Pop Your Collar, The Black Swan Is Here.

Pop Your Collar, The Black Swan Is Here.

The plan on Tuesday was for G-7 finance ministers and central bankers to issue a joint statement to reassure investors who, hopefully, would be feeling pretty good about things after Monday’s “best-in-a-decade” rally on Wall Street and an overnight RBA rate cut.

Then, once the the communique had a couple of hours to resonate, the Fed would cut rates by 50bps just a half-hour into the US cash session. After that, Powell would hold a press conference an hour later.

Policymakers probably assumed all of that together would surely bolster sentiment and propel US equities to another gain. At the least, frayed nerves would be calmed, even as the world stares down a black swan (or, if you’re in the camp that contends we always knew it was just a matter of time before a pandemic posed a grave threat to the global economy, call COVID-19 a “gray rhino”).

Read more: Fed Delivers Emergency 50 Basis Point Rate Cut Amid Virus Scare, Oversubscribed Repos

It didn’t work out that way.

Instead, US equities careened sharply lower with bond yields, as frazzled markets reacted in deer-in-headlights fashion. 10-year US yields actually sank to 0.90% at one juncture, after breaching 1% for the first time ever, possibly bringing in convexity flows, which may have amplified the move. At the lows, 10-year yields were down nearly 26bps on the day.

2-year yields, meanwhile, fell as much as 28.1bps – the two-week move is on the order of 65bps now. It is, in a word, astonishing. As Bloomberg’s Edward Bolingbroke notes, index swaps priced in “30bp of additional rate cuts into the March meeting, with 50bp priced into the June FOMC [while] other global bank OIS followed suit starting with almost 50bp of cuts priced into Wednesday’s Bank of Canada policy meeting”.

You might very well argue that, very much contrary to what the Fed intended to accomplish, Jerome Powell scared everyone to death. That, despite delivering precisely what the market had spent the last week effectively begging for.

It’s the old “what do they know that we don’t?”, worry. And it has to be especially maddening for the Fed, because officials were likely wondering the same thing about money markets last week.

In any event, the news flow around the virus didn’t help. The prospects of the US avoiding a serious outbreak of COVID-19 have dimmed considerably.

All S&P sectors were lower on Tuesday. The benchmark is back below its 200-DMA. After going more than 70 sessions without a 1% move, almost every, single day is “interesting” now.

Futures tracked almost tick for tick with USTs.

At one point, Tuesday was the best day for the ETF that tracks the Bloomberg Barclays Aggregate Bond index in years, although by the end of the day, it came up shy. Still, this makes two out of three sessions that AGG has logged gains on par with its best days in a decade.

“The coronavirus will weigh on US growth at least during the first half of the year, with a pullback in spending by households and businesses”, Cleveland Fed President Loretta Mester said, during remarks in London. She added that she’s “skeptical that the benefits of negative interest rates would outweigh the costs in the US”.

We may be about to find out, Loretta. Because it certainly seems possible that, just as the market forced the Fed into a 50bps emergency cut, traders might well compel the Fed to choose between returning to the lower bound as soon as this summer or else wrong-footing traders (heaven forbid).

So much for Richard Clarida’s contention that the Fed doesn’t suffer from the “hall of mirrors” affliction.

Trump wasn’t satisfied. He called for further easing in an irritated tweet after the Fed made its move. And that wasn’t all he said.

The US president, apparently, knows a thing or two about how important forward guidance is when it comes to underwriting gains for risk assets.

Of course, if that’s the case, it leads one to question the relative wisdom of Trump’s decision to effectively fire Janet Yellen. After all, Janet was pretty adept with deploying forward guidance in the service of perpetuating low (indeed, non-existent) equity volatility.

A hard act to follow.

Big shoes to fill.

A heavy collar to pop.


12 thoughts on “Pop Your Collar, The Black Swan Is Here.

    1. D’you mean: could a big, systematically important institution be in trouble again?

      In Q4, we saw the repo market dry up during the last month or so of the quarter. And here we are, mere days into March, with the same thing happening.

      Whatever the forcing function is, it seems to be periodic.

  1. Maybe if he starts cutting 50bps per week it’ll make people go to work sick and schools stay open and a vaccine be developed. I mean how low do rates need to be for us all to play 2/100 odds Russian Roulette? Maybe if you got to refi your house, student loans and credit cards at 0% interest? No…? Me neither.

  2. H-Man, once again the BlacK Swan is flapping her wings. And she is angry. She can’t understand how 1 million virus testing kits were promised on Monday translated to 47 being shipped on Monday.

    1. But that’s easy to understand. Kits were handled by clowns, which were supervised by monkeys. I assume CDC has plenty of both.

  3. I don’t see a recovery within decades. Thanks trump! Negative yields ahead equity crash and and at least 6 months of sustained downtrend.. pretty hard to dig out ever!

  4. That swan was obvious since January. And, of course, nobody did anything to prepare for pandemic.
    I’ll make short prognosis for 2020 in USA: 15 millions infected, >100000 dead, deep recession. This is not fearmongering, this is optimistic scenario

    1. This is totally ridiculous. Please do not leave these kinds of comments on Heisenberg Report. There is zero justification for your “prognosis” and this serves no purpose but to stoke fear. That is not welcome here.

      1. Yes, those numbers are ridiculous, ridiculously low. No flu season has ever produced infection numbers that low. Covid is twice as infectious and nearly 20 times as virulent as the seasonal flu, at present. Without a substantial change in the nature of this virus, these numbers will be far worse.

        I’ve read you for a long time and I know you can crunch numbers. Take the R(0) and halve it. Take the CFR and halve that as well. The numbers that you get still suck.

        Here’s the thing, the numbers are bad but the percentages aren’t. I’m in the group where I have a better than 90% chance of getting passed this virus. This is to say that my stairs are more dangerous to me than the virus. Below my group most of it is simply a rounding error around zero, Yes, these numbers may be quite large eventually but population wise, they aren’t more than a blip,

        1. Michael: Read your comment and compare it to the comment I was responding to. Do you see why yours is a value-add while that person’s is not? That’s my only point. You’ve provided a balanced assessment that readers can benefit from. That other comment (even if it turns out to be true) was merely an ad hoc effort to throw out some fear. I want more comments like yours and less comments like his/hers. And my response has achieved that outcome.

  5. There were no great choices for Powell here, but we’ve all watched enough enjoyably silly TV shows to know that succumbing to extortion doesn’t generally end well. In giving into the market (and/or the president if you’re so inclined) Powell has simply invited more, and more extreme, concessions. If you’re looking for a silver lining, which isn’t easy in these times, it is perhaps that we can now foresee with a growing sense of confidence the end of this business/financial super-cycle. One only hopes that the associated collateral damage can be managed though political means.

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