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‘Lockdown, Shutdown And Limit Down’: Traders Come Into New Week Pondering Depression Redux

"Yet, without fresh capital, businesses will fold".

Markets were not amused coming off a weekend that featured a truly disconcerting rise in COVID-19 deaths in Italy and Spain and a proliferation of shelter-in-place orders in the US, where 1 in 4 Americans are now effectively living under quarantine.

Gridlock in D.C. most assuredly didn’t help. Republicans and Democrats are resigned to the necessity of spending between $1 trillion and $2 trillion to shield the US economy, but were unable to seal the deal on a hotly-anticipated third aid package prior to the open of markets in Asia and the start of trading for US equity futures, which plunged.

Even if things improve overnight, the following visual is not the kind of start you want to see coming off the worst week for US equities since the crisis, and it reflects extreme consternation both with the state of the public health crisis and with US politicians’ inability to come together quickly to reassure a nervous public.

“That breathtaking drop in US equity futures to limit-down status at Monday’s open shows traders are taking the dire economic warnings out there with extreme seriousness”, Bloomberg’s Garfield Reynolds wrote, referencing projections from Morgan Stanley and Jim Bullard.

“Monetary and fiscal policymakers are now acting in concert, with the Fed trying to ensure liquidity remains ample and cost of funding low, while Congress is acting quickly to pass a sizable stimulus package that includes important lifelines for impacted households and businesses on the order of $1.3-1.4 trillion”, Morgan Stanley wrote, in a note that carries the euphemistic title “A Deeper US Recession” (“euphemistic” because a 30% contraction is more “depression” than “recession”).

Read more: Morgan Stanley Sees 30% GDP Contraction. Bullard Warns Of 30% Unemployment. Lawmakers Dither.

Bloomberg’s Reynolds went on to caution that “investors have no patience for Congress as it struggles to tune stimulus measures [and] are left doubting any and all earnings forecasts, while the dash for cash undermines the verity of the risk-free rate when it comes to discounting”.

What’s left to do in that scenario? Well, as he puts it, “When the windscreen is terminally fogged up, the only thing you can do is stop”.

To be sure, the Fed is doing everything it can. In addition to resurrecting the commercial paper facility, expanding swap lines beyond the G-7, backstopping prime money market funds, and stepping into the muni market, they bought $272 billion of Treasurys last week and $68 billion of MBS. That means they’re nearly halfway to the $700 billion in new QE announced just a week ago, which certainly seems to suggest the $700 billion figure will go up at some point.

And all of that is to say nothing of Congress likely granting the central bank the authority to purchase longer-term munis, corporate bonds and lend trillions to businesses (more on that in the “read more” linked post above). Here’s a summary of what’s been done so far via SocGen:


“The Fed is being given carte blanche to pursue Draghi like ‘whatever it takes’ measures [moving] beyond the point of no return and will continue to do so”, JonesTrading’s Mike O’Rourke said Sunday evening, adding that “we expect the Fed will need to announce another round of asset purchases in the coming weeks [and] it will be interesting to watch [them] support high Treasury bond prices just as the Treasury comes to market with $340 Billion in securities”.

But there’s (arguably) nothing else to do but bail everyone out. And remember, rates were already low. Right now (as in, amid the crisis) it’s the availability of funds that matters, not the cost of them. “Company access to new credit is limited and existing debt is stressed in secondary markets”, SocGen writes, in a Sunday note. “Yet, without fresh capital, businesses will fold”.


Axicorp’s Stephen Innes called Monday morning “Lockdown, Shutdown & Limit down”, in a characteristically colorful note (I don’t think he’ll mind that I borrowed the title).

“Investors are recoiling in horror this morning at the explosive COVID-19 death counts around the world”, Innes went on to say, noting that “traders are buckling in preparing for a horrendous peek into their future this week when US initial jobless claims are released”.

As a reminder, the claims numbers are set to be off-the-charts bad. Goldman is projecting an almost unfathomably large jump.

On the bright side (and as detailed extensively here), stocks may get a reprieve headed into month- and quarter-end from fixed-weight rebalancing.

“Equities are down 35% and Treasuries are trading at central bank supported bubble prices –  that is the rebalancing opportunity of a lifetime for a pension fund manager”, JonesTrading’s O’Rourke remarked, in the same cited note.

Oh, and insult to injury: The Financial Times said the Tokyo 2020 Olympics may be postponed by up to two years. Shinzo Abe told parliament Japan has to consider pushing the games into the future if safety isn’t assured, although he called the idea of canceling the Olympics altogether “unthinkable”.


8 comments on “‘Lockdown, Shutdown And Limit Down’: Traders Come Into New Week Pondering Depression Redux

  1. My wife who is a great stock picker but not economics savvy asked me “where is all this money that the Fed is injecting coming from?…is anybody concerned about hyperinflation if we come out of this….PS I was quoted on tonight saying the obvious…it’s going to get worse before it gets better

  2. Mr. Market really cannot do much of anything except wait for Aunt Nancy to give $5 and a lipstick kiss on the cheek of her favorite nephew who is definitely not him.

  3. I have patience with lawmakers on the bailout. I may be naive about lawmaking but to be honest I would prefer that they put some thought into it. We will have to live with it. Who can make laws that quickly and expect them to work. The markets can fall in the meantime too much VaR in the bailout to frankenstien the package.

    Since it was mentioned above it is rare when I point anyone to a financial op-ed, but Kelton was sent out to family and in-laws this morning.

  4. $500BN off payroll tax relief means 1/2 of this package will be spent on people who still have jobs. That is called missing the point.

    • Yup, law makers will definitely get this wrong at least for the next 2 weeks.

      It will take more pain in the market to get the Republicans to realize increasing bank balance sheets and corporate bailouts won’t solve the problem this time.

      It will take the S&P 500 hitting 1500 before they wake up. In the mean time, initial claims will likely be inline with all the events of the past 3 weeks, meaning the number will be unfathomable. 2 million is likely a conservative number, I expect much closer to an 8 figure number. I expect unemployment to peak at 40%.

      The good news is, if we get the $4+ trillion package that puts money in the hands of people who will spend it (aka temporary UBI) the economic destruction will be transitory.

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