I’ve been dreading this. In the midst of all the policy responses to the collapse of the mortgage finance Bubble, I recall writing something to the effect: “I understand we can’t allow the system to collapse, but please don’t inflate another Bubble.” It was obvious early on that policymakers had every intention to reflate Bubbles.
There was a failure to grasp the most critical lessons from that terrible boom and bust episode: Aggressive monetary stimulus foments market distortions, while promoting risk-taking, leveraged speculation and latent risk intermediation dysfunction. Years of deranged finance ensured unprecedented economic imbalances and deep structural impairment. There was no predicting a global pandemic. Yet today’s acute financial and economic fragility – and the risk of financial collapse – are directly traceable to years of negligent monetary management.
I have to adjust my message for today’s post-Bubble backdrop: I understand we can’t allow the system to collapse, but Please Don’t Completely Destroy the Soundness of Central Bank Credit and Government Debt. Does anyone realize what’s at stake?
I don’t see another Bubble on the horizon. Each reflationary Bubble must be greater in scope than the last. Mortgage finance was used for post-“tech” Bubble reflation. Policymakers unleashed the “global government finance Bubble” during post-mortgage finance Bubble reflation. Massive international inflation of central bank Credit and sovereign debt went to the heart of global finance – the very foundation of “money” and Credit.
There is no greater Bubble waiting in the wings to reflate the collapsing one. We are instead left with desperate measures to expand central bank “money” and government borrowings that will surely appear absolutely reckless in hindsight.
Let’s touch upon prospects for Bubble reflation. There was an abundance of positive spin coming out of the previous bust period. “If only the Fed hadn’t incompetently failed to bail out Lehman, crisis could have – should have – been avoided.” Reckless home lending caused the crisis, and regulators will never tolerate a replay. Prudent “macro-prudential” policies and an abundantly capitalized banking sector ensure stability. From the crisis experience, central bankers learned to move early and aggressively to nip market instability in the bud.
The previous crisis was labeled “the 100-year flood.” Onward and upward, with enlightened central banking both leading the way and ensuring a smooth ride.
With assurances of central bank liquidity and market backstops, an unprecedented Bubble inflated throughout global leveraged speculation. Popular “carry trades,” foreign-exchange “swaps,” myriad derivatives (incorporating leverage) and such morphed during this cycle into a colossal self-reinforcing Credit Bubble. The resulting liquidity became a prominent fuel source for asset and economic Bubbles, reminiscent of the late-twenties.
Can’t a massive expansion of central bank Credit (securities purchases, lending facilities, swap lines, etc.) now reflate the Bubble? I seriously doubt it. Risks associated with various strategies have been revealed. Leverage in its many forms has been, once again, shown to be a serious problem. Rather than the proverbial “100-year flood,” for the second time in less than 12 years the world is facing the worst financial crisis since the Great Depression. Burn me once, shame on you. Fool me twice…
It’s not hyperbole today to use “depression” to describe the unfolding deep global economic downturn. Coronavirus uncertainty makes it impossible to forecast the length and severity of the economic collapse. In the best case, the rapidly expanding outbreak in Europe and the U.S. subsides over the coming weeks. Even so, economies around the world will take huge hits. And prospects for the coronavirus to reemerge next winter (and emerge more powerfully during the southern hemisphere’s approaching winter season) will keep risk-taking well-contained for many months to come.
Coming out of the previous crisis, the global economy had the benefit of a powerful “locomotive” of accelerating expansions in China and the emerging markets more generally. Importantly, post-Bubble reflationary measures came as those fledgling Bubbles were attaining powerful momentum. Beijing pushed through an unprecedented $600 billion stimulus package, while aggressive monetary policy stoked EM booms generally. Keep in mind that total Chinese banking system assets inflated from about $7 TN to $40 TN since the crisis.
Looking ahead, the global economy is without “locomotives.” It evolved into one massive global financial Bubble financing a precarious synchronized global economic expansion. And I believe speculative finance became a prevailing source of Global Bubble Finance.
Here’s where I could be wrong. I seriously doubt this Bubble is revivable. The unwind will likely unfold over weeks and months. Extraordinary central bank measures will spur rallies and hopes for recovery. At times, it will appear that liquidity is returning. Yet the Bubble will not be reflated.
Confidence has been shattered. Faith that central banks have everything well under control has been broken. Myriad fallacies have been exposed. Central banks can’t guarantee liquid markets, especially in a Bubble-induced highly levered speculative environment. The entire derivatives universe has been operating on the specious assumption of liquid and continuous markets. History is unambiguous: markets experience bouts of illiquidity, dislocation and panicked crashes. The fantasy that contemporary central bank monetary management abrogates illiquidity and market discontinuity risks is being debunked. The mania in finance has, finally, run its course.
Leverage has to come down – and I believe it will stay down for years to come. A month ago risk could be disregarded – had to be disregarded. Market, financial, economic, social and geopolitical risks matter tremendously now, and they will matter going forward. In the best-case scenario, the coronavirus peaks over the coming weeks. I don’t want to ponder the worst-case.
A Friday-evening Zerohedge headline says it all: “Stocks Suffer Worst Week Since Lehman Despite Biggest Fed Bailout Ever.” In last week’s CBB, I wrote that we “saw more than a glimpse of what the beginning of financial collapse looks like”. This week’s sequel was how global financial collapse gains momentum – especially Wednesday. I watched the ’87 stock market crash on a Quotron machine. I’ve witnessed scores of bursting Bubbles and collapses – including bonds in ’94, Mexico ’95, SE Asia ‘97, Russia/LTCM in ’98, “tech” in 2000, 9/11, the spectacular 2008 collapse and 2012’s near melt-down. None of those previous crises were as alarming as current market dynamics.
The dollar index surged 4.1% this week, in a perilous market dislocation. The Mexican peso sank 10.2%, and the Russian ruble fell 9.2%. The South African rand dropped 7.6%, the Czech koruna 7.5%, the Indonesian rupiah 7.4%, the Hungarian forint 7.0% and the Brazilian real 4.5%. Massive “carry trade” losses (i.e. borrow in dollars to lever in higher-yielding EM bonds) were compounded by collapsing EM bond prices (surging yields). Even with Friday’s bond rally (yield decline), yields this week surged 96 bps in Peru, 82 bps in South Africa, 70 bps in Turkey, 44 bps in Indonesia, and 39 bps in Thailand.
