Markets stocks

Fear Reigns.

"In a significant way".

US equities careened sharply lower in volatile trading on Thursday, in keeping with the current environment, where sentiment is hostage to coronavirus headlines and markets are beholden to an underlying setup that’s conducive to exaggerated price action.

Texas health officials announced the state’s first coronavirus case outside of a federal quarantine site in what commissioner John Hellerstedt called a “significant development”. The patient was infected while traveling outside the country, apparently. New York now has 22 cases, double the number from just a day ago. “The number has to go up if you continue to test”, Andrew Cuomo said. “I’m worried about undue fear and anxiety”. New Jersey has its first case, a 32-year-old man. It’s not known how he contracted the illness.

10-year US yields fell below 0.90% around the time the slide in stocks accelerated. The curve flattened. USDJPY touched a six-month low.

Meanwhile, Italy reported 3,858 virus cases, up sharply from 3,089 on Wednesday. There are 3,296 active patients in Italy, 414 recoveries and 148 deaths. France’s infection total jumped 92 to 377, with a half-dozen deaths.

The UK now has 115 cases, with 25 in London. “It is now highly likely that the virus is going to spread in a significant way”, Boris Johnson’s spokesman James Slack said Thursday.

Like the virus, selling on Wall Street spread in “a significant way” as the headlines continued to roll in.

As noted earlier, these moves are being amplified. “Equities investors right now are suffering under the two-way slingshot of vol dealer hedging flows”, Nomura’s Charlie McElligott said Thursday. “Every directional move [is] exacerbated as, say, in the case today, dealers get ‘longer’ the lower stocks travel and thus hedge by selling Delta in hole”.

It makes no sense to quote the Dow in points over longer time periods for obvious reasons, but in the short-term, the following visual is useful for the “shock value” — it demonstrates the power of fear, flows, volatility and systematic selling:

Notably, the buying climate gauge on Bloomberg’s Consumer Comfort Index has fallen 6.8 points in the last five weeks, which Bloomberg notes is “the steepest decline over a similar period since May 2015”. Still, the comfort reading for personal finances improved even in the face of one of the worst selloffs for US equities in recent memory.

Remember, this all comes amid a shallow earnings recession that now depends on a “hockey stick” assumption for S&P profit growth to rebound in the full year.

Goldman last week slashed their estimate for S&P 500 earnings growth in 2020 to 0%, and you can expect more desks to follow that lead as the virus’s impact becomes more readily apparent in corporate guidance. Consider this bit from JonesTrading’s Mike O’Rourke:

According to S&P, the current 2020 forecast for S&P 500 operating earnings is $173.04, that indicates 10% year over year growth.  Typically, earnings estimates drop by 10% as the year progresses, and that is absent a tail risk event like the coronavirus.  The virus repercussions are only just starting to be felt now in the US and widescale testing is also just now starting.  Of course, this crisis will pass, but there will be a slowdown.  The equity market will try to look through slowdown to the other side, but that should be hard to do in an expensive tape that lacks meaningful earnings growth.

Also on Thursday, Southwest Airlines warned on Q1, just a day after United sent a memo to employees announcing cost-control measures. Southwest said it sees a $200 million to $300 million hit to operating revenue for the period. Here’s an excerpt from the filing:

However, in recent days, the Company has experienced a significant decline in Customer demand, as well as an increase in trip cancellations, which is assumed to be attributable to concerns relating to reported cases of COVID-19. Based on these recent revenue trends, which are currently expected to impact the remainder of March 2020, the Company now estimates its first quarter 2020 operating revenues to be negatively impacted in the range of $200 million to $300 million, and RASM to be in the range of down 2 percent to up 1 percent, year-over-year, as compared with its previous guidance of a year-over-year increase in the range of 3.5 to 5.5 percent.

In keeping with the “tilted J-curve” characterization outlined on Tuesday by Zoltan Pozsar, Southwest said a decline in fuel costs will initially cushion some of the blow. Here’s one more passage from the company:

Relative to previous expectations, the Company’s cost outlook has improved, which is offsetting a portion of the estimated first quarter 2020 COVID-19 revenue impact. Based on the Company’s fuel derivative contracts and market prices as of March 3, 2020, the Company now estimates its first quarter 2020 fuel costs to be in the range of $1.90 to $2.00 per gallon, including $.05 per gallon in premium expense, and no cash settlements (hedging gains) from fuel derivative contracts. This compares with the Company’s previous first quarter 2020 guidance in the range of $2.05 to $2.15 per gallon, including $.05 per gallon in premium expense, and $.01 per gallon in cash settlements (hedging gains) from fuel derivative contracts.

While dissecting COVID-19’s funding market effects, Pozsar described the situation as a “tilted J-curve”, where the initial demand destruction creates a positive funding effect. To wit, from his note:

The initial positive funding impact comes from three sources: (1) Less demand for commodity finance, as commodities are not in demand and don’t need to be mined and moved around (less demand for oil, coal and copper). (2) Less demand for trade finance as factories remain shut across China and there is no demand for intermediate goods. (3) Less demand for shipping finance as new commodities and intermediate goods are not being sourced and because final goods are not being shipped.

Of course, that positive funding effect is only temporary. Without revenue and operating income, businesses simply die.

As far as how many humans are likely to die from the disease, the good news is, Donald Trump’s “hunch” tells him international experts are wrong about the mortality rate. For those who missed it, here is what the president told Sean Hannity:


Nothing further.


4 comments on “Fear Reigns.

  1. Bob says:

    We’ve got a long way to fall.

    I’m guessing that we’ll spike down then move sideways until march 18th. Good setup there. How far? Who knows? But I suggest all you young traders who think stock prices only move up, sell now and save yourself some pain. The markets are still richly priced, and when the jobs numbers start tanking, you won’t know what hit you.

    Without major Fed intervention after March 18th, I’d guess a drop to about 2400 on the S&P could be in order for the medium term. But on the positive side, companies will be busy buying back their own shares, setting a firm base for the next move up.

  2. Emptynester says:

    For what it is worth, if you look at the website:, you can see a lot of detail about flights in/out of China over the past few months. As expected, the number of flights have decreased dramatically from December 31, 2019 through Feb. 25. I think that normally, by Feb. 25 China would have been up and running after Chinese New Year. However, as of March 3 (compared to Feb. 25) the flights out of the largest airports have doubled, on average, except for Wuhan, which is only 7 flights/day compared to 272 flights on December 31, 2019.

  3. hookandgo says:

    H-Man, this long gamma, short gamma has been befuddling. But when you throw in that VaR variable I collapsed.Getting off ground, I dusted my pants, and recalibrated. So if I get the drift, $$$ people assess risk and trade according to the formula. Since the VaR is a moving target, balance risk against the collapse of the position. VaR requires more short hedging to protect the position Down market on the VaR requires more selling. Got it. But liquidity in the market is a topic for another day. Question: How much has the VaR changed in the last 15 days?

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