Good Morning. Blimey!!! That was quite a move and the speed of the S&P fall into the close last night was brutal to watch. It did 70 points in about 30 minutes!! This move in US stocks is one of the fastest on record. Capitulation is the only word for it and is a direct result of years of vol suppression and complacency. Some of you will not want to her this but the signals were there. I hear a lot of talk about hedging but it is too late for that with vols up here. You hedge when things are looking good and vols can be used when they are low. You have 2 choices; ride it out or get out. I think the CTA and some in the hedge fund communities have decided on the latter. Gold is very disappointing but again I think margin calls are creating this pressure. I have almost no recommendations here as things are moving fast and to date, the central banks have been very quiet but market pricing is about to force the Fed to cut in March. Anything could happen into the run-up to the weekend and over it so few specs will be going home long equities tonight. We have quiet a bit of data but unlikely to pick up much of the recent concerns. Volatility is here for a while longer so expect the unexpected and trade accordingly by deleveraging if you have to trade. This is not the time for heroes; plus the fact it is a Friday, so “Be careful out there”…
Keep the Faith..
Data.. All Times GMT
08:55.. Germany Unemployment Chg (000’s) Cons: 5k Prev: -2k
Germany Unemployment rate Cons 5.0% Prev 5.0%
13:00.. Germany CPI y/y (Prelim) Cons: 1.7% Prev: 1.7%
German CPI mom Feb Cons: 0.3% Prev -0.6%
13:30.. US Advance Goods Trade Balance Cons: -68.5 Prev: -68.7
US Personal Income Cons: 0.3% Prev: 0.2%
US Personal Spending Cons: 0.3% Prev 0.3%
US PCE Core m/m Cons: 0.2% Prev: 0.2%
Canada GDP mom Dec Cons: 0.1% Prev 0.1%
Canada GDP Annualized qoq Q4 Cons 0.3% Prev 1.3%
14:45.. US Chicago PMI Feb Cons: 45.9 Prev 42.9
15:00.. US Univ. of Michigan Conf (Final) Cons: 100.9 Prev: 100.9
Speakers:..
10:00.. ECB Speaker: Weidmann (Very Hawkish), in Frankfurt
11:15.. BoE Speaker: Chief Economist Haldane (Hawkish), in Oxford
14:15.. Fed Speaker: Bullard (NV, Very Dovish), on the Econ & Mon Pol. Text: yes. Q&A: yes
16:15.. BoE Speaker: Cunliffe (Dovish), at China’s Trade and Financial Globalisation conf, London
Details 28/02/20
“Nightmare on Wall St”. Part 1; the curse of vol suppression:
For a while yesterday, I mistakenly thought we might end the session near the highs mid-way through the afternoon as stocks seemed to find some friends but alas, the news of an outbreak in California swamped the markets yet again and the S&P hit 3006 at one point and bounced. Then we got a second wave less than an hour before the close and the capitulation became very real as we had a shocking 70 point dump in the S&P in the last 30 minutes or so. The volatility I have been mentioning is still being unwound and the VIX hit 39.16 overnight after further steep losses in the futures market. This VIX level is higher than the move in late 2018. The thing this time is the speed of the move and that puts this apart from previous moves. We went from an ‘all-time high’ to a ‘correction’ (-10% off all-time highs) within 6 trading days; this is almost unprecedented. (FYG, the last time was the 1928 Great Depression but I don’t want to scare anyone). Now we are into day 7 and it looks just as dire. The VIX chart below is from yesterday but gives an idea of where we are and you can add another 4 points to the numbers on the left.
The vol suppression and complacency in stocks are being replaced by fear of getting out rather than fear of missing out. It seems the lower we go the more selling is seen. In the span of six days, the S&P 500 has sold off over 14% in pretty much a straight line it seems (unless you were trying to day-trade the stuff and got topped and tailed 20 times; but you take my point). This move is starting to register at some of the bigger fund managers now and CTA’s and some large hedge funds are capitulating quickly. Bonds remain bid and oil continues to fall (down another 2.5% overnight) with WTI hitting $45.60. Strangely, gold is refusing to rise but I am holding on for that but I think margin calls are keeping the likes of gold and AUD moving further for now. The USD is also no longer reacting to risk off and the EUR rallied strongly against most currencies yesterday and is above 1.1000 against the dollar as I think demand is for borrowing in negative EU rates to use elsewhere. All very strange. You are going to see this chart (below) banded about a lot again.
It seems the virus is spreading outside of China now and California is currently monitoring 8,400 people for signs of exposure to the coronavirus after they travelled to Asia, Governor Gavin Newsom said. Thousands of people around the U.S. have been asked to self-isolate or check themselves for symptoms since the U.S. put new limits on travel earlier this month. This will impact consumer sentiment and consumer behaviour and will start to show up in the data at some point later next month but we have to assume that businesses and consumers will feel this. Again, as suggested yesterday, margins are tight and businesses in many cases cannot take a demand hit. The services side of the economy in many countries now stand exposed to this crippling of supply chains and a total loss of confidence. A March cut from the Fed is now priced at 13bps and 47 now for June.
