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”).
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”.