The market has finally bounced on Friday after having reached an extreme on Thursday but we still had very high intraday volatility on Friday with the Eurostoxx dropping 10% from intraday highs to lows.

The S&P managed to close up 9.3% but it was up more than 7% in the last 30 minutes of trading… huge delta and closing orders work on both sides.


Technically, on the S&P, this is the trendline to watch for the next days. A failure to hold it would be very bearish.

Yesterday evening, the Fed has cut Fed Fund rate by 100bps to 0-0.25% range, and will increase its bond holdings by at least $700 billion, letting banks borrow from the discount window for as long as 90 days, reducing reserve requirement ratios to 0% and lowering the rate on standing US dollar liquidity swap by 25bps. The Fed delivered a comprehensive easing package, but stressed the rest of the policy response burden falls on the shoulders of fiscal authorities.

In addition, BOJ (Japan) increased its stimulus, buying more assets including ETF (up to $113 billion per year, double current annual target) and corporate bonds, and offer a new zero-interest rate loan program to firms.

Today, G-7 leaders will gather for an emergency response to the virus on a teleconference.

It was the most aggressive Fed move ever

The result on US Real Yields is almost 2% below inflation, the lowest level in 40 years.

This morning the sell-off has continued in Asia with the Nikkei falling 4.5% intraday and closing at -2.5%, China down 4% and Australia a whopping -9.7%.

European futures are now down 3.5% and US futures are down 5% on limit down (before the cash open).

European markets are therefore down 35% Ytd now.


The market this morning is saying that it needs an aggressive fiscal policy response and a sign of peaking out on virus contagion in order to get a sustained bounce.

Feds emergency cuts was typically a negative signal for the markets and everybody today is wondering why they had to cut on a Sunday, is the situation this bad? Probably yes. Market confidence is being shaken in the central banks crisis management capabilities.


As we remarked already, the main issue of the last 2/3 days wasn’t about the virus but panic selling and very low liquidity (if not absent) on most of asset classes.

This is how it looks now the exposure of these funds now, a complete washout.

The evaporation of liquidity was evident across virtually all asset classes, but its absence was most stark in securities which normally serve as havens and see their prices increase during a turmoil. That caused strange, unsettling moves as traders watched long-established cross-market relationships disintegrate.

We have also seen cash drain from initial and variation margin calls across products.

Almost $17 trillion has been erased from equity values since the 20th of January, the pace of wealth destruction has been faster than in 2007-2008 in both dollar and percentage terms.

We have been stressing the fact that every investor was consensually long the market and the risk coming from the systematic funds.

Last Friday we have explained how Risk Parity funds were selling across the different asset classes raising the correction to the highest seen in years.


Volatility will continue to remain high and the market is mainly focus on 4 aspects now:

  • Containment of the virus and lockdowns of cities/countries
  • Concerted global policy response
  • Economic impact both in terms of macro and micro
  • Margin calls/Liquidity issues


If the market wants to go considerably higher it will need to solve all the points above. As some of them will require time, we will possibly trade in a range awaiting for more clarity.


The Spread of virus slowing in Asia while Europe and US are increase the lockdowns in order to contain it. It will require hard work and time.

In terms of policy response, the Ecb was mainly focused on 3 points:

  • Amount of QE: 120bn€ announced on Thursday come on top of the 140bn€ already implemented BUT importantly, there is no monthly limit of what they can buy, meaning that they can use 120bn in March and maybe something additional not yet announced.
  • No limit on capital key on ECB buying
  • Support of banking loans

Importantly, it seems that the European Union is ready to trigger the crisis clause allowing a full coordinated European fiscal stimulusToday there is full focus on the Eurogroup meeting.

German Finance Minister Scholz recently announced that Germany will implement a strong fiscal stimulus if needed, spending billions to cushion the economy, without putting limit on credit program to mainly help small medium enterprises and setting-up safety nets for virus-hit companies.

The real fiscal news though, is that Germany will do whatever it takes to push the economy and will very likely take on added debt. In addition, resources for Germany’s state bank are set to rise up to €500 billion.