Ominously, the rout was even more pronounced in dollar-denominated EM bonds. This market rallied sharply Friday after the announcement of enhanced central bank swap facilities. Mexican yields sank 44 bps Friday but were still up 72 bps for the week. Brazilian yields surged 68 bps this week, even after Friday’s 34 bps decline. For the week, dollar-denominated yields were up 152 bps in Ukraine, 131 bps in Qatar, 97 bps in Chile, 92 bps in Philippines, 92 bps in Turkey, and 74 bps in Indonesia. This type of dislocation in highly levered markets signals global markets are “seizing up.”
Market dislocation went much beyond the emerging markets. Crude oil’s 29% collapse was behind the Norwegian krone’s stunning 13.9% decline. The Australian dollar fell 6.7%, the Swedish krona 6.6%, the New Zealand dollar 5.9%, the British pound 5.3%, the Canadian dollar 3.9%, the euro 3.8%, the Swiss franc 3.6%, and the Japanese yen 3.0%. Mayhem.
Pointing to acute systemic risk, “developed” nation bond markets also dislocated. After beginning the week at 1.85%, Italian yields spiked to 2.99% in panicked Wednesday trading. Greek yield began the week at 2.10% (up from 0.96% on Feb. 21) and traded as high as 4.09% Wednesday. Portuguese yields were at 0.86% in early-Monday trading before spiking to 1.61% by mid-week. Spanish yields surged from 0.66% to 1.38%. Even German 10-year bund yields rose from Monday’s negative 0.59% to Wednesday’s negative 0.24%.
Wednesday’s meltdown spurred the ECB into emergency action, announcing a new $800 billion QE plan. ECB buying was surely behind the big end-of-week rallies in euro zone periphery bonds.
March 15 – Financial Times (Martin Arnold): “Christine Lagarde has apologised to other members of the European Central Bank’s governing council for her botched communication about its new monetary policy strategy which triggered a bond market sell-off last week. Speaking to the ECB’s top decision-making body in a call on Friday, the central bank’s president said she was sorry for comments that led to the biggest single-day fall in Italian government bonds in a decade… In Thursday’s press conference Ms Lagarde said it was not the ECB’s role to ‘close the spread’ in sovereign debt markets…”
Lagarde’s “gaff” was ridiculed by market pundits, with comparisons to communication blunders early in Powell’s chairmanship. Yet it should never have become the ECB’s role to narrow borrowing spreads, or for the Fed and global central bankers to kowtow and backstop the securities markets. Years of central bank cultivation of risk-taking and leveraged speculation are coming home to roost in the a very bad way.
Evidence of acute financial instability made it to U.S. shores this week. “Short-Term Bond Market Roiled by Panic Selling;” “Government Bonds Buckle as Investors Dump Haven Assets for Cash;” and “How a Little Known Trade Upended the U.S. Treasury Market.” It was the nightmare scenario for highly levered contemporary finance: Illiquidity and rising safe haven yields, rapidly widening Credit spreads, surging CDS prices, de-risking/deleveraging, general market illiquidity and dislocation. The definitive recipe for devastating outcomes. Even more alarming, systemic dislocation unfolded not long after the Fed announced a new $700bn QE program.
March 15 – Wall Street Journal (Nick Timiraos): “The Federal Reserve slashed its benchmark interest rate to near zero Sunday and said it would buy $700 billion in Treasury and mortgage-backed securities in an urgent response to the new coronavirus pandemic. The Fed’s rate-setting committee, which delivered an unprecedented second emergency rate cut in as many weeks, said it would hold rates at the new, low level ‘until it is confident that the economy has weathered recent events and is on track’ to achieve its goals of stable prices and strong employment. ‘We have responded very strongly not just with interest rates but also with liquidity measures today,’ Fed Chairman Jerome Powell said during a press conference Sunday evening…”
As the week unfolded, it was full-fledged financial crisis. It was difficult to keep track of the various emergency measures.
March 17 – Bloomberg (Christopher Condon, Craig Torres, and Matthew Boesler): “The Federal Reserve unleashed two emergency lending programs on Tuesday to help keep credit flowing to the U.S. economy amid strain in financial markets… The central bank is using emergency authorities to establish a Commercial Paper Funding Facility with the approval of the Treasury secretary… The Treasury will provide $10 billion of credit protection from its Exchange Stabilization Fund. Later in the day it announced a Primary Dealer Credit Facility, also with backing from Treasury. The moves follow mounting pressure to act after the Fed’s Sunday evening emergency interest-rate cut to nearly zero and other measures failed to stem market stress as investors reacted to the risk that the virus will tip the U.S. and global economy into a recession.”
March 18 – Reuters (Howard Schneider and Megan Davies): “The U.S. Federal Reserve rolled out its third emergency credit program in two days to battle the fallout from the virus crisis, this one aimed at keeping the $3.8 trillion money market mutual fund industry functioning if investors make rapid withdrawals. The Money Market Mutual Fund Liquidity Facility unveiled on Wednesday will make up to 1-year loans to financial institutions that pledge as collateral high quality assets like U.S. Treasury bonds that they have purchased from money market mutual funds. The Fed is in effect encouraging banks to buy assets from those mutual funds, insulating the funds from having to sell assets at a discount if they come under pressure from households or firms wanting to withdraw money.”
Despite it all, U.S. markets convulsed uncontrollably. U.S. equities were bludgeoned (S&P500 down 15.0% and Nasdaq falling 12.6%). Yet the more alarming developments were within the Credit market. Dislocation was deep and broad-based – Treasuries, investment-grade corporates, high-yield, municipal debt, MBS, commercial paper, CDOs and derivatives. A popular investment-grade corporate ETF (LQD) collapsed 13% in three sessions (Tuesday through Thursday). Perceived safe and liquid (“money-like”) instruments were crushed in a panic (see “Market Instability Watch” below). ETF problems turned acute, as “investors” ran for the exits.
