18 Mar AN INCREDIBLY VOLATILE DAY
A Bloomberg headline read “A Volatility Doom Loop May Be Taking Hold In US Markets.” The article cited “unnamed SEC officials” talking about the issue of risk parity funds and high volatility funds reinforcing this negative loop amplified by low liquidity.
JP Morgan writes the depth in US equity futures is seven times worse than the poorest levels during the financial crisis.
In my view the lack of liquidity in the bond market is considerably worse than in the equity markets. I simplistically point to the one of the most “conservative markets” as evidence. A generic AA rated 10-year muni is now trading over 200 bps of the corresponding 10-year. Historically they trade around 90% of Treasuries.
Yesterday I referenced a Dow Jones Market Watch story about implementing Section 13(3) of the Federal Reserve Act that authorizes the central bank to create a new credit facility that could lend to companies hit by the economic shutdown, not merely banks and financial institutions. Former Fed President Kevin Warsh argued that such should occur immediately to provide liquidity.
This is gargantuan.
As I wrote yesterday, the equification of fixed income trading is a gargantuan failure. While I generally abhor government intervention, the growing liquidity crisis in the bond market has the potential to destroy the economy. Liquidity has to return before a long-term solution is enacted. To write the obvious, today’s liquidity vehicle of choice, ETFs, is failing miserably.
This should have been expected as fear is always more powerful than greed.
Speaking of the economy, government has ordered almost a complete shutdown of both the economy and of society under the simplistic guise of “Abundance of Caution.” Questions vastly outnumber answers about the corona virus. A strong case can be made that both government and big business are operating under one worst case scenario.
I can imagine a scenario where society rebels if the number of cases does not sky rocket, where the prevention is worse than cure. At this juncture, many are living in a state of fear. Paralyzed by the apocalyptic headlines and government dictums.
According to the CDC as of 1200 PM March 17, there are total of 4,276 cases and 75 deaths in the US and its territories. I must write the number of cases is expected to rise given the increased availability of testing. The number of deaths should be accurate.
Equities were extremely volatile, rising as much as 7% the falling into the red only to end about 6% higher. The President has proposed sending a check for a $1,000 or more within two weeks and perhaps more later. This is a direct stimulus to the individual unlike 2008 where the stimulus went to some government entity. It is a huge change.
Moreover, the President proposed a 90-day delay for paying taxes as well as a possible suspension of mortgage and car payments.
Treasuries were crushed on the news as the 30-year fell over 10 points to yield 1.70% and the 10 year fell 3 1/2 points to yield 1.08%. The was their biggest one day increase since 1982. Wow! Yields on the 30 year are now 70 bps higher than the record low set last week.
What will happen today?
Last night the foreign markets were down. London was down 5.19%, Paris down 5.57% and Frankfurt down 5.45%. China was down 1.88%, Japan down 1.68% and Hang Sang down 4.18%.
At this juncture, the markets are expected to open moderately lower. Earlier in the morning futures hit their “down limit.” The 10-year is off 7/32 to yield 1.11% and the 30-year unchanged at 1.70%.