“This is the end / My only friend, the end”…
Monday, March 9, 2020, will live in infamy, not just for the scope of the decline in US stocks (which fell the most since the financial crisis), but also for the confluence of events which precipitated the drop.
In the simplest possible terms, market participants are staring down a pandemic and an all-out oil price war between the Saudis and the Russians. To call it “daunting” would be an early candidate for understatement of the year.
Given that Lehman was more than 11 years ago, it’s not an exaggeration to say that many current market participants have never seen anything like what’s currently unfolding.
Bear in mind, the last week of February was the worst week since the crisis. So, now we’ve had the worst week and the worst single-day since 2008, all within the same one-month window. The VIX rose to 54. It topped 60 at one point.
After the bell, Italy extended its COVID-19 quarantine to the entire country. PM Conte asked all residents to stay in their homes. For what it’s worth, Italian shares fell an absurd 11% on Monday.
Stocks in Brazil dropped by the most in 21 years. The currency sank to a record low. The Ibovespa is in a bear market. Brazil CDS blew out 56 basis points, the most since the crisis years.
Speaking of CDS, US investment grade credit’s “fear gauge” (i.e., CDX.IG) jumped the most since Lehman, underscoring the acute panic gripping credit markets, which was already evident last week, but worsened materially during Monday’s chaotic trade.
As noted Monday morning, high yield CDX spreads ballooned out near 600bps, in what amounted to a near six standard deviation move. The high yield ETFs (HYG and JNK) both had their worst days since the crisis. Oil and anything related to energy was absolutely bludgeoned.
“Fear can take the market lower, but expect a quick recovery when the health threat recedes”, Lloyd Blankfein tweeted, adding that those words of encouragement go double for the US where, according Lloyd anyway, the “underlying economy is strong, banks are well-capitalized and the system is not too leveraged”.
“Unlike 2008, [we’ll] avoid systemic damage that could take years to work through”, he added. “Obviously, [I’m] not ignoring the tragic human toll.”
Ray Dalio chimed in. “Periods of turbulence provide both large risks and large opportunities, so after you make sure that you and your people are safe from the risk of ruin, look for the opportunities”, he advised.
In a testament to the sheer insanity gripping markets, 30-year US yields fell the most intraday on record Monday. I used the following chart earlier, but I want to roll it out again just to drive home the point:
You should be aware that there’s no liquidity. “Clearly, concerns over the economic impact of the COVID-19 outbreak and associated hedging activity have played a key role in the bond rally, but a deterioration in liquidity has likely exacerbated the moves”, JPMorgan said, in a note, on the way to providing the following additional color:
Indeed, there was a sharp deterioration in our market depth metrics both for cash 10y USTs as well as 10y UST futures on Feb 28th, with a further deterioration on Mar 2nd, before a modest recovery until close of business on Thursday (Figure 26). Anecdotally, however, it likely deteriorated further on Friday.
Amid the historic bond rally, TLT has gone absolutely parabolic. It’s up nearly 11% in three sessions and looks more like a crypto stock than a UST ETF.
The White House is, naturally, panicking. As documented in “Fit To Be Tied“, Trump tried to deflect on Twitter, but to no avail.
Vanity Fair‘s Gabriel Sherman says that according to his sources (and you can always take these anecdotes with a grain of salt, but if nothing else, Sherman’s accounts are dependably amusing), Trump has been complaining that Larry Kudlow isn’t doing enough to pacify the market.
Apparently, Larry actually turned Trump down when asked to do an on-camera briefing.
“Larry didn’t want to have to take questions about coronavirus”, a person close to Kudlow told Sherman. “Larry’s not a doctor. How can he answer questions about something he doesn’t know?”
Then again, Larry’s not an economist either. But he does play one on TV.