Markets are finally bouncing today with Japan up 7%, Australia +4.2%, China +3% and European futures up 5%. In US last night the market dropped to the lowest since 2016 with the Dow erasing all gains since Trump’s election. This morning US futures are up 3%.

We were seeing already yesterday that markets in Europe were not falling much and have been creating a base since the 16th of March. As we have already discussed, we were expecting less volatility after the largest expiry on history but it surprising to note that even post expiry the open interest (open positions) on the Eurostoxx futures has reached an all-time high of 6.5mln contracts. To put this in context, is 50% higher than the previous peak in 2002 and in $ terms equates to 175bn$. On Net basis, there 60bn$ of shorts and 9bn$ of longs, just a bit lighter than the most extreme point in 2008.

The already very large short base and the short bans on most of European countries have helped the European market to be sustained vs the US.

Despite the huge amounts short on Index futures, the liquidity is not improving. Yesterday the S&P traded at the lowest liquidity levels since 2015, the Eurostoxx traded volumes more than 90% below the average Ytd!

Another indicator of concern is given by the activity in high-strike VIX options: more than four times as many VIX options with strikes 100 or higher have traded this month in the history of VIX options before that.

Annual volume (thousands of contracts) in VIX calls with strikes 100+.

Looking at the charts, in Europe the market seems to have found a base. Look at the Dax futures as an example, which has moved within a range since the 16th of March defending the support at 8300 on the index.

Today we will have the release of first European macro data which will include the virus effect. The PMI for March should see the sharpest monthly declines on record, with the composite Euro area PMI dropping 12.7 points to 39.3 in March (consensus). Beyond the headline numbers, the March flash PMIs will be informative about the severity of the economic disruptions in Italy and Spain vs. the rest of Europe, and  potential further supply chain disruptions beyond those caused by the factory shutdowns in China.

Central Banks and Government interventions

  • The FED said it would buy as much government-backed debt as needed to soothe fraught markets and unrolled a series of programs meant to shore up both large and small businesses, unveiling a whatever-it-takes effort to cushion the brutal economic blow of coronavirus.

The Fed will be buying corporates bonds (in the primary, secondary market and also credit ETFs) and municipals to unclog the frozen corporate bond market along with, in addition to Treasuries, Agency Commercial MBS all in unlimited size. Importantly, the Fed circumvented the Reserve act to buy corporate bonds.

So the Fed will be buying $75b in USTs and $50b in MBS each day this week amid the new open ended QE. They had previously guided to 500bn Treasuries and $200bn of MBS so this is a huge step up.

Open ended QE. The Fed could end up buying up to 2-3tln by when this is done.

This will facilitate the trading on IG and HY bonds, CDS have started to tighten yesterday after the announcement.

Have a look at the latest Fed’s balance sheet.

The target is Investment Grade (IG) US corporate credit. Specifically, it seems the target is also front-end debt (up to 4-5y in maturity) and non-banks, but the Fed could, in theory given the wording of the announcements, indirectly buy all sorts of US IG debt via IG ETFs.

Have a look at the bounce made yesterday on the US IG Corporate bond ETF.

The US Government further delays the virus economic stimulus plan but House Speaker Nancy Pelosi revealed the amount  (2.5trln$) and the target would have broad implications for the financial sector. It would force lenders to grant a temporary reprieve from mortgage and car payments and credit card bills. It would order the Federal Reserve to provide loan servicers with liquidity to allow borrowers to stop paying their mortgages for up to 360 days. Public housing residents would get a temporary reprieve from paying rent, and student loan borrowers would have $10,000 of debt forgiven. Negative consumer credit reporting would be halted. Foreclosures and evictions would be banned.

Democrats on Monday blocked Senate Majority Leader Mitch McConnell‘s second attempt at a procedural vote to advance his $1.8 trillion plan, saying its loan program for companies lacks transparency and oversight.

The House and Senate would have to pass the same version of the bill before sending it to President Donald Trump for his signature.

  • Nikkei is outperforming thanks to the Bank of Japan purchases, yesterday it bought a record amount of 201.6bn ETFs!
  • The German Government has signed off on taking on billions in new debt as part of an unprecedented package totaling 750bn€
  • Even China is flooding the market with a massive amount of liquidity. The overnight repo rate, gauge of short-term borrowing costs in China’s interbank market, is down to 0.8%, the lowest since 2006 (it was 2.7% in January).

The cost on China’s one-year interest-rate swaps tumbled to 2%, the lowest level since 2010, suggesting traders expect funding costs to drop even further.

Cost on China’s one-year IRS

China’s three-month Shibor, an indicator for borrowing costs in the money market, slumped for 36 days in a row to the lowest level in nearly a decade.

3-month Shibor

Virus update

The market seems to start getting confident on the first signs that exponential upward curve in infections in Europe is flattening

In Italy, while there was a drop in new cases yesterday, the underlying trends are still mixed. The next 3-5 days are key to seeing if Italy’s lock down measures are having an impact (most countries have taken 10-15 days to start to see a decline in peak cases from their implementation of aggressive social distancing and this occurred on Mar 11th in Italy) and if the US will diverge or follow the Italian trajectory.

In China, the social-economic situation is gradually improving. Shanghai de-escalated public health emergency response level from level 1 to level 2, while the Wuhan municipal government announced that the lock-down measure will be partially and gradually relaxed (public transportation to resume). So far, Beijing, Tianjin, Hubei are the only regions that have not de-escalated the emergency response mechanism in China.

Activity and production are slowly recovering. Daily power coal consumption by the six major power generation groups is trending higher (chart), 82% of people have returned to Tier 1-2 cities, while intracity traffic congestion over the weekend picked up to 88% of the comparable period last year.

Daily Power Coal Consumption

Cumulative rate of return Tier 1-Tier 2 cities


Crude oil is up 9% in just few hours, trading now at 24.5$

The six-month timespread for Brent crude future contracts widened to its biggest contango since 2009 on Monday after more nations went into lockdown to try and curb the spread of the coronavirus. Crude for prompt delivery was more than $8 a barrel cheaper than shipments for six months later, a market structure known as contango that’s a signal of over-supply.

Gasoline futures were down to 50 cents yesterday, the lowest level since 2001, signaling further deflationary pressure and how far crude markets and the broader economy have to fall. Gasoline prices have dropped 73% since the start of the year, which translates into lower returns for American shale producers and abilities to repay their debt.


Gold has started to outperform again (up 6% in 3 dass) after having been sold off as too crowded and as cash source for margin calls.

A very interesting chart shows that gold futures aggregate open interest (red line) is falling, signalling that the mass liquidation of positions is boosting volume. After having seen several margin calls on interest rates, mainly in US, we have been seeing volatility denting gold positions in portfolios. Also the USD funding shortage (Bloomberg USD index +8% since March)  is definitely having an impact on gold prices, which is down more than 12% since March highs.

Gold future aggregate open interest (red) vs Aggregate volume (histogram)