A Badly Needed ‘Crash’

A Badly Needed ‘Crash’

Lost in a truly egregious rout for US equities on Thursday was news that Steve Mnuchin and Nancy Pelosi have agreed to ensure a stopgap funding bill remains “clean” to avoid unnecessary complications which might “accidentally” dead end in a government shutdown.

If confirmed (and assuming any such agreement holds) that would presumably mean stimulus talks will remain separate from the wider government funding discussion. I won’t delve too deeply into this other than to say that siloing the two negotiations would reduce the odds of a “grand fiscal failure” while perhaps raising the odds that the two sides dig in further on the stimulus stalemate.

“House Democrats are for a clean continuing resolution”, Pelosi spokesman Drew Hammil told the media. “We do believe that we’ll be able to get funding to avoid a shutdown”, White House Press Secretary Kayleigh McEnany remarked. There was no immediate word on the duration of any CR.

For market participants accustomed to uninterrupted gains, Thursday was a cold, hard slap in the face.

It spoke volumes about the extent to which narrow rallies can beget harrowing routs when losses in the handful of stocks which drive gains in top-heavy indices beget outsized slumps in the same benchmarks when the Jenga tower finally tips over. Apple plunged the most since March 16, for example, shedding ~$170 billion in market cap in the process.

The flip side of this is that the equal weighted S&P held up better during Thursday’s dramatics than its cap-weighted counterpart. Needless to say, it fared far better than “pure”, “concentrated” measures of tech euphoria, like the FANG+ index, which plunged nearly 7%. Value outperformed momentum by a wide margin.

Not helping matters was a historic plunge in Ciena, whose largest customers include tech heavyweights.

“Ciena’s warning [on tech spending] showed telecom equipment isn’t completely isolated from the pandemic’s economic fallout and that major carriers are reducing spending to reflect less demand from their own customers”, Bloomberg wrote, capturing the gist of the problem in just a few words.

The VIX jumped the second-most since March, and “crash” is en vogue. “We currently see VVIX back north of the finger-in-air 120 ‘tension’ level”, Nomura’s Charlie McElligott said Thursday, noting that “demand for wingy stuff only builds” as perceptions of market “‘broken-ness’ agitate under the surface”.

Frankly, rates felt like a bit of a disappointment in all of this. Yields were richer by just 3-4bps at the long end. You might have expected something more dramatic considering the scope of the equity selloff.

“The Treasury rally has yet to reach extremes one might characterize as overbought; therefore, from a technical perspective at least, there is ample room for the price action to extend until 10s reach the 50 bp level”, BMO’s US rates team wrote on Thursday afternoon, adding that really, “the US rates market has simply retraced to the middle of August’s range”.

Still, the recent rates rally has been strong (or maybe “enduring” is better) enough to unwind the bear steepening unleashed by Jerome Powell’s unveil of average inflation targeting. Thursday marked the fifth day of bull flattening.

Coming full circle to where we began — i.e., with government funding and stimulus — it’s at least possible that Thursday’s stock rout was just what the doctor ordered.

As I put it prior to the cash open, “unfortunately, I suspect it’s going to take a shockingly bad top-tier data point or another market crash to prod Congress into action”.

Thursday wasn’t a “crash”, really, but it was a proper selloff.

“A real stock market crash is the best thing that could happen to the economy right now, because it’s the only thing likely to convince Republicans to vote for serious stimulus”, Binyamin Appelbaum said, in an afternoon tweet.

That about sums it up.


5 thoughts on “A Badly Needed ‘Crash’

  1. Another really good post. You punch them out like I can’t believe.

    We know an airpocket is coming up will be quick and furious. That’ll be the time to go in.

    Bring it on.

  2. On the stimulus front, for Pelosi and Mnuchin to agree to a CR w/o stimulus suggests both see no stimulus as a not intolerable outcome. If stock weakness stimulates them back to the table, who will be more anxious to deal? I suspect the White House.

  3. I suspect political calculations. Government shutdown can paint both parties unless one is clearly taking ownership. I suspect also that there is some deal working, not that this administration can be trusted to honor any agreement. I suspect if there is a deal it is with the Senate. However the Administration will be wanting to take credit for anything worked out in the Senate. It may be we need a market drop to teach them a lesson who is in charge.

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