A (Dove’s) Wing And A Prayer.

Washington State health officials announced at least four additional deaths from the coronavirus on Monday, and Brazil said the number of suspected cases rose to 433 from 252.

That’s the kind of news day it was on the COVID-19 front.

“We have moved to a new stage in the fight to contain, mitigate and manage this outbreak”, King County Executive, Dow Constantine, said at a press conference, explaining the severity of the situation in Washington State, where it appears America is on the verge of witnessing its first sizable virus cluster. “These have probably been going on for a while”, Jeff Duchin, a health official in Seattle and King County remarked.

National Institutes of Health infectious-disease expert Anthony Fauci told NBC News that the spread of the virus has “now reached outbreak proportions and likely pandemic proportions”.

Although he urged Americans not to panic, NBC notes that he did effectively suggest that public life could be brought to a temporary standstill. Here’s what he said:

If we get a major outbreak of this coronavirus in this country, that would mean perhaps closing schools temporarily, getting people to do more teleworking, canceling events where there are a lot of crowds in confined places [and] canceling unnecessary travels so that you’re not on an airplane for five hours with a bunch of people who might be infected.

To put it mildly, that would not be the best news for the US services sector, which, at least on the flash read for IHS Markit’s gauge, contracted for the first time in four years this month.

Asked if he was under pressure from the White House to spin the situation, Fauci said no. Actually, he said “absolutely not”.

Give me the real stuff

Fauci may not be under any pressure, but one person who is most assuredly being badgered by the administration is Jerome Powell. Larry Kudlow and Steve Mnuchin are both reportedly in favor of an emergency rate cut (i.e., before the scheduled meeting), according to people familiar with the matter who spoke to Bloomberg.

“As usual, Jay Powell and the Federal Reserve are slow to act”, Trump said, in a tweet.

Of course, the opinion of administration officials is largely irrelevant at this point. STIR traders (and the bond market more generally) have rendered their verdict. There will be a rate cut this month. When it’s delivered is still an open question, but if it comes prior to the meeting, it will only be a “surprise” in name. At this point, the “surprise” would be if Powell waits much longer.

One thing’s for sure, Fed balance sheet expansion is no longer enough to support the risk-on mood. This is becoming a pretty amusing visual:

Back to the drawing board! Or maybe: “We’re gonna need ‘real’ QE” now – not merely “QE-Lite”.

It might be time to get back to buying coupons in an overt effort to compress risk premia, as opposed to merely buying bills for “reserve management” purposes. The Fed is going to be forced to go that route anyway (e.g., due to technical concerns around net negative bill issuance), so why not get started?

Nobody wants “QE-Lite” anymore. We want the real thing.

Credit carnage

As you can imagine, junk bond funds are hemorrhaging. On Lipper’s data, investors yanked $4.2 billion from high yield funds during the week through last Wednesday, and last week saw record outflows for popular ETFs.

Meanwhile, CDX IG continues to blow out, now to the widest in more than a year – i.e., the widest since credit markets were trying to recover from the Q4 2018 risk asset meltdown, which stoked all manner of fears across credit markets.


As Bloomberg notes, “last week marked the market’s first zero issuance week [for high grade issuers] aside from holidays and seasonal considerations since July [of] 2018”.

It certainly looks like folks were tapping LQD for liquidity last week. The vehicle witnessed its largest outflow ever.

“If you’re looking at your portfolio, you can either sell high yield — which is down significantly — or you can sell LQD, which hasn’t moved as much”, Academy Securities’s Peter Tchir told Bloomberg.

Right. So maybe “just get me out” isn’t the right header for that chart. Maybe it’s “just give me some liquidity”.

But if that’s the case, it again raises some of the same fundamental questions about credit ETFs being used as liquidity sleeves during moments when the underlying market is under pressure. I’ll leave that discussion for another time.

A wing and a prayer

Markets closed sharply higher on Wall Street Monday, in predictable “grabby” fashion into the close.

The Dow rose more than 1,000 points. Clearly, the move was being turbocharged by at least some of the dynamics discussed towards the end of “All Bets Are Off“. It’s also possible that Amy Klobuchar’s decision to end her bid for the Democratic nomination and endorse Joe Biden gave stocks a lift. Ostensibly, that gives Biden at least some of Klobuchar’s votes and also a portion of Pete Buttigieg’s support. The Mayor plans to endorse Biden at a rally in Dallas on Monday.