March 19 – Financial Times (Robin Wigglesworth): “When financial markets were rattled across the board last week, some investors and analysts thought they knew where to point the finger. ‘The risk parity kraken has finally been unleashed,’ one tweeted. Risk parity is a strategy pioneered by Bridgewater’s Ray Dalio. His pioneering fund, All Weather, has been hit hard in the recent turmoil, sliding 12% this year. That is quite a fall, for a strategy designed to function well in almost any market environment, by seeking to find a perfect balance of different asset classes such as stocks and bonds. Some analysts say such funds are not just succumbing to the wider turmoil but exacerbating it — especially the freakish sight of both supposedly defensive government bonds and risky equities selling off at the same time. ‘These moves suggest a rapid unwind of leveraged strategies like risk parity,’ said Alberto Gallo, a fund manager at Algebris Investments.”
With Treasuries these days providing minimal upside, losses escalated for myriad levered strategies. The global leveraged speculating community is hemorrhaging. The derivatives complex is in chaos. Goldman Sachs Credit default swap (5-yr CDS) prices surged 66 to 223 bps, the high since the 2012 European crisis. Bank of America CDS jumped 63 to 199 bps; Citigroup 60 to 214 bps; Wells Fargo 59 to 192 bps; Morgan Stanley 57 to 211 bps; and JPMorgan 53 bps to 176 bps. Ominously, the big U.S. financial institutions were at the top of the global bank CDS leaderboard this week.
If financial collapse can be avoided, an altered financial world awaits. The old scheme doesn’t work any longer. The era of cheap money financing massive stock buybacks has ended. Leveraged speculation creating self-reinforcing liquidity abundance and asset inflation – over. Buy and hold and disregard risk has been discredited. Blindly plowing savings into perceived safe and liquid ETFs is a thing of the past. In the new financial landscape, can derivatives be trusted? How about the private equity Bubble? The age of endless cheap finance for virtually any borrower and equity issuer (irrespective of cash flow or earnings) has reached its conclusion.
Meanwhile, “helicopter money” has arrived. Seemingly outrageous on Monday, Senator Schumer’s proposal for a $750 billion stimulus package was small potatoes compared to spending plans contemplated by week’s end. Federal Reserve Assets surged $356 billion the past week to a record $4.668 TN. Fed Assets were up $907 billion over the past 28 weeks, as it becomes clear a $10 TN balance sheet will unfold more quickly than I have anticipated.
The inexhaustible inflationists and eager MMT adherents see their opening. “Please Don’t Completely Destroy…” will haunt me – and the world. In a crisis, no one was willing to stand up to Bernanke. Today, “Helicopter Ben” looks fainthearted compared to what today’s central bankers are about to attempt. The experiment has gone terribly wrong, just as foolhardy bouts of inflationism have throughout history.
If they actually believe the massive inflation of central bank and government Credit will reflate markets and economies, they will be grievously disappointed. Government debt and central bank balance sheets have commenced what will be a frightening buildup. The inflationary consequences are today unclear. What is clear is it will be anything but confidence inspiring. The desperate inflation of perceive money-like Credit will not encourage the leverage speculating community to re-leverage. It will not entice burned investors back into perceived money-like ETFs. It will not stabilize currency markets. However, it does risk a bond market debacle.
History’s greatest Bubble is nearing the end of the line. It’s all left to central bank Credit and sovereign debt – the massive inflation of Credit at the very foundation of global finance. This experimental strategy is so fraught with peril that it is difficult to believe that risk will be disregarded – that things can somehow stabilize and return to normal. Confidence in central banks’ capacity to control global markets has been irreversibly damaged – and a long overdue market reassessment of the value of financial instruments has commenced.
Truth is stranger than fiction. The world’s weakened superpower cracks down, initiating a trade war with the aspiring superpower. Relations sour. Then, shortly after a watered-down compromise agreement is signed, a virus outbreak erupts in the aspiring country that leads to a global pandemic and major crisis in the superpower country. The aspiring nation’s dictatorial government, seeking a scapegoat to pacify its shaken populace, blames the superpower for the virus and its collapsing Bubble. The superpower government, in an election year, points blame at the aspiring nation’s government. Two strongmen leaders face off. The American Virus vs. the Chinese Virus, with consequences that are chilling to contemplate.
Two strongmen leaders face off – in the oil market. Why all the strongmen? No coincidence. A decade (or two) of booms and busts and resulting heightened global insecurity has led to this critical juncture. Strongman heads of state, uncontrollable monetary inflation, and epic bursting Bubbles make for a perilous geopolitical backdrop. Covid-19 has let the genie out of the bottle.
For the Week:
It was a debacle. The S&P500 sank 15.0% (down 28.7% y-t-d), and the Dow fell 17.3% (down 32.8%). The Utilities collapsed 17.2% (down 25.7%). The Banks sank 18.8% (down 46.6%), and the Broker/Dealers lost 14.5% (down 34.1%). The Transports slumped 13.9% (down 37.3%). The S&P 400 Midcaps sank 18.7% (down 39.0%), and the small cap Russell 2000 dropped 16.2% (down 39.2%). The Nasdaq100 fell 12.5% (down 19.9%). The Semiconductors dropped 15.9% (down 29.8%). The Biotechs declined 8.6% (down 21.6%). While bullion declined $31, the HUI gold index recovered 1.6% (down 31.3%).
Three-month Treasury bill rates ended the week at 0.015%. Two-year government yields dropped 18 bps to 0.18% (down 125bps y-t-d). Five-year T-note yields sank 26 bps to 0.46% (down 123bps). Ten-year Treasury yields fell 12 bps to 0.85% (down 107bps). Long bond yields declined 12 bps to 1.42% (down 97bps). Benchmark Fannie Mae MBS yields dropped 18 bps to 2.19% (down 52bps).
Greek 10-year yields jumped 30 bps to 2.39% (up 96bps y-t-d). Ten-year Portuguese yields rose 13 bps to 0.95% (up 51bps). Italian 10-year yields fell 15 bps to 1.63% (up 22bps). Spain’s 10-year yields gained 11 bps to 0.73% (up 27bps). German bund yields surged 22 bps to negative 0.32% (down 14bps). French yields rose 10 bps to 0.12% (unchanged). The French to German 10-year bond spread narrowed 12 to 44 bps. U.K. 10-year gilt yields gained 15 bps to 0.56% (down 26bps). U.K.’s FTSE equities index declined 3.3% (down 31.2%).
