traders faced with these margin calls tend to sell other assets to make the requirements and they most likely turned to their profitable gold and treasury positions.  Yesterday was a tough day for investors.  The White House and Congressional Leaders appear to be working closely together to come up with a comprehensive stimulus package which should offer some relief.  Unfortunately, until the path of the virus’ spread across both Europe and the US is better understood, markets will continue to experience volatility.  It is important to remember the virus will ultimately be contained as it has been in China.  China’s equity markets, though still volatile have traded back into ranges from prior to the outbreak.

 

Supersized!  Yesterday, the Fed announced that it would be conducting a large open market operation which would include $1.5 trillion in liquidity for two consecutive days.  It is part of a $5+ trillion package which is expected to be offered in the days ahead.  The Fed offers liquidity to banks to ensure that they have the necessary capital to meet the deposit requirements and, more importantly, to lend to companies and consumers.  There have been reports that large companies have been drawing down credit lines to bulk up on cash in order to deal with the temporary slow-downs in business.  While it is quite normal and rational for companies to do that, banks which lend the money must fill their vaults up with more cash in order to continue lending and operating.  The Fed provides liquidity to banks in either overnight lending or through repos.  A repo, or repurchase agreement, is when a bank sells a bond to the Fed and agrees to buy it back at a future date at a higher price.  The cash from the sale of the bond becomes the loan proceeds to the bank and the higher repurchase price becomes the interest.  Repos are typically done with treasury-bills but in yesterday’s case was done on all maturities across the curve, which would ultimately amount to the Fed buying bonds.  The package is akin to the quantitative easing, or QE, offered by the central bank after the financial crises.  Many Fed watchers are expecting the Fed to announce a more comprehensive package, closer to QE1-QE3, during next week’s FOMC meeting.

 

THE MARKETS

 

Stocks and bonds sold off in yesterday’s session on further Coronavirus jitters.  Both the S&P500 and the NASDAQ joined the Dow in bear market territory. The S&P sold off by -9.51%, the Dow Jones Industrial Average dropped by -9.99%, the Russell 2000 sank by -11.18%, and the NASDAQ Composite Index traded down by -9.43%.  Bonds dropped and 10-year treasury yields fell by -6 basis points to 0.80%.  Gold fell by -3.6% and Crude Oil slipped by -4.49%.

 

NXT UP

 

– University of Michigan Sentiment is expected to have fallen to 95.0 from 101.0.

– Lots of housing numbers, Retail Sales, Leading Indicators, and a critical FOMC meeting next week. Check back on Monday for calendars and details.

daily chartbook 2020-03-13 -1