Bonds are bid but EDs took off with massive upside options being bought and options suggest many looking for zero rates at the Fed this year. There is a very good chance that the Fed now cuts in March. I am not sure many specs will be going home long equities this weekend either and I expect a lot of company growth forecasts will be slashed in coming days. I have said for weeks that this will hit US and global earnings and now finally it is starting to be understood as GS reduced US earnings forecasts to zero. Maybe the Fed does not want to cut but the market is forcing it now.
Lagarde says the virus yet to cause any long-term effect but how the hell does she know that? No one knows for sure and can she honestly say how long it will take to re-establish supply chains and recover sentiment? Not at all and she has no idea how bad the slowing Chinese economy will hit the EU; but it will and pretty hard in my view. She, Trump and many others seem to be talking this down but the reality maybe quite different. Lagarde said it was not yet at the stage where it would have a lasting impact on inflation and, therefore, require a monetary policy response. But surely by the time they see it in the data, it will be too late. Welcome to the new job Christine; your first crisis came pretty quickly. The truth is that the ECB know fully well that moving rates from these levels will not help and they are reluctant to do so. They may try and ride this out but the EU is also unable within the rules to start spending in many nations. Things may look very different when they meet in 2 weeks’ time. Bank of America cut its forecast for eurozone growth this year from 1 per cent to 0.6 per cent, while Credit Suisse cut its projection from 0.9 to 0.5 per cent. Both could be optimistic! Where are our beloved central bankers I hear investors scream? Good question; but I think quite a big stimulus is on the way.
Nikkei fell nearly 4% (into correction down 10% from the highs), HK was down 2.5% when I last looked and even Shanghai fell nearly 3% which has taken S&P futures down a further 1.5% at the time of writing and it’s a Friday, which will keep markets nervous into the weekend. In Sydney the S&P/ASX 200 dropped 3 per cent, while South Korea’s Kospi share index was 2.9 per cent lower and FTSE 100 contracts pointed to a 2.8 per cent fall when trading in London begins. What I would say is that a lot of the Asian economies have more room to cut and create stimulus packages than the developed world, barring Japan. Again this leaves the ECB rather stranded but may go ahead and ease anyway as they know nothing else. To me it may hit the EU consumer with a massive loss of confidence. I am still monitoring the Junk space and according to the FT, Junk bond funds suffered their biggest outflows in more than a year during the market tumult of the past week, with more than half the withdrawals coming from a single exchange-traded fund. Investors pulled $6.8bn from mutual funds and ETFs that invest in high-yield bonds in the week through to Wednesday, according to EPFR Global data, including a total of $4bn from BlackRock’s flagship high-yield ETF, known widely by its ticker HYG.
This is likely to be the tip of the iceberg.
Global growth forecasts are set to be cut and possibly to levels not seen since 2008-9. Banks and economists will be trying to figure out something that is impossible to figure out. We simply do not know and the data that could pick this latest shock is some way away still. Economists are not very good at looking forwards, so this is a new issue for them to deal with; welcome to the real world. Markets, however, do look forwards and bonds and many other instruments have been sending some pretty clear signals for a while which many decided to ignore. That was an expensive mistake. The clever chaps at BoA have cut their global growth outlook to 2.8% this year, which would be the first sub-3% print since the financial crisis but what markets want to know is what the Fed make of all this and I just wonder if Clarida and the other recent Fed speakers are quite as smug about things as they were earlier this week? We may now be looking at a U-shaped recovery that does more long-term damage but again that is something of a guess by me as I do not use models (which in my view are rendered useless in this).
What we need to know is what spill-over we get from a manufacturing recession into services now and for that to be seen we need more data that covers events happening now. But I am pretty sure we shall see a hit to services surveys like PMIs and ISMs in coming months around the globe. But what is really concerning is what damage this is doing to the consumer. Not only in the US but globally. It is impossible to ignore what is happening in HK and China with pictures of empty streets and empty shops but the same applies to Italy. Millions could shun public events and shopping Malls. Luxury goods are for the good times but people really do have concerns about where this takes us. People will be fearful of losing jobs in many industries and retail outlets and again many businesses are run on a shoestring. They simply cannot take a drastic hit from the demand side. Investors in many cases have some very deep-rooted profits and the real money guys may not be reacting. But this is hurting as they are marked to market. I also wonder how the SNB portfolio is looking but of course they do not have to F9 their book. At the end of the day, stocks were getting to a euphoric state where many felt they were bullet proof and the central banks had their back. They may yet ride to the rescue but only if the economy is threatened. It is also a long time to the March FOMC meeting. I am not hearing enough form central bankers yet for an emergency cut (yet).
—————————————————————————————————————-
Strategy:
Macro:.
Long Gold @ $1638.00 Stop below $1620.00.
Macro Long FTSE250 20,900
Brought to you by Maurice Pomery, Strategic Alpha Limited.
—————————————————————————————————————-
Strategic Alpha Report Disclaimer
Doo Prime endeavor to ensure the reality, adequacy, reliability and accuracy of all the information provided, but do not guarantee its accuracy and reliability. All the information, analyses, comments, statements, and/or data provided in this report is for information purposes only. Client’s use of any contents of the report as the basis for the transaction, the client shall fully aware of the risks and agreed to bear all the risks. Client shall cautiously judge the accuracy of the information. Doo Prime has no liability for any loss caused by any inaccuracy or omissions of the contents and subjective reasons of Client.
