Global equities rebounded and S&P futures traded limit-up as the wild swings continue, with traders now hanging their hats on stimulus hopes stoked by Donald Trump’s promises of “dramatic” action delivered at a press conference on Monday evening.
Bond yields rushed higher. 10- and 30-year yields in the US rose ~20bps, while sovereign debt sold off in Europe as well, as markets frantically retraced Monday’s action. 30-year yields in the UK jumped 20bps Tuesday.
Italian yields fell, in another reflection of the risk-on mood, even as the country became the first, globally, to attempt a full, nation-wide lockdown.
The yen sank the most since 2014 after Monday’s flash-crashing FX madness which, at one juncture, looked poised to push dollar-yen to 100. Fast forward to Tuesday, and we’re pushing towards a 105-handle.
Shinzo Abe unveiled a 430 billion yen fiscal support package aimed at helping shield the economy from the effects of the virus. Japan is, in all likelihood, already in a recession.
“It seems pretty clear that owning the yen still works when bond yields are falling, volatility is spiking and risk appetite is disappearing, so today’s a bad day for the yen as we reverse all those sentiments”, SocGen’s Kit Juckes wrote Tuesday.
“However, that opens up the opportunity to get yen longs on before we exit the eye of the storm and feel its fury again”, Juckes added.
With the market still trading in the negative gamma zone (whereby every directional move is amplified), there’s scope for US equities to run on a squeeze higher.
And yet, clearly, the risk is that the White House disappoints later when Trump unveils what he’s calling “major” stimulus said to include a payroll tax cut and expansion of paid sick leave.
“The total put/call ratio (this includes options on stocks, ETFs and indexes) surged to its highest reading ever in data going back to 1995, exceeding the high set in December 2018 just before stocks staged a furious comeback”, Bloomberg’s Andrew Cinko wrote early Tuesday, describing just how incredible things really were during Monday’s rout. “The put/call surge yesterday comes after last week’s jump in short-interest in the SPDR S&P 500 ETF”.
As of Friday, the quantity-on-loan in SPY had matched levels seen during the capitulation levels of December 2018, JPMorgan notes.
“The rebound in global stocks has been triggered by President Trump saying that his administration will discuss various fiscal measures with the US Congress and that there will be ‘major’ economic announcements later today”, Rabobank’s Piotr Matys remarked, in a Tuesday note, adding that “in our view this is a classic bear market rally rather than the beginning of a sustainable return to normality”.