The market has continued to plunge with Wall Street falling the most since 1987 (again). The S&P had daily moves of more than 4% for 6 days in a row and volatility has reached the highest level (on the close) that we had since the GFC of 2008!

Over the past three weeks we have had the fastest 20+% decline in the S&P 500 from an all-time high, the sharpest increase in the VIX in history, the biggest fall in Oil prices since 1970, and the largest collapse in Bank equity prices, ex-financial crisis.

We believe that it started as a correction with the Virus trigger which happened in the worst possible moment as every category of investor was very bullish and fully invested. Over the last 3 trading sessions the situation is however getting even worst and this is not only because of the still alarming news on Virus but because we are having a liquidity crisis! If the situation will further deteriorate without any backstop it could go into a systemic crisis like it happened in 2008. We need to be careful.

There are some talks of potential market closures, we are absolutely against this solution as it will just exacerbate liquidity issues short term.

To further testify the dramatic market situation, you just need to check the Gold (-2% today, -13% in 5 days) and Silver (-11.6% yesterday, -29% in 5 days)! If you wonder how it is possible to have such a meltdown of precious metals and Fed having the greatest cut ever in such a short time, the only explanation is: margin calls. Basically investors and retailers have been continuously asked more margins and we have now reached the point that they need to sell everything to cover the margins. Precious metal included. We have been warning investors over the last two months to be careful on Gold as it became the most consensus position and it failed miserably the task of protecting portfolios. On a similar note, even Bitcoin has been plunging more than 10% yesterday and 58% in just a week.

Yesterday the S&P future was in limit down pre-market open, have a look at the bid offer sizes around 10am EU CET time.

The market is already being flooded with record liquidity by Central Banks and this will increase over the next days but Governments also need to step in and deliver meaningful fiscal packages that underwrite the credit (we didn’t really find a bottom in 08 until after TARP was announced) and restore confidence. The fiscal package announced on Friday in the US was a step in the right direction and amounts to 1-2% of GDP. You might wonder how fragile must be the financial system that it requires zero rates, 700bn$ QE, 500bn$ in Repos not even 4 weeks away from all-time highs and still it doesn’t seem enough.

On Friday there will be an important future and options expiry which might further increase the volatility of the market (both ways).

The S&P got pretty close to its low from December 2018 at 2350. The Dow smashed already through its corresponding level, but the Nasdaq is still a few percent above that.  In Europe, having being fallen more than in US, there are some first signals of total exhaustion but it is of course still early to give a conviction buy signal.

The S&P has opened the week failing to sustain the support of the 200 weekly moving average and the support of the uptrend that lasted since 2009. The week has just started and it is therefore not confirmed yet but it won’t be a nice signal if on Friday this will be confirmed.

The Dax yesterday has been able to close above the 8,700 level that held in 2014 and 2016, the Index is down 34% Ytd.

Although nearly 1/3 of the serious market corrections we have seen over the past 100 years have been worse in magnitude compared to where we are today, we have never seen an SPX correction move the way this one has. This has been the most rapid correction to date, with the average daily loss setting a new record by a wide margin.

Have a look at this table showing how many days it took for the S&P to fall 20%.. this time just 15 days!

European equities are pricing in a more than 20% fall in earnings. US equities are also pricing in recession (with unemployment rates rising by c.3%). A sizeable hit to activity has been factored in, in record time.

The US Yield curve has started to steepen (10y – 2Y) and as seen in the past, it normally anticipates well the beginning of a recession.

Interesting to note that high quality corporates, those deemed to be defensive, have been struggling as well. US AAA, AA and utility sector bonds have all given up gains, following relative outperformance when the credit crisis first struck. See in the chart AAA, AA spreads jumping to 8-year peak with correlation spiking too.

AA Credit spread (red) vs AAA credit spread (blue)

As far as US short-term funding is concerned, the yesterday’s $500 billion repo operation was unsubscribed, which is good as it means there should be less liquidity problem in the industry.  In total, the Fed has injected $148 billion in the market. However, it might be a short-term effect of the Fed most recent announced bazooka and re-started Quantitative Easing.

But we also saw yesterday the Repo market scrambling again, as this time the liquidity issues moved from funding shortages and right back to repo market. The overnight General Collateral Repo Rate jumped up to 2.50%, more than 2% above the effective fed funds rate (chart). This means that there still are liquidity problems in the system. That’s why the Fed announced that it will conduct an additional overnight repurchase agreement operation for $500 billion. Massive liquidity keeps flooding the market.

Another scaring point is on Collateralized Debt Obligations, an almost $700 billion market. The biggest problem here is the relentlessly plunging Libor rate (chart). Most of the payment on CLOs are tied to Libor rate, which means that if Libor were to fall below the spread of these structures or zero, the negative all-in coupon could mean CLO debt holders would owe money back to issuers rather than receiving the coupon. The market is not ready though, as it does not seem CLOs have mechanism for debt investors to pay interest to the CLO. What’s gonna happen?

Libor rate

S&P cut Boeing’s credit rating by two notches yesterday, to BBB from A-, as its cash flows for the next two years are going to be much weaker than expected, with a huge pile of debt. As Boeing might be downgraded to junk in a short run, the firm is seeking short-term aid in talks with the White House and lawmakers, in other words a bailout.

Interesting that the Bank of Japan is buying ETFs at a record pace and they are ready to raise its annual buying to a limit of 12Trln Yen.

The pressure on markets coming from the number of incremental cases is likely to worsen until April-June. The reported number of US cases continues to rise sharply, and further dramatic-looking increases are inevitable as testing is ramped up, and the virus continues to spread Given that testing is not universal and most people with the virus don’t need medical attention, the only way we’ll know for sure that the outbreak is over is when the number of deaths begins clearly to fall. The number of deaths is still rising rapidly. China has a similar median age to the US, but air quality is terrible and the smoking rate is double the US rate. Italy has good air quality but the population is older and smoking rates are high. No one under 29 has died in Italy from Covid-19.

However, lockdown is starting to happen everywhere and this is a potential good news for markets as the Virus should get contained. Once the virus peaks, investor’s focus will turn to a H2 2020 and 2021 recovery.

Oil price is falling further (-10% yesterday,up 4% today,  -51% from January’s highs) and while it is common view that this drop help the consumer through lower costs and higher real income and it could be positive for the Gdp (US Consumer accounts for 70% of Gdp) we tend to disagree. Have a look at the chart showing the correlation between oil price and US consumer confidence. There is also a very strong correlation between equity market performance and oil prices.

Have a look at the net open positions on all Oil futures and options, we are at an extreme point.

Interesting to note something on Smart working and Telecom companies. Companies including Telefónica, Orange and Vodafone have taken the unprecedented step of asking citizens to reduce their internet usage to ensure that quality of service is maintained. They are all reporting record amount of traffic with Telecom Italia saying that internet traffic is up by 2/3 in the lockdown country.

On Macro, US March Empire State index fell by record 34.4 points to -21.5, the lowest since 2009, confirming the very sharp Macro deterioration. Gauges of new orders, shipments and employment all fell into negative territory.

General Business Condition

And finally, the latest CNN Fear & Greed indicator… keep it mind, you won’t see this number frequently and an interesting phrase from Warren Buffett: “Be greedy when others are fearful”.