Japan’s Nikkei Equities Index fell 5.0% (down 30% y-t-d). Japanese 10-year “JGB” yields increased three bps to 0.08% (up 9bps y-t-d). France’s CAC40 declined 1.7% (down 32.3%). The German DAX equities index slumped 3.3% (down 32.6%). Spain’s IBEX 35 equities index declined 2.8% (down 32.5%). Italy’s FTSE MIB index slipped 1.4% (down 33.1%). EM equities were sold. Brazil’s Bovespa index collapsed 18.9% (down 42%), and Mexico’s Bolsa fell 10.0% (down 21.3%). South Korea’s Kospi index dropped 11.3% (down 28.7%). India’s Sensex equities index sank 12.3% (down 27.5%). China’s Shanghai Exchange fell 4.9% (down 10.0%). Turkey’s Borsa Istanbul National 100 index lost 10.3% (down 25.0%). Russia’s MICEX equities index increased 0.7% (down 23.5%).
Investment-grade bond funds saw outflows of $35.585 billion, and junk bond funds posted outflows of $2.910 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates surged 29 bps to 3.65% (down 63bps y-o-y). Fifteen-year rates jumped 29 bps to 3.06% (down 65bps). Five-year hybrid ARM rates rose 10 bps to 3.11% (down 73bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up 11 bps to 4.08% (down 21bps).
Federal Reserve Credit last week surged $241bn to $4.463 TN, with a 28-week gain of $741 billion. Over the past year, Fed Credit expanded $535bn, or 13.6%. Fed Credit inflated $1.652 Trillion, or 59%, over the past 384 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt sank $29 billion last week to $3.411 TN. “Custody holdings” were down $69bn, or 2.0%, y-o-y.
M2 (narrow) “money” supply jumped $68bn last week to $15.691 TN. “Narrow money” surged $1.207 TN, or 8.3%, over the past year. For the week, Currency increased $2.1bn. Total Checkable Deposits rose $35.8bn, and Savings Deposits added $5.4bn. Small Time Deposits were little changed. Retail Money Funds jumped $25.2bn.
Total money market fund assets surged $159bn to $3.936 TN. Total money funds jumped $871bn y-o-y, or 28.4%.
Total Commercial Paper gained $17.9bn to $1.147 TN. CP was up $63bn, or 5.8% year-over-year.
Currency Watch:
For the week, the U.S. dollar index surged 4.1% to 102.817 (up 6.5% y-t-d). For the week on the downside, the Norwegian krone declined 13.9%, the Mexican peso 10.2%, the South African rand 7.6%, the Australian dollar 6.7%, the Swedish krona 6.6%, the New Zealand dollar 5.9%, the British pound 5.3%, the Brazilian real 4.5%, the Canadian dollar 3.9%, the euro 3.8%, the Swiss franc 3.6%, the Japanese yen 3.0%, the Singapore dollar 2.5% and the South Korean won 2.3%. The Chinese renminbi declined 1.23% versus the dollar this week (down 1.87% y-t-d).
Commodities Watch:
The Bloomberg Commodities Index sank 6.4% (down 24.5% y-t-d). Spot Gold declined 2.0% to $1,499 (down 1.3%). Silver sank 14.6% to $12.385 (down 31%). WTI crude collapsed $9.10 to $22.63 (down 63%). Gasoline collapsed 32.7% (down 64%), and Natural Gas fell 15.6% (down 28%). Copper sank 11.9% (down 22%). Wheat rallied 6.6% (down 4%). Corn dropped 6.0% (down 11%).
Coronavirus Watch:
March 17 – Reuters (Marine Strauss, Jan Strupczewski, Foo Yun Chee, Michel Rose, Crispian Balmer and Joseph Nasr): “Italy’s prime minister… declared coronavirus was causing a ‘socio-economic tsunami’ as European leaders agreed to seal off external borders, but many countries thwarted solidarity by imposing frontier curbs of their own. ‘The enemy is the virus and now we have to do our utmost to protect our people and to protect our economies,’ European Commission President Ursula von der Leyen said…”
March 20 – CNBC (Weizhen Tan and Riya Bhattacharjee): “California Gov. Gavin Newsom on Thursday issued a statewide order for all residents to ‘stay at home’ amid a coronavirus outbreak. ‘We need to bend the curve in the state of California,’ Newsom said, as he announced a statewide order for Californians to stay home. ‘There’s a social contract here, people I think recognize the need to do more … They will begin to adjust and adapt as they have been quite significantly. We will have social pressure and that will encourage people to do the right thing,’ he said… Newsom added: ‘Home isolation is not my preferred choice … but it is a necessary one …This is not a permanent state, this is a moment in time.’”
March 18 – CNBC (Dan Mangan): “The United States border with Canada will temporarily close to ‘non-essential traffic’ due to the coronavirus pandemic, the leaders of both countries said… The U.S.-Canada is the world’s longest border between two countries. The closing will affect tourism, but not trade, or workers involved in so-called essential work. ‘We will be, by mutual consent, temporarily closing our Northern Border with Canada to non-essential traffic,’ President Donald Trump wrote on Twitter. ‘Trade will not be affected.’”
March 17 – New York Post (Jackie Salo): “‘Stealth’ coronavirus cases are fueling the pandemic, with a staggering 86% of people infected walking around undetected, a new study says. Six of every seven cases – 86% — were not reported in China before travel restrictions were implemented, driving the spread of the virus, according to a study… in the journal Science. ‘It’s the undocumented infections which are driving the spread of the outbreak,’ said co-author Jeffrey Shaman of Columbia University Mailman School…”
Market Instability Watch:
March 17 – Bloomberg (Srinivasan Sivabalan): “Carry trades are collapsing in the face of a rebounding U.S. dollar, aggressive interest-rate cuts by emerging-market central banks and a flight to safety as the coronavirus fallout worsens. Traders borrowing in the dollar and investing in developing-nation currencies were getting the worst year-to-date returns since 2015 even before the greenback began its ascent last week. The losses have almost doubled since then, putting a gauge of major EM carry trades on course for the worst quarter since 2011.”
March 18 – Bloomberg (Anooja Debnath, Michael Hunter, and Susanne Barton): “Liquidity evaporated in the $6.6 trillion-a-day currency market as few traders wanted to take positions against a surging dollar ahead of a potential lockdown in the biggest trading hub for foreign exchange. The pound on Wednesday sank as much as 5% to its lowest since 1985 and Norway’s krone plummeted more than 13% to a record low, moves akin to so-called flash crashes.”
