‘There Are Calls For A Market Closure To Stop The Bleeding’

Man down!

As expected after an overnight session that found futures flatlined, US equities were halted limit-down out of the gate at the cash open on Monday, and kept falling once trading resumed.

The Dow fell as much as 12%. The benchmarks were down 10% in the US an hour into the cash session. The moves erased Friday’s late-session surge and served notice that, at least for now, monetary policy is no panacea – indeed, it’s not even a Band-Aid. This was the picture at the morning lows on the Dow:

Were the S&P to hold intraday losses (or get worse), Monday would be even more heinous than last Thursday.

In other words, we would have a new “worst day since 1987” just two sessions after the last such historic rout.

This is another session where irrespective of what happens from the time these lines are written, what unfolded after the open cannot be “erased”, so to speak. Monday, March 16, 2020, is yet another day that will live in infamy.

“[There are] increasing calls for an emergency national holiday ‘market closure’ to stop the bleeding, as the risk-asset response to the FOMC’s announced return to the ELB and upgrading of LSAP’s was a resounding ‘not enough'”, Nomura’s Charlie McElligott wrote Monday, adding that although the Fed’s actions were fast-tracked, they were “nonetheless ‘standard playbook’ [and] refrained from using emergency tools [which] is part of what’s driving the extension of the risk off trade today”.

If you’re wondering what was behind Friday’s surge into the close (you know, the one that prompted Donald Trump to autograph a chart and gift it to Fox’s Lou Dobbs), you might recall that I described it as a combination of “hopes for stimulus tied to the emergency declaration, hedge monetization, short covering and your standard, late-session, ‘up’-day squeeze”.

McElligott reiterates that on Monday. Here’s Charlie with the more granular take:

Friday’s Equities “rally” was almost entirely a function of mechanical hedging flows and NOT of renewed optimism with the crisis response–meaning the buying was largely on account of the still-present “Negative Gamma” position for Dealers; Dealer hedging of Variance Swaps; stille-extreme client “Short Delta” which forces aggressive covering / monetizations into “up” moves and exacerbate violence of rallies; covering in futs / ETF shorts which have been dynamically hedged; and leveraged US Equities ETFs, which had nearly $15B to buy into the close on end-of-day rebalancing (4.2b spx, 4.7 ndx, 800mm rty, then 3.8b across leveraged sector etfs)

Incidentally, nothing has been “fixed”, so to speak. And I don’t mean that in the generic sense of central banks being inherently unable to fight a pathogen with rate cuts or drown a disease in liquidity.

Rather, as McElligott goes on to write, “we continue to see stressed markets / abnormalities in Repo markets, CP markets, X-Ccy basis sticking at extremes, Treasury basis and off-the-runs remaining ‘broken’.”

“Market depth on 10y USTs declined to just $18mn on Monday 9th, its lowest level since December 2008”, JPMorgan writes. “Our Hui-Heubel metric for 10y UST futures, shown in Figure 11, also deteriorated further [last] week”.

(JPMorgan)

In equities, the picture is bad. As noted here on any number of occasions, market depth never recovered from “Vol-pocalypse” and to the extent this is possible, things are getting worse.

“The picture in terms of equity market depth for the S&P 500 e-mini contract has deteriorated further”, JPMorgan’s Nikolaos Panigirtzoglou goes on to say, in the same cited note, before observing that what you see in the left pane below (the standard visual for market depth in equity futures) “is further corroborated by looking at an alternative metric, the Hui-Heubel ratio from the academic literature [which] captures the price impact of volumes on prices or market width”.

(JPMorgan)

Through Monday morning, US equities had lost $8 trillion in market value from the February top.

“Equities players voice no desire to even think about playing offense until we begin to address credit, corporate cash flows and lending disruptions into an economic shock which is still expanding in scope and scale”, Nomura’s McElligott remarked, on the way to lamenting that “it only gets worse on the liquidity/dysfunction front this week, as in my world, it is Serial OpEx all while the CBOE floor is closed into the largest notional expiration in history”.