‘Tin Hat’ Time In FX As Duration Goes ‘Offer-less’ Amid Quarantine Panic

Global coronavirus cases topped 99,000 on Friday, and markets quite simply melted down, especially in rates, where a panic unfurled. Equities closed well off the lows on Wall Street, but the action was harrowing, as it’s been all week.

“Duration [went] ‘offer-less'”, Nomura’s Charlie McElligott wrote, documenting the series of limit-up, circuit-breaker halts in Ultras and the absolute crash in long-end yields. “[This is] an investor climate that is fixated on ‘imminent global recession’ via pandemic ‘lock-down'”, he said.

Indeed it is. One source of acute consternation was a story in The New York Times which noted that city health officials are watching 2,773 New Yorkers at home “in self-quarantine”. New York City health commissioner Dr. Oxiris Barbot said the majority of them had “recently returned from the five countries where the outbreak has been most severe: China, Italy, Iran, South Korea and Japan”.

We’ve reached that point where the media is starting to obsess over every cough – literally. A headline from Bloomberg on Friday reads: “Japan Says Abe’s Cough Stems From Hay Fever”

The situation in Iran and Italy is dire – I don’t think that’s unnecessarily hyperbolic. Italy will get the help it needs, Iran may not. And that’s tragic. Cases in France and Germany soared. Norway has quarantined 1,300 soldiers and the Netherlands reported its first death (not captured in the chart).

Rate cut odds are going crazy, and, as documented in the linked post here at the outset, funding stress is starting to show up in all the “wrong” places. In equities, we’re nowhere near levels that would get us back into the gamma “pocket” where dealer hedging tamps down volatility.

“S&P futures / SPY options’ cumulative Dealer-Gamma profile remains deeply negative vs spot and thus, the extremely ‘chase-y’ behavior at end-of-day into both selloffs and rallies, with the Gamma ‘breakeven’ remaining painfully far away at 3216”, McElligott went on to say Friday.

(Nomura)

“Wednesday’s ‘Biden bump’ has been short-lived… as investors fret over COVID-19 tip of the iceberg scenario”, AxiCorp’s Stephen Innes remarked, adding that “investors are starting to price in worst-case scenarios anticipating that the spread of this virus will grow through Europe and the US and are now accelerating their hedging game plans for the eventuality of the Eurozone falling into recession and the US economy stagnating in the first half of the year”.

ING on Friday declared this “tin hat time” in FX land, where that means folks are starting to look at the distinct possibility that Fed QE is in the cards (and I mean “real” QE – the kind that’s designed to compress risk premia).

“The spread of [the virus], its economic impact and the policy response remain highly uncertain, but it seems as though the FX markets are starting to price in the Fed’s money printing presses being properly fired up again”, the bank said, in an e-mailed noted. “If the Fed were to restart QE, we would expect the dollar to undertake a much deeper decline than the one we currently pencil in [as this] would really be the US monetary story converging on the zero rates and QE underway among major trading partners”.

For what it’s worth, the dollar is riding the largest cumulative 11-day slide since August of 2015.

And, obviously, 30-year yields are seeing an absolutely insane daily move amid what, on many levels, can be described as an unprecedented couple of weeks for USTs.

Don’t panic. And carry a towel.