March 16 – Financial Times (Tommy Stubbington): “Volatility in US government bonds has reached its highest level since the 2008 financial crisis as coronavirus ricochets through markets. The wild swings in Treasuries have fuelled concerns about the proper functioning of the world’s most liquid debt market. The Federal Reserve on Friday signalled it was accelerating its purchases of Treasuries in a bid to ease those strains, before announcing an additional $700bn of asset purchases on Sunday as part of a sweeping package of crisis-fighting measures.”
March 19 – Bloomberg (Suketu K Kothari and Krysta Lipinski): “Bid-ask spreads for U.S. Treasuries have widened beyond levels seen during the 2008 financial crisis… The bid-ask spread on U.S. Treasuries reached 11 bps for notes with maturities of seven to 10 years on Wednesday.”
March 19 – Reuters (Kate Duguid): “The cost for companies to borrow short-term loans increased again on Thursday, suggesting investors remained skeptical that the Federal Reserve’s facility announced on Tuesday would significantly improve liquidity in the commercial paper market… The rate to borrow both low- and high-grade 90-day paper – the longest maturity on offer – rose by about 20 bps each on Thursday…”
March 18 – Bloomberg (Tasos Vossos): “The extra yield investors get for holding euro investment-grade corporate bonds over safer sovereign debt has exceeded 200bps for the first time since 2012 as the coronavirus rattles credit markets.”
March 18 – Wall Street Journal (Matt Wirz): “Short-term bonds typically act as a haven in turbulent times. But debt maturing in three years or less has been routed in recent days, punishing investors in markets ranging from corporate bonds to asset-backed debt. The selloff is the latest example of stressed investors resorting to extreme behavior at a time when the economic outlook is unsettled at best and market liquidity, the capacity to buy and sell quickly without roiling prices, is uneven. Many traders say that high-grade, short-term corporate bonds are being sold en masse by investors who probably would like to sell other assets in their portfolios but can’t find anyone to buy them at prices that won’t cause heavy losses… But the yield that investors demand to own two-year Wells Fargo WFC -5.10% & Co. bonds shot up to 3.349% Tuesday from 2.267% Friday…”
March 18 – Bloomberg (John Ainger): “German bonds — some of the safest assets in the euro area — are throwing a tantrum. Bunds, as they’re called in the market, have fallen for seven consecutive days, taking their yield more than 60 bps higher from a record low of -0.91%. It’s their longest run of losses in two-and-a-half years.”
March 15 – Bloomberg (Jennifer Surane, Paula Seligson, Alex Harris, and Liz McCormick): “A corner of the financial system that provides corporate America with short-term IOUs to buy inventory or make payrolls is seizing up, triggering a scramble for cash elsewhere and fueling speculation that the Federal Reserve will intervene. In the $1.13 trillion commercial paper market, yields over risk-free rates have surged to levels last seen during the 2008 financial crisis. The strains are causing companies to draw down on backup credit lines, according to people with knowledge of the situation.”
March 19 – Bloomberg (Alexandra Harris): “A record $249 billion poured into U.S. government money-market funds over the past week as investors sought refuge in high-quality, liquid assets amid historic market mayhem. Total assets rose to an all-time high of $3.09 trillion in the week ended March 18…”
March 19 – Reuters (Alwyn Scott and Kate Duguid): “From airlines and cruise lines to retailers and energy companies, investors are fleeing large pockets of the corporate credit market, worried that the coronavirus pandemic will lead to bankruptcies, defaults and credit rating downgrades. The premium investors demanded to hold riskier junk-rated credit rose to 904 bps over safer Treasury securities on Wednesday, its highest level since 2011… The premium for safer investment-grade credit rose to its highest since 2009, at 303 bps over Treasuries… The risk premium for both has roughly tripled since the start of the year.”
March 18 – Bloomberg (Danielle Moran): “Municipal bonds continued their more than week-long slide in early trading, extending the sell-off that’s driving state and local debt to its biggest loss since 1987. The drop came as global bonds plunged as markets braced for a deluge of debt by governments fighting the economic slowdown caused by the coronavrius pandemic. Ten-year benchmark municipal bond yields rose 7 bps to 1.86%, more than twice what it was on March 9. Those on 30-year securities rose 2 bps to 2.40%, marking a full percentage point jump since the rout began…”
March 18 – Bloomberg (Stephen Spratt and Chikako Mogi): “Japan’s interest-rates swaps are seeing a mass exodus of foreign funds. The nation’s 30-year swap rate surged by more than 20 bps, the most since 2008, on Wednesday, dramatically underperforming cash bonds. Funds have built up long positions in recent weeks, driving down long-dated interest rates, as they bet that the Bank of Japan will ease. On Wednesday, they hit the eject button…”
March 16 – Bloomberg (Yakob Peterseil): “A measure of fear in U.S. stocks surged on Monday as an emergency move by the Federal Reserve to ease policy did little to calm markets over the spreading coronavirus. The CBOE Volatility Index jumped as high as 76.3 in early trading… That was just shy of its highest level since the 2008 financial crisis…”
March 20 – Bloomberg (Sarah Husband, Lisa Lee and Alastair Marsh): “A wave of panicked and forced selling has swiftly pushed spreads on some triple-A rated collateralized loan obligations to their widest since 2009 on both sides of the Atlantic. Risk premiums on selected top-rated U.S. CLOs nearly doubled on Thursday, jumping to over 500 bps from around 275 on Wednesday… In Europe, the average extra yield investors demand to hold AAA CLOs compared with sovereign debt spiked to around 400 bps…”
March 16 – Bloomberg (Elena Popina): “Historical precedents of the S&P 500’s move in the past three days are hard to find, but they can be found in two of the past’s most dramatic trading periods. The S&P 500 fell as much as 11% on Monday in its third day of intraday swings of more than 9%. The last time the index moved this much for three consecutive sessions was in October 1987: the S&P plunged 20% on Black Monday before rising more than 9% on an intraday basis in each of the next two days. If the S&P 500 holds on to its session lows and closes more than 9% lower, it will be the first time in a little less than a century when the index moved 9% or more on a closing basis for three consecutive days. The benchmark tumbled 13% during the depth of the Great Depression on Monday, Oct. 28, 1929, only to fall another 10% the following day and then gain 13% on Wednesday.”
