Something’s Gotta Give: Bonds Most Overbought Since LTCM, Consumer Sentiment At Cycle Peak

US equities plunged out of the gate on Friday, extending a 7-day slide that made this the second-worst week for US equities dating back to the second world war.

From here, things are likely to get extremely interesting, given that the Fed (and other developed market central banks) will almost surely marshal some manner of coordinated response.

To state the obvious, it isn’t just US equities that are having flashbacks of 2008. The Stoxx 600 has fallen more than 12% over the past five sessions. That’s the worst five-day stretch dating back to Lehman.

The VStoxx nearly hit 50 at one juncture.

Meanwhile, the collapse in Treasury yields is starting to venture into unprecedented territory, by some measures. For example, the 14-day RSI for 10-year yields fell below 17 on Friday morning.

That is the lowest since the LTCM crisis.

Amusingly, the data continues to come in solid in the US, just as it did on Thursday. Friday brought a better than expected final read on University of Michigan sentiment, for example. In fact, at 101.0, we’re basically at the cycle peak, even as 10-year yields are at record lows.

Despite the upbeat headline reading, caution was starting to creep in earlier this week amid the carnage on Wall Street. Here’s the survey’s chief economist, Richard Curtin, with some color:

The coronavirus was mentioned by 8% of all consumers in February when describing the reasons for their economic expectations. However, on Monday and Tuesday of this week, the last days of the February survey, 20% mentioned the coronavirus due to the steep drop in equity prices as well as the CDC warnings about the potential domestic threat of the virus. While too few cases were conducted to attach any statistical significance to the findings, it is nonetheless true that the domestic spread of the virus could have a significant impact on consumer spending. Importantly, the early indications suggested only a very modest impact as the Sentiment Index among consumers who mentioned the coronavirus was still quite high (just over 90.0).

Curtin continued, as follows:

There is likely to be some advance buying and increased online shopping, but much of the discretionary spending may not occur. To be sure, there is no reason to anticipate that consumers will engage in such extreme measures at this time. It is a fine line that needs to be drawn to encourage people to take normal steps of preventive hygiene but not to engage in panic reactions. Panic is best avoided by a strong sense of confidence in the government’s responses that aim to control the potential spread of the virus and limit any resulting damage to the economic welfare of consumers. The most effective fiscal and monetary policies include proposed reactions to the virus that are transparent, well understood, and act to maintain confidence in government economic policies close to its nearly two-decade high.

Not to put too fine a point on it, but that only underscores the absolute necessity of avoiding the kinds of errors and missteps committed by the Trump administration on Wednesday evening and throughout the day on Thursday, when news that Steve Mnuchin and Larry Kudlow were added to Mike Pence’s epidemic response team undercut sentiment (by making it appear as though the White House cares more about equities than public health) and reports that Pence may be serving as a gatekeeper for what scientists can and can’t say to the media.

It will be interesting to see what happens to the following series if the epidemic worsens and/or the stock market continues to careen lower:

Note that it collapsed in 2008 along with the market and the economy. A repeat of that would not bode well for Donald Trump in November.

Read more: One Simple Reason For The Nightmare On Wall Street