The Dow’s 5% gain was the largest since the crisis – the slide in the VIX the biggest (on a net basis) since 2011.

And here’s a little “rotational”/rebalancing action for you:

Primarily, Monday’s bounce was brought to you by hopes that the teleconference between G-7 finance ministers and central bankers will produce a coordinated policy response sufficient to rescue markets. CNBC reported that Powell and Mnuchin will lead the call at 7 AM ET.

The RBA is all set to cut rates, and Monday found the BOJ, the BOE and the ECB all joining Powell in jawboning the market (the BOJ provided some liquidity). “Governments and central bankers have now clearly signaled there will be coordinated stimulus to deal with the effects of the coronavirus”, Kevin Muir said, in a Monday note, adding that while central bankers “can’t fix anything… the real reason to ease is to provide the liquidity [and] fix the massive inversion in the curve”.

BMO’s Ian Lyngen, Ben Jeffery, and Jon Hill provided a brief requiem for normalization that has faint, nostalgic overtones.

“Taking a step back, there was a valiant effort made on the part of the Yellen/Powell to bring domestic policy off the zero bound of 2008-2015; alas, the degree and duration of the normalization have both underwhelmed”, they wrote, on the way to declaring that “the Fed’s path is straightforward from here; cut rates to the effective lower bound, transition into a more dovish framework, and eventually, if the economic strain warrants it, reengage in balance sheet expanding QE”.

Contingent on the evolution of the virus, of course.

Either way, we’re living on a wing and a prayer.


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6 thoughts on “A (Dove’s) Wing And A Prayer.

  1. How much of today’s action (especially late-afternoon action) was about Klobuchar’s announcement (and Buttigieg’s last night)? Wall Street could take or leave Donald Trump, but it really, really hates Bernie Sanders (and, to a lesser degree, Elizabeth Warren). With the moderate wing of the Democratic Party starting to come together (congeal?) around Biden, I think the street is breathing a little easier about the likelihood of a President Sanders.

    1. Well, if so, they might get a slap in the face tomorrow. Bernie still looking strong out here in CA. Also, lots of folks vote by mail here, and have already mailed ballots in. So today’s drop-out’s may have been too late to boost the remaining centrists on Tuesday (?)

  2. yeah – not so convinced we’ll just rally to new highs from here. current levels are totally justified. will be so stupid if stocks keep rising along with cases/deaths. the case for last week’s drop is only stronger, but market rallies and algos are only too high happy to oblige.

    1. Bas, to your point regarding algo-driven activity… If this is basically going to come down to a “battle of headlines” over the next few weeks, then it seems like the virus will “win”. The G7 will announce whatever they’re going to announce tomorrow … fantastic, that’s great … by the way, probably already baked into today’s torrid afternoon rally. Then… each day thereafter will come the steady influx of case counts, deaths, new nations affected, major event cancellation, school closures, NCAA basketball tourney sites with no crowds present, etc. etc. etc.

      I go back to Dec 2018/Jan 2019 … The Fed got too tight, whoops! A single “pivot” in early January 2019 … all better!

      Then, to the trade war volley throughout the rest of 2019 … Trump took things a bit too far, got the Chinese to sign some meaningless piece of paper in exchange for significant tariff relief … Boom! All better!

      Now, where’s our single “turning point” headline with this virus…? Not so clear…

      I’m thinking a series of lower highs and lower lows on SPX for a few months. Happy Spring everyone…

  3. If there was a deadly military threat, individuals and businesses (the private sector) would not be left to pay for the defense with resources on hand. Yet a deadly viral threat, up til now, has not seen any new resources from the monetary sovereign. If all the G7 do is monetary policy, and no fiscal policy, then fade the rally…..According to ANG Traders

  4. The market is likely to rally into fiscal and monetary stimulus if it happens for at least a couple of days-it went straight down after all. The Democratic race is congealing into a two person contest which will make investors feel a little better. Of course the second and third order effects could deliver a blow later so caution is warranted. If your risk is too high use this opportunity to exit very risky positions (if you are an investor).

NEWSROOM crewneck & prints