March 18 – Bloomberg: “Investors withdrew from U.S.-listed fixed income exchange traded funds last week following six straight weeks of inflows. Broad bond-market ETFs led the outflows. Government bond ETFs had the second biggest change from the previous week. Net outflows from ETFs totaled $21.2b in the week ended March 17, including the effect of leveraged funds, compared with inflows of $999m the prior week…”
Global Bubble Watch:
March 17 – Bloomberg (Stephen Spratt): “It is said that liquidity is a coward, it disappears at the first sign of trouble. What happened in Treasuries last week was one example of this, as problems in one small corner of the bond market helped spark a liquidity crisis in another that lead to a $5 trillion Federal Reserve promise to calm markets. As coronavirus cases spiked around the world and unprecedented travel restrictions multiplied, investors rushed to Treasuries… But even the Treasury market has a hierarchy of liquidity — so they rushed to futures first rather than cash bonds, driving spreads between the two much wider. That in turn disrupted a normally sleepy trade popular with leveraged investors known as the cash-futures basis. ‘We suspect levered funds were stopped out of basis and relative value trades in the past two weeks as dislocations were exacerbated by the flight to quality rally,’ wrote Citigroup Inc. strategist Jason Williams… The trade works like this: when futures diverge from the notes underlying them, investors can buy the ‘cheap’ bonds and sell the futures to pocket the difference. The spreads between the two are usually tiny so funds use cash borrowed from the repurchase market to leverage up positions and boost returns.”
March 17 – Financial Times (Eva Szalay and Colby Smith): “Companies and banks are hoarding dollars to pay their debts and keep business flowing during the coronavirus pandemic, helping to send the currency higher. A collapse in revenues, seized-up debt markets and broader fears over the economic impact of Covid-19 have all encouraged companies to max out their credit lines to keep large amounts of cash at hand. The US Federal Reserve has stepped in, seeking to enhance flows around the world’s financial system by lowering the cost of borrowing dollars through swap lines. Such facilities, set up with the central banks of Japan, Europe, the UK, Canada and Switzerland, allow cheap access to dollars in exchange for their respective currencies. But the pressure is not abating, analysts said. The dollar has pushed higher against its peers this month… Ordinarily, rate reductions of this magnitude would weaken a currency. ‘When you have the most unexpected recession we’ve seen in modern times, a lot of people are caught in dollar-funding issues,’ said Paul Meggyesi, head of FX strategy at JPMorgan… ‘This crisis is affecting every sector and every country in a synchronised way.’”
March 18 – Financial Times (Katie Martin, Chris Giles and Alex Barker): “Global markets were rocked in a panic-ridden day of trading as forced selling and a loss of faith in government intervention deepened the global economic crisis triggered by the coronavirus pandemic. As London prepared to go into lockdown to try to control the disease, which has infected at least 200,000 people and claimed more than 8,000 lives worldwide, the S&P 500 fell about 5% and oil prices hit the lowest level in nearly 17 years. Sterling tumbled almost 5% against the dollar to its lowest point since the 1980s. Indiscriminate selling early on Wednesday in government bonds that are typically considered a safe harbour in times of stress also indicated that funds were scrambling to keep afloat or pay investors back their cash.”
March 18 – Bloomberg (Ruth Carson, Greg Ritchie, and Hooyeon Kim): “The world’s reserve currency surged, with a dollar gauge rising to a record high, amid a rush for cash in anticipation of a prolonged coronavirus pandemic. All Group-of-10 currencies tumbled, with the oil-linked Norwegian krone suffering the most heavy losses. Even traditional safe assets, such as the yen, dropped as much as 1.4% as liquidity evaporated with investors rushing to meet margin calls. ‘Everything is getting sold,’ said Chris Rands, portfolio manager at Nikko Asset Management Ltd. ‘We’re doing the absolute bare minimum because offering to sell anything in these markets is just crazy — we’re trying our best to hang on and see where it all shakes out. I don’t see this dollar stampede going away.’”
March 18 – Bloomberg (Greg Ritchie, John Ainger, and Dirk Gojny): “European sovereign bonds led a global rout, with markets bracing for the kind of supply surge not seen for years, after nations unveiled spending plans of more than $1 trillion to fight the coronavirus crisis. Dramatic jumps in yields amounted to a wide and deep re-pricing of the market, with investors selling debt across the board. Italian 10-year yields jumped as much as 64 bps, before easing marginally on speculation the European Central Bank is buying the nation’s debt. Rates on German 30-year debt surged to pop back above 0%, and those on 10-year U.S. Treasuries extended their advance during London trading after clocking up the biggest jump since 1982 on Tuesday.”
March 20 – Reuters (Shawn Donnan, Christoph Rauwald, Joe Deaux, and Ian King): “The world’s supply chains are facing a root-to-branch shutdown unlike any seen in modern peacetime as efforts to contain the coronavirus outbreak hit everything from copper mines in Peru to ball bearing makers in Germany’s industrial heartland. In the last few days, a supply chain crisis that began earlier this year with Chinese factories has spread into key industries elsewhere that had weathered the impact until now. The shutdowns are contributing to the growing conviction that the world has slipped into its first recession since the financial crisis more than a decade ago.”
March 16 – Wall Street Journal (Serena Ng): “Companies around the world are drawing down their credit lines at the same time, forcing banks to cough up large sums of money on short notice and further straining a financial industry already hammered by sinking interest rates. The pressure on banks was highlighted by a rare and dramatic Sunday evening move by the Federal Reserve, which cut its benchmark interest rate by a full percentage point to almost zero and took a range of actions to support bank lending, including flooding markets with liquidity by ratcheting up its purchases of Treasurys and mortgage bonds.”
March 17 – Financial Times (Anna Gross): “Fast-falling global markets have prompted companies to shelve plans to raise tens of billions of dollars, as fears caused by the coronavirus outbreak close off critical sources of capital across the world. On Monday there were zero sovereign, corporate and financial bonds issued in Europe, the Middle East, Africa or the Americas… There were three bonds issued in Asia-Pacific, from financial companies. ‘Primary market activity for most types of issuers is likely to remain anaemic for the foreseeable future,’ said Antoine Bouvet, Senior Rates Strategist at ING in London.”
March 15 – Financial Times (Chris Flood and Attracta Mooney): “Saudi Arabia’s decision to launch an oil price war caused carnage last week for highly leveraged exchange traded products run by WisdomTree, UBS, Société Générale and Janus Henderson. Leveraged ETPs multiply the performance of an underlying asset and US regulators have repeatedly warned they are unsuitable for retail investors because they can generate unexpectedly large losses.”
