Market have somehow recovered from intraday lows yesterday with the S&P closing down 5.2% recovering 5% from lows. European futures are now indicated down 0.5%, recovering more than 6% from the levels they were trading at 5am this morning.

Panic is on every asset class but Central Banks and Government are providing support. The 5-Day Moving Average of Equity Put/Call Ratio is at its highest level ever, surpassing the prior record from November 2008. With data going back to 2003, there has never been as much fear as there is today in the options market.

The Bond market continue to be increasingly  dysfunctional with dealers barely making bids. This includes Treasuries and European sovereign bond market are collapsing.

Have a look as an example at the difference between the ETF of the Vanguard Total Bond Fund  and the value of the underlying bonds it holds. The ETF is trading 6% below the value of the bonds…this is because of the liquidity search. This ETF is the largest bond ETF with 50bn$ in assets. The discount is now bigger than the worst day in 2008, the day before of the TARP announcement.

Funding stress is taking the focus with banks taking up huge dollar amounts in auctions even today. It is a further remark that funding pressures are far from over but at least Central Banks are helping. Euro area banks took up 112bn$ funding in a special auction by the ECB (the most since the 2008/9 crisis).

BTP spreads already at levels which have forced the ECB to act buying bonds in an attempt to stabilize the market.

Oil has continued to fall (-24% yesterday, +13% this morning, -30% in 3 days) and is now trading at the lowest in 17 years (down 64% Ytd). Oil’s plunge has stung currencies across emerging markets like Russian Ruble (-15% this month), South Africa and Turkey, and there’s probably worse to come.

On Dollar, we had the biggest 7-day gain, +7% Bloomberg Dollar Index, for the US Dollar since Black Wednesday in 1992. Why? Massive dollar liquidity shortage. As a reminder, according to JPMorgan’s calculations  the global dollar short that has doubled since the financial crisis and was $12 trillion as of this moment, some 60% of US GDP. It seems that the global dollar short margin call came due.

On Virus situation, it seems that in Italy both new cases are peaking but deaths have gone beyond 2,500, a 150% increase in a week with a death rate of nearly 9% of total infected people, the highest in the world.

A news study is confirming that more than 99% of Italy’s coronavirus fatalities were people who suffered from previous medical conditions. More than 75% had high blood pressure, about 35% had diabetes and a third suffered from heart disease. The chart shows the number of prior illness for the total of deaths.

87% of the deaths are above 70 years old with an average age at 79. In younger age groups, only 0.8% of the deaths were of patient with no medical condition at all. Wuhan reports that are no new virus case after almost 2-month lockdown.

Government and Central Banks intervention

The ECB recently announced a massive quantitative easing program of as much as €750 billion, purchases will be conducted in flexible manner, mainly favoring Greece and PIIGS (Italy). In addition, the ECB also expanded the range of eligible assets to non-financial commercial paper and to ease the collateral standards to allow banks to raise money against more of their assets including corporate finance claims.

ECB Governing Council was unanimous in its analysis that monetary policy has reached its limits and fiscal policy is needed to address coronavirus crisis.

US President Donald Trump is still considering a stimulus plan that could reach $1.2 trillion.

The Bank of England stands ready to act further to minimize the economic impact of the coronavirus in concert with the Treasury and the GBP fell yesterday more than 1% vs the Eur and nearly 2% vs the $.

Bond moves

On German Bunds days ago investors desperately had to lend money to Germany at -0.9%, today they demand less than -0.3%. These moves are huge. Part of the reason equities have been hammered is due to the bond narrative but those “safe haven” trades a week ago have been totally washed out. German 10 year yield has not closed here since mid January.

On Credit, the selling flows on Investment Grade and High Yield are increasing and as asset prices fall, quick outflows have created a vicious cycle of forced selling and in turn lower prices.

The speed of this outflows is extraordinary as shown on the table below on both IG and HY (where roughly 1.5% of total HY market has been withdrawn in just 2 weeks).

The increase in corporate QE, while welcome, looks inadequate to the scale of the current crisis. HY flows have three times the market impact of IG flows (much wider spreads ). Thus even increased QE purchases are running at less than one-quarter of the pace of recent outflows.

The  ECB announced the results of its first LTRO auction taken this week: €109 bn was taken up by 110 banks. This is a significant number which shows that banks anticipate funding conditions to worsen.

On corporate, there is an increasing number of downgrades to junk. The latest in Europe was Aston Martin. Credit Default Swaps are spiking even for massive corporations. Boeing 5-year Credit Default Swap is currently pricing 32% odds of default.

Liquidity constraints are creating volatility in markets like gold which we should expect to benefit from the current uncertain environment.  1-week Gold volatility (option proxy) jumped to the highest in almost 10 years. And it makes sense, after oil selling-off, shrinking liquidity, dollar funding shortage, Central Banks mainly Emerging markets have reduced the pace of gold purchase. As we know, Central bank reserves have been a driver of gold demand for several years, with Russia among the largest purchasers.

A final note on US FAANG stocks (Facebook, Amazon, Apple, Netflix and Google) have hold very well in this market correction and they consequently risen to a new level of prominence relative to the Nasdaq Composite Index. The five megacaps now for 30% of the index’s market capitalization, a new record.