It’s Official: We’ve Got A Bear Market And A Pandemic

Ladies and gentlemen, we’ve got ourselves an “official” pandemic.

That’s according to WHO Director-General Tedros Adhanom Ghebreyesus, who (sorry) spoke at a press briefing on Wednesday.

“All countries can still change the course of this pandemic”, he said. “If countries detect, test, treat, isolate, trace and mobilize their people in the response, those with a handful of cases can prevent those cases becoming clusters and those clusters becoming community transmission”.

---

Suffice to say equities weren’t listening. The Dow fell 20% from its February peak into bear market territory.

Specifically, 23,641 was the closing level beyond which the bull would officially perish. The index did, in fact, close below that level. The 11-year bull market is over.

The top pane in the visual just shows the extent to which things have gone – for lack of a better way to describe the situation – totally off the rails since February 24.

The Fed boosted the size of repos (O/N ops are now up to $175 billion) and added a trio of one-month ops to the schedule, but that’s not the problem. The problem is pestilence – literal pestilence.

And if you want to get into the finer points, Bloomberg’s Cameron Crise notes that “the issue hasn’t been with GC repo rates, but with the implied repo of bond futures as relative value trades blow up”. The Fed also boosted repos on Monday (i.e., ahead of the new schedule) in a bid to avert a panic.

“The action most directly impacts repo of course, helping to dull upward pressure on GC [but] most of the funding pressure has been evident in unsecured rates, with front FRA-OIS widening out briefly north of 50bp and 3m USDJPY cross-currency basis sinking briefly through -50bp”, Credit Suisse wrote, adding that “addressing the underlying issue may require encouragement of discount window usage, usage/expansion of FX swap lines, and, as the Fed has gestured toward, a less strict supervisory eye on lending to borrowers in need”.

(Credit Suisse)

Although I often half-joke that you can’t drown a virus in liquidity or subject a pathogen to death by a thousand rate cuts, the Fed does need to be mindful of the possible knock-on effects of the economic disruptions globally from COVID-19. Zoltan Pozsar laid things out in characteristically trenchant fashion last week.

---

The containment efforts in the US are getting quite serious. Washington suggested the cancellation of large gatherings in the nation’s capital, Capital One told employees to work from home, the Trump administration may well raise the travel warning on Europe and San Francisco banned events of 1,000 people or more.

Abroad, Kuwait simply shut it all down. The government said March 12-26 is now a holiday period. All commercial flights are suspended.

Below is the latest virus chart. Do note that this has been updated from the version published here earlier Wednesday. The numbers have changed materially in just hours. For example, the number of fatalities in Italy jumped 31% from when we published the same chart earlier. There are now 827 deaths in the country. UK cases rose by 22% today.

Markets want fiscal stimulus badly. The UK delivered on that front Wednesday and the BOE did its best to turbocharge things with a big rate cut and additional targeted measures, but the world needs something from the US – something bigger than the $8.3 billion package approved last week.

The administration and Congress aren’t so much dragging their feet as they are acting like deer in headlights. It’s just not clear what the proper course of action is, and the acrimony between the parties doesn’t help.

“[Tuesday’s] rip higher was largely due to Trump’s touting of the ‘yuge’ payroll tax holiday. Last night, and [today’s] selloff is the result of Trump not following through with concrete plans”, Kevin Muir wrote, in a Wednesday note. He worries that a lack of follow through “could potentially cause massive selling across the board”.

“The market can deal with the expected increase in coronavirus cases but what [it’s] completely unprepared for is a lack of action from government officials”, Kevin went on to caution.

JonesTrading’s Mike O’Rourke wasn’t amused with the idea of bailing out US shale (floated by some lawmakers on Tuesday). “There is little doubt in our mind that Congress will enact legislation to provide virus relief, but the size and scope is highly debatable”, he remarked on Tuesday evening, before lamenting that “the proposal of coronavirus aid for shale oil companies was preposterous [as] the prospect of bailing out over-levered energy companies who made poor business decisions is poor policy and is in opposition to capitalism”.

And I could go on, and on, and on. There is very little chance that the Trump administration and lawmakers are going to be able to satisfy the markets or the public. Skepticism about the capacity of a hopelessly gridlocked US political machine to respond to the burgeoning public health crisis is deeply ingrained thanks to years of Beltway chicanery. That’s one reason stocks can’t settle down.

Unfortunately, bonds were no help on Wednesday, as yields rose. In fact, this is setting up to be a terrible week for stocks + bonds (colloquially).

And it just gets worse everywhere you look, frankly. Boeing, for instance, fell 18% after saying it plans to draw down a loan. Hilton Worldwide plunged after saying it would tap a credit line.

---

Meanwhile, analysts continue to update their Fed calls. “We now expect the Fed to reach the effective lower bound by the April meeting, or possibly earlier”, Nomura said. “Our baseline outlook calls for two 50bp rate cuts, at the March and April meetings, but we cannot rule out any action taking place during the inter-meeting period”, the bank’s Lewis Alexander went on to write, adding that “We expect the Fed to engage in state-based forward guidance and some form of QE”.

Poor Jerome Powell. I mean, not really. He’s worth many, many millions. But at the current juncture, I’m not sure any middle-income American with a sense of what’s going on would willingly trade places with ol’ Jay.

As if to add insult to injury, Trump said Wednesday afternoon that the country “may not need stimulus”.

“I’ve made some decisions”, the president remarked, during a meeting with bank executives. “I’ll be making some more soon”.

---