Trump Administration Watch:
March 20 – Associated Press (Andrew Taylor and Lisa Mascard): “Treasury Secretary Steven Mnuchin and Trump administration officials descended Friday on Capitol Hill to launch high-stakes negotiations with Senate Republicans and Democrats racing to draft a $1 trillion-plus economic rescue package amid the coronavirus outbreak. The closed-door convening is the biggest effort yet from Washington to shore up households and the U.S. economy as the pandemic and its nationwide shutdown hurtles the country toward a likely recession. Mnuchin wants Congress to vote by Monday. ‘We want to lay out the need for urgency and quick action,’ said Eric Ueland, the White House director of legislative affairs… ‘The American people expect action.’”
March 17 – Bloomberg (Justin Sink, Josh Wingrove, Saleha Mohsin, and Jennifer Jacobs): “Steven Mnuchin had an ominous message for Senate Republicans gathered Tuesday…: we need to pass a virus stimulus bill, or the U.S. could be looking at a 20% unemployment rate. The message was a far cry from little more than a week ago, when Trump and his aides had declared the economy was resilient enough to withstand the coronavirus outbreak. That line had changed, and it fell to Mnuchin to brief the Republicans… Mnuchin said the fallout actually could be worse than the 2008 financial crisis…, and called for a package of more than $1 trillion that would include direct payments to everyday Americans. His tone echoed the sudden urgency of his boss, President Donald Trump, who on Monday asked Americans to essentially shut down public life in the country — stay away from restaurants, bars and gatherings of more than 10 people; educate your children at home, if practical.”
March 17 – Wall Street Journal (Jon Hilsenrath and Nick Timiraos): “Behind a flurry of activity in Washington Tuesday was an increasingly urgent problem for a nation grappling with the novel coronavirus pandemic: the growing risk that millions of businesses and households won’t be able to pay their everyday bills—rent, payroll, utilities—as business activity grinds to an unprecedented halt. The Federal Reserve launched a program to provide short-term loans to businesses in commercial paper markets, while White House officials and lawmakers scrambled for ideas to get funds into the private sector, and the Treasury postponed one of the biggest bills coming due for anyone: individual income taxes. ‘Americans need cash now, and the president wants to give cash now. And I mean now, in the next two weeks,’ Treasury Secretary Steven Mnuchin said…”
March 20 – Reuters (David Shepardson): “A group representing U.S. states on Friday asked lawmakers to provide them with at least $150 billion in federal aid to address the coronavirus outbreak… Numerous state and local transportation agencies are seeking emergency government assistance as ridership plummets and tens of millions of Americans work from home. New York’s Metropolitan Transportation Authority (MTA), which oversees two commuter railroads, subways and buses, this week sought $4 billion as ridership has fallen more than 60% on the subways.”
March 16 – Bloomberg: “President Donald Trump for the first time on his Twitter feed used the phrase ‘Chinese Virus,’ stepping up friction between the world’s two biggest economies as each tries to deflect blame for a deadly pandemic. Trump, who has previously called the disease a ‘foreign virus,’ tweeted on Tuesday: ‘The United States will be powerfully supporting those industries, like Airlines and others, that are particularly affected by the Chinese Virus.’ Trump has previously retweeted a supporter who called it a ‘China virus.’ …Chinese Ministry of Foreign Affairs spokesman Geng Shuang said at a press briefing on Tuesday that Trump’s tweet smears Beijing, state broadcaster CCTV reported. ‘We are very angry and strongly oppose it,’ he said, ‘The U.S should redress its mistake and stop baseless attacks against China.’”
March 15 – Associated Press (Aamer Madhani): “President Donald Trump said Saturday he had the power to fire or demote Federal Reserve Chairman Jerome Powell, adding new fuel to his long-running animus toward the central bank’s leader at a moment when the economy was at risk of edging into recession… ‘I have the right to do that or the right to remove him as chairman’, Trump said Saturday at a news conference called to provide an update on the administration’s response to the coronavirus outbreak. ‘He has, so far, made a lot of bad decisions, in my opinion.’”
Federal Reserve Watch:
March 17 – Wall Street Journal (Nick Timiraos and Julia-Ambra Verlaine): “The Federal Reserve on Sunday unleashed its arsenal to prevent market strains from turning a public-health emergency into a financial crisis, but investors are pushing for the central bank to pull more levers to cushion the economy against a severe downturn. The Fed slashed its benchmark interest rate to near zero and said it would buy $500 billion in Treasury securities and $200 billion in mortgage bonds over the coming months to address unusual strains in those markets that surfaced last week as the novel coronavirus spread world-wide.”
March 17 – Reuters (Matt Scuffham and Pete Schroeder): “The U.S. Federal Reserve said on Tuesday it would reinstate a funding facility used during the 2008 financial crisis to get credit directly to businesses and households as fears over a liquidity crunch due to the coronavirus have grown in recent days. The reintroduction of the so-called Commercial Paper Funding Facility (CPFF) is one of a number of moves by the central bank in recent days to try to counter the adverse economic impact of the coronavirus outbreak, and the resulting turmoil in global markets, by pumping money into the real economy. The commercial paper market is an important unsecured, short-term funding market, where companies typically pledge future accounts payables or inventories for cash, which they repay in less than a year.”
March 17 – Wall Street Journal (Nick Timiraos): “The Federal Reserve said Tuesday it would relaunch a crisis-era facility that allows large financial institutions access to short-term loans. The Primary Dealer Credit Facility, originally established in 2008, will seek to tamp down strains in funding markets by expanding loans to the 24 large financial institutions. Known as primary dealers, they function as the Fed’s exclusive counterparties when trading in financial markets. The program will essentially function as an overnight loan facility for primary dealers, similar to how the Fed’s discount window provides a round-the-clock backup source of funding to banks. The facility will offer terms as generous as those made available in late 2008. Primary dealers will be able to pledge a broader range of collateral than the government-backed debt required for open-market operations, and the Fed will charge the same 0.25% rate being made available for banks at the discount window.”
