By the time the dust settled Friday, the optimism evident in a limit-up overnight surge for Nasdaq futures had evaporated, leaving steep losses for US equities.
There are still questions around when a third round of stimulus will be agreed on Capitol Hill and Americans are facing the prospect of entire states under lockdown with all but the most essential businesses and services closed. Wall Street’s largest banks now see a historic downturn for the US economy in Q2, with Goldman grabbing headlines Friday for their forecast of a 24% contraction.
US equities had their worst week since the financial crisis, falling some 15%.
The dollar had an absolutely epic run, rising more than 4% on the week, even as Friday saw the greenback take what counts as a “breather”.
Funding stress – as manifested in forward points and basis swaps – eased a bit on the final day of a week that everyone is happy to see come to a close, but this was a harrowing five days, defined by frozen markets, USD hoarding and emergency action from the Fed to expand access to swap lines.
“The unique nature of this crisis and collapse in risk assets has exposed fragilities in the system — think leverage, think liquidity – and USD funding stresses have re-emerged despite the lessons supposedly learned in 2008”, ING’s Chris Turner wrote Friday afternoon.
“Policymakers are now in fire-fighting mode”, Turner went on to say, adding that although “the Fed and the US Treasury have the tools to address the strains in the USD funding markets and conditions will probably start to improve over coming weeks, there is no getting away from the fact that prolonged lock-downs mean deep recessions”.
Here’s a snapshot of Wall Street’s forecasts for Q2:
Gold logged a second weekly loss as investors sold everything that isn’t the dollar amid cross-asset chaos and to meet what some have described as “a massive margin call on the whole post-2010 financial asset rally”.
Oil, which was buoyant overnight following its best day in history Thursday, couldn’t hold gains. WTI plunged Friday, and was down 29% for the week, its worst weekly loss since 1991.
“Tens of thousands of Texans are being laid off across the state in places like the Permian Basin shale fields in west Texas as companies shut down their drilling rigs”, Bloomberg wrote Friday, citing Ryan Sitton, Texas Railroad Commissioner, who has been invited by OPEC Secretary General Mohammad Barkindo to make an appearance at the cartel’s summer meeting in Vienna.
Sitton is proposing a joint-output cut. He had this to offer in a tweet:
Just got off the phone with OPEC SG Moh Barkindo. Great conversation on global supply and demand. We all agree an international deal must get done to ensure economic stability as we recover from COVID-19. He was kind enough to invite me to the next OPEC meeting in June.
— ryansitton (@RyanSitton) March 20, 2020
As you can imagine, some are skeptical.
This was – as discussed on Thursday evening in “Swan Song“- an unfathomably bad week for the IG credit ETF. The losses are mind-boggling.
Suffice to say credit ETFs are undergoing their most strenuous stress test ever, as markets ponder the prospect of severe stress for an over-leveraged corporate sector, US government bailouts for distressed companies and, in all likelihood, a wave of downgrades and defaults.
“There are just no bids for the bonds”, one person I spoke to Friday remarked.
At the end of the day, there will be no sustained bounce until the coronavirus epidemic shows definitive signs of having peaked in western nations.
On that score, Friday was a dark day, indeed. Italy reported 627 deaths in the past 24 hours, and France said its infection total jumped 1,617 over the past day to 12,612. US cases continue to climb by the hour.
“So what happens next? On the virus side we and likely no one knows, but we are not expecting a significant improvement and macroeconomic fundamentals have significantly deteriorated”, JPMorgan’s Marko Kolanovic writes. “On the structural flow side we think conditions will improve with large option expiry [seeing] a meaningful portion (~1/3) of short gamma expiring [which] should reduce the chop and volatility going forward”.
“By suppressing volatility, central banks created a system unable to deal with bad news”, SocGen’s Andrew Lapthorne put it recently. “Leverage was built up on the premise that nothing bad happens”.
It’s worth noting that Friday was the first day in history that the S&P fell 4% while the VIX closed lower.