Among some high-profile ECB figures, Visco said the ECB can frontload and concentrate particular jurisdictions if needed, which translates into Central Bank buying Italian debt. The spread between Italian and German 10-year narrowed about 30bps. Also, Villeroy declared that the ECB will use all the flexibility it has to combat fragmentation in the Euro area, moving away from the capital key to purchase more of some countries debt if required. Clearly, the market misunderstood Lagarde’s commentary, and the ECB wants to give reassurance that they will do whatever it takes.

The Fed as we know, last Thursday announced a plan to pump $1.5 trillion into the short-term funding industry with several 1,3-month repo, to address temporary disruptions in the market for Treasury securities, purchases in each of five maturity sectors of the curve up to 30-year took place on Friday for as much as $37 billion.

These purchases are part of the $80 billion of planned monthly purchases, including both $60 billion of reserve management purchases and $20 billion of reinvestments of principal payments received from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities.

All Emergency POMO (permanent open market operations) were oversubscribed. This means that the market wants more and more liquidity. The Fed’s move to buy bonds all the way out to the 30-year maturity is the central bank’s whatever it takes moment. The Fed funds futures market has convincingly priced in another 100bps of FOMC cuts by next Wednesday’s meeting as the April 2020 contract is trading with an implied rate of 16.5bps.

Last Friday the Chinese Bank has cut the reserve requirement ratio (RRR),  by 0.5% to 1%

China is calling for improving financial support for businesses hit by the impact of the crisis. Chinese consumer demand is looking bleaker. Core inflation, excluding food and energy, rose at the slowest pace since June 2010 last month, highlighting the slump in demand. New household lending posted a net decline of 413.3 billion yuan last month on lower property and car sales. This is a clear example of a slump in property market a vital engine for economic growth.


While local authorities are carrying out a series of events to encourage local consumption potential and attract tourism post-virus outbreak, we are seeing a slow and gradual normalization of activities in Hubei province.


Daily power coal consumption by the six major power generation groups is improving (chart), while stable return of workers is increasing intra-city traffic (75% returned to tier 1-2 cities) and traffic congestion and subway passenger traffic in large cities is trending higher (chart).


Daily Power Coal Consumption – Blue line 2020

Cumulative return rate of people – Tier 1-2 Cities

In terms of Positioning.

Last week Mutual Funds have seen $6bn of redemptions, the worst in 6 years!. In normal times, the numbers would not be seen as impactful overall but bear in mind that because of the very weak market structure now, these flows matter.

We have also seen the largest monthly outflows from Systematic/Quant accounts.


Looking at futures, last Thursday were sold on Eurostoxx 4bn$ taking the total net short to 26bn$ close to the record 30bn$ seen in 2018.

The amount of Puts on the market is also very large and on the Eurostoxx last week it has been traded roughly 80bn$ of delta, a very large amount.

Last week we had the biggest cash inflow ever (137bn$) and the 2nd biggest inflows into gold ever (3.1bn$)


On Credit, markets were not functioning or liquid enough last week and is becoming the new Private Equity…no liquidity when investors want to get out.

The move of the 30-day implied volatility on Credit was a 10 standard deviation move, more dramatic than 2008

The top five largest bond ETFs traded with discounts to their net asset values that were either records or the biggest since 2008. The $23 billion iShares 20+ Year Treasury Bond fund’s price ended Wednesday 5% below the value of its assets. In the almost 18-year history of the product, the average difference between its price and the value of its assets has been 0.03%.


In terms of flows, we had the largest bond weekly outflows ever!

Brokers are now doing the exercise of downgrading Macro & Micro estimates.

Last Friday Goldman has downgraded the Eurostoxx 600 EPS (Earning Per Share) growth forecast from -6% to -14% for 2020, and upgraded 2021 growth to +10% from +6%.

This means that they are predicting the slowest pace of growth since 2009.

Macro wise, China has this morning reported the Industrial output for January & February dropping 13.5% YoY, retail sales fell 20.5%, and fixed-asset investment dropped 24.5%. The unemployment rate jumped to a record 6.2% in February, when the outbreak worsened and much of the economy was shutdown.