The first quarter of 2020 will go down as one of the most consequential stretches in modern history, both for markets and for humanity in general.
The new year began with the loud beating of war drums after the US assassinated Qassem Soleimani, and ended with virtually all nations engaged in a fight to vanquish an invisible, biological foe which, through March 31, had claimed nearly 41,000 lives globally.
On Tuesday, New York surpassed Hubei (where COVID-19 originated) for total cases. The state has nearly 76,000 total infections.
In the face of this, virtually all economies – both developed and emerging – are operating under some manner of containment regime, if they’re operating at all.
Q2 will witness some of the worst data in the history of modern economic statistics. That much we know.
We’ve already seen a preview stateside (see top pane below), and it’s about to get much worse by all accounts. Goldman on Tuesday slashed an already dour outlook for the US economy. The bank now sees a 34% contraction in Q2.
This was the worst quarter for US equities since the crisis. And it would have been far, far worse. A short squeeze and likely rebalancing flows helped the S&P rally some 12% (cumulatively) over the last seven sessions. Even that was a bumpy ride, though, with sizable losses logged on three of those seven days.
For the Dow, it was the worst quarter since 1987.
The bull market is dead, and so is the expansion.
True to the adage, it wasn’t “old age” that did it. But inconsistent with that same adage, the murderer wasn’t the Fed.
Rather, both the geriatric bull and the longest expansion in US history succumbed to a literal plague.
Credit spreads ballooned wider, as a cycle that’s been kept in suspended animation by years of central bank largesse finally looks set to turn. Q1 witnessed the largest quarterly widening for high yield since the crisis.
Crude fell 67% for the quarter. Just try to wrap your head around that. Prices are barely holding above $20. It was the worst quarter ever – literally.
Here’s the kind of quarter high yield energy had:
In IG credit, Q1 was a catastrophe. In addition to spreads blowing out, raising the specter of the “BBB apocalypse” coming to fruition, the high grade ETF snapped, trading at a discount to NAV not seen since the crisis (it was hardly alone in that regard).
Thankfully, the Fed stepped in with a promise to buy corporate bonds, including via ETFs. That calmed things down, but credit markets remain distressed. Nobody knows what’s next, and many corners of the market are still frozen.
The idea that the VIX was near an 11-handle just ~four months ago is surreal and speaks to the power of the pernicious volatility-flows-feedback loop which was activated during the biggest VaR shock since Lehman.
Since Wuhan was locked down in late January, global equities have fallen some 23% and US 10-year yields are down 105bps.
We came into the quarter with the vol.-control universe running the highest exposure since the January 2018, post-tax cut melt-up. The de-leveraging was epic.
In risk parity, the “shock-down” (if you will) was the stuff of nightmares for those who have spent the better part of a decade insisting the RP de-risking ghost story wasn’t real.
What you see in the visual below is, in a word, unprecedented:
This was also a quarter when many of the demons from the GFC returned, as dollar funding stress manifested in widening cross-currency basis, which then spilled over into the spot market, causing the greenback to go “vertical”.
The Fed was forced to enhance and extend its swap lines, going so far on Tuesday as to launch a new repo facility for foreign central banks in an effort to make absolutely sure that USD liquidity is available.
The Fed – which just one year ago was still getting used to the idea of halting balance sheet rundown – was buying at a breathtaking pace last week. The balance sheet ballooned to more than $5 trillion.
As rough as the first three months of the new decade most assuredly turned out to be, the next three months are likely to be even more trying.
Steel yourselves and don’t listen to that voice in your head imploring you to build a doomsday bunker in the backyard.