March 18 – Reuters (Howard Schneider and Megan Davies): “The U.S. Federal Reserve rolled out its third emergency credit program in two days to battle the fallout from the virus crisis, this one aimed at keeping the $3.8 trillion money market mutual fund industry functioning if investors make rapid withdrawals. The Money Market Mutual Fund Liquidity Facility unveiled on Wednesday will make up to 1-year loans to financial institutions that pledge as collateral high quality assets like U.S. Treasury bonds that they have purchased from money market mutual funds. The Fed is in effect encouraging banks to buy assets from those mutual funds, insulating the funds from having to sell assets at a discount if they come under pressure from households or firms wanting to withdraw money.”
March 15 – Bloomberg (Simon Kennedy and Enda Curran): “The Federal Reserve and five counterparts united to ensure that dollars keep flowing around the world after the coronavirus emergency sparked a rush for greenbacks. In coordinated statements on Sunday, the Fed, Bank of Japan, European Central Bank, Swiss National Bank, Bank of Canada and Bank of England said they would use their swap lines to support the international supply of the world’s reserve currency. They added a weekly offering of dollars over a longer maturity, and reduced the cost of the facility.”
March 16 – Reuters (Pete Schroeder and Elizabeth Dilts Marshall): “The eight largest U.S. banks said… that they would be jointly access funding from the Federal Reserve’s so-called ‘discount window.’ The banks said that while they are strong and well-capitalized, the move is aimed at reducing the stigma attached to that low-interest emergency funding tool, after banks shied away from it following the 2008 financial crisis. The joint move was announced by their trade group the Financial Services Forum…”
March 17 – Reuters (Jonnelle Marte): “The New York Federal Reserve said it would offer up to $500 billion in overnight loans in the market for repurchase agreements, or repo. It is the central bank’s latest effort to provide more liquidity to money markets during a period of high volatility related to the coronavirus. The repo operation will be conducted at 1:30 p.m. eastern Tuesday.”
March 17 – Financial Times (James Politi and Brendan Greeley, Colby Smith and Joe Rennison): “The US Federal Reserve took aggressive new action to shore up liquidity in financial markets on Tuesday night by allowing approved dealers in government debt, including the largest banks, to borrow cash against some stocks, municipal debt, and higher-rated corporate bonds. The move, which revived a tool used by the US central bank during the last financial crisis, highlighted the Fed’s concern for the health of the short-term funding markets which have been thrown into chaos by the coronavirus pandemic. …The Fed said its primary dealer lending facility would ‘allow primary dealers to support smooth market functioning and facilitate the availability of credit to businesses and households’.”
March 18 – Bloomberg (Saleha Mohsin, Josh Wingrove and Jennifer Jacobs): “The Treasury Department proposed to temporarily guarantee money market mutual funds with taxpayer dollars as part of its coronavirus stimulus plan, according to a document obtained by Bloomberg News. In a proposal to lawmakers sent early Wednesday, the department laid out plans to temporarily permit use of its exchange stabilization fund to guarantee money markets…”
March 17 – CNBC (Kayla Tausche, Tucker Higgins and Dan Mangan): “Federal regulators are discussing relaxing liquidity rules on banks and raising the amount of leverage they can hold to reduce financial pressure on them stemming from the coronavirus pandemic, sources said… The steps being discussed could allow banks to take on a higher proportion of loans with lower credit ratings, and make banks more likely to extend loans to companies that could, in the near future, be classified as risky. Those companies include firms in the energy and travel sectors, which have been particularly hit by the unfolding public health crisis and a related global pullback in economic activity.”
March 15 – CNBC (Jeff Cox): “Federal Reserve Chairman Jerome Powell said Sunday that it’s unlikely that central bank will entertain negative interest rates as the next step to help the economy during the coronavirus scare. Instead, he said, the Fed is focusing on interest rates and other ‘liquidity tools’ it is using to keep credit flowing and financial markets operating properly.”
U.S. Bubble Watch:
March 18 – Wall Street Journal (Jon Hilsenrath): “The coronavirus pandemic is about to test the bounds of how much debt the U.S. government can bear. Even before the crisis hit, the U.S. was on track to increase its budget deficit to nearly $1 trillion in the fiscal year that ends Sept. 30. It was already up to $625 billion in the five months since the current fiscal year began Oct. 1. Now analysts say the deficit will soar well past the record $1.5 trillion hit in 2009… Moody’s Analytics estimates the budget gap will hit $2.1 trillion this year and $1.8 trillion the next. J.P. Morgan economists project deficits of $1.7 trillion this year and $1.5 trillion next. Decision Economics Inc. projects $1.9 trillion this year and $2.5 trillion next.”
March 19 – Reuters (Daniela Guzman and Aaron Weinman): “As corporations draw down on revolving credit lines to combat the expected adverse effects on earnings of the coronavirus pandemic, the ability of US and global banks to provide liquidity has come into question. The decision to borrow typically undrawn financings has echoes of the 2008 financial crisis when companies drew down on unfunded credit lines, taking the banks by surprise, and putting a significant strain on their deposits… Lenders’ liquidity and the quality of the assets they are required to hold against the capital they loan are also under scrutiny. ‘Beyond the underlying stress that is driving these draws, questions have been raised about banks’ ability to meet the funding demands and the implications for capital ratios and asset quality,’ Barclays Capital analysts wrote…”
March 18 – Associated Press (Hilary Russ): “U.S. restaurants… asked the White House and congressional leaders for at least $455 billion in aid to help them weather the coronavirus crisis, saying the industry could shed nearly half of its 15.6 million jobs and a quarter of annual sales.”
March 19 – Wall Street Journal (AnnaMaria Andriotis and Ben Eisen): “U.S. consumers are facing what could become the biggest credit crunch since the Great Depression. Lenders and credit-reporting firms aren’t sure what to do about it. As coronavirus spreads, thousands of wait staff, bartenders and airline employees are out of work and could be on the brink of missing payments on mortgages, credit cards and other loans. Lenders have yet to report a spike in missed payments, but the impact could be considerable. If borrowers start defaulting, they could lose homes and cars. In the longer term, those delinquencies could get factored into their credit reports, hurting their ability to borrow for many years.”
March 19 – Associated Press (Tom Krisher): “Concerns about the spreading coronavirus forced most of North America’s auto plants to close, at least temporarily. Ford, General Motors, Fiat Chrysler, Honda, and Toyota said they would shut down all factories in the region… Nissan will close U.S. factories. Hyundai shut down its Alabama plant after a worker tested positive for the virus. Detroit’s three automakers said their closures would begin this week, while Honda