We have well anticipated the bounce for Friday in Europe as we were expecting some cover of negative delta but the relief has lasted just few hours as US market closed on intraday low with the S&P down 4.3% to new lows for the year with the weakest weekly performance since 2008.

Forced market liquidation from Systematic Investors has already occurred and we should have expected less volatility after the large delta balance has expired but market is in total panic mode and we are going into unchartered territory.

Last week we had the highest 10-day volatility since Black Monday in 1987.

In Asia we had Japan bouncing 2% and a very weak Chinese and Australian session. US futures are once again in limit down while European futures are now down 4.5% after being trading overnight as low as -6%. In US the markets have erased 4 years of economic boom in just a month, in Europe we have erased 8 years.

Over the weekend we had the following main moves from Governments:

  • US: the virus rescue package was discussed over the weekend with talks designed to boost the US economy by about 2trln$. While the market was expecting a final vote this morning, this has been surprisingly  delayed by the Democrats, not a good news for US markets today.
  • UK: unprecedented move in the UK on Friday night where the UK government agrees to guarantee 80% of wages of UK employees impacted by Corona up to GBP2500 a month. The UK government may also take stakes in British Airways and rivals.
  • Germany: Government plans more than Eur160bln in debt spending to help the economic fallout of the coronavirus pandemic. German government expects GDP to shrink by 5% this year.
  • Italy: to close most industrial production in response to Corona. The total number of cases in Italy jumps by 13.9%.

While in China the PBOC confirmed yesterday that their economy will swiftly return to its potential growth rate and there’ll be significant improvement in the coming three months. “Economic indicators will likely show significant improvement in the second quarter and the Chinese economy will return to potential output level rather swiftly,” People’s Bank of China Deputy Governor Chen Yulu told reporters in Beijing.

The virus is rapidly expanding across the world.

Countries with more than 1000 cases and with the worst daily growth rate (the only number that no media is reporting) are:

  • 1-USA +34%
  • 2-Brazil +31%
  • 3-Turkey +31%
  • 4-Australia +26%
  • 5-Portugual +25%
  • 6-Israel +21%
  • 7-Belgium +21%
  • 8-Austria +19%
  • 9-Netherland +16%
  • 10-U.K. +13%

Cases are also picking up in Hong Kong. This is not good for many reasons, but a big one is that it means places are likely to see multiple waves of infection (& containment efforts) as the virus ricochets back and forth.

Containment of volatility is key for markets because unprecedented volatility had created three self-reinforcing negative feedback loops, one between volatility and market liquidity, one between volatility and deleveraging by VaR sensitive investors and another one between volatility and funding markets.

Let’s remind that the repercussions (i.e. continued de-grossing and negative alpha) could persist for a couple more months as big de-grossing and negative alpha like we’ve seen usually occurs closer to the start of a difficult period than the end, even if the negative alpha / de-grossing doesn’t accelerate from here.

A positive effect could come from Pension funds buying from now until the end of the month/quarter with some estimates talking of up to 150bn€ of buying flows, the largest imbalance ever!

DeMark chart on the Eurostoxx is still confirming the buy signal but flows are on the opposite side yet.

Interesting to note that the S&P earnings yield has now gone to 50-year highs relative to Treasury yields.  The equity risk premium, or the difference between the earnings yield on the S&P 500 and the yield on 10-year Treasury notes. Monday’s premium amounted to 5.65%, the widest since July 2012 and very close to 2008/9 levels.

It seems impossible to believe that we have seen the absolute lows yet despite some first interesting support signals and a complete turnout of positioning.

Liquidity crunch is real and not only within banks but with many big funds having difficulties selling and with many potential redemptions coming. As we said over last week, we fear that a sell-off started with the Virus excuse could turn into systemic risk. We should therefore monitor very closely any future development on liquidity.


New data on positioning, very impressive considering that it all happened in 1 month.

Equity, Bond and Gold fund flows

Record levels of Quant deleveraging

5-day change in gross exposure from Quant

A similar chart could be seen on Investment Grade flows

As you might remember we were warning about being long on consensus “darling positions” as we were noting a very high historical crowding. Guess what happened over the last three weeks?

Mutual fund ownership

Hedge Funds ownership

Central Banks & Governments intervention

Fed, ECB and the BOE came out with a new round of QE, which will increase their balance sheet by a total ~$1.8t. While these actions should provide ample liquidity to the market, they do not solve the immediate cash-flow stress for the most directly impacted households and corporate sectors.

After having set up a Money Market Mutual Fund Liquidity Facility to ease pressure off prime money market funds on Wednesday, The Fed decided to expand its emergency program, allowing the purchase of assets from single-state and other tax-exempt municipal money market funds (highly rated municipal debt with terms of up to one year).

Basically, the Federal Reserve Bank of Boston will now be able to make loans available to eligible financial institutions secured by certain high-quality assets. This move is aimed at enhancing the liquidity and functioning of crucial state and municipal money markets. Also, by expanding the program to include short-term municipal bonds, it may ease the difficulty cities and states are having in raising funds.

So far, the global health crisis has hammered municipal bonds as states and localities strain resources to prepare a medical response.

Investors are placing a high premium on US dollar cash. The Fed has failed so far to inject liquidity directly to those who need it most.

Trump said on Friday that that loan payments on federally-held student loans could be suspended for 60 days without penalty as the economy is hit by the coronavirus. We have warning over last few months about the dangerously growing number of student loans.

Bonds & Credit

The realized volatility for 10-year Treasury yields far outpaced the MOVE index of implied volatility for the U.S. government bond market. This might also be the consequence of the extremely low liquidity (95% less) for US Treasuries.

BBB rated bonds are doing worse than Junk. Bonds at the lowest rung of investment-grade are doing worse than they did in 2008 and the prospect of a recession is increasing the probability of turning many of those bonds into junk. BBB- (on the cusp of junk) lost 16.2% this month while BB+ (the best of high yield) fell 13%.

Falling angel risk is growing and it’ll aggravate forced selling across credit markets.

In the chart below, you can see that the current slump in US Investment Grade, -18% has been even worse than 2008, -14%, mainly due to the recent rise in Treasury yields and convexity as well as the widening of credit spreads. The IBoxx USD Liquid IG index is  designed to provide a balanced representation of the USD investment grade corporate market.

While, as we mentioned last week, Bond ETFs have withstood one of the toughest liquidity tests they have ever faced. Investment Grade, High Yields and Leveraged Loans ETFs had their largest monthly outflow in the history. The passive bubble is now bursting.

The price dislocation may cause investors to abandon the ETFs and Central banks might soon purchase European high-grade ETFs in addition to corporate bonds in order to reduce selling pressure on the underlying bonds.

Dozens of Nordic Bond funds have suspended trading, blocking investors from pulling out in a reflection of the intense strain in High Yield corporate debt markets. Regulators are now highly concerned that huge drops in the price of corporate debt, and sever challenges in determine the true market price of some corporate bonds, make it hard for fund managers to produce a reliable measure of how much money their clients have lost or to fulfill a wave of requests to pull money out!

In the last three weeks, outflows amounted to $30.6 billion from Emerging Debt funds, an enormous amount. Last week saw the second-highest outflows only surpassed by October 29, 2008, more local currency than hard currency. Importantly, credit issuance was halted, with EM credit undergoing its steepest sell-off in the past 15 years and spreads at the widest level since 2008.


State-level anecdotes point to an unprecedented surge in layoffs with next jobless claims report covering the week of March 15-21 potentially showing initial claims rising to roughly 2¼ million, the largest increase in initial jobless claims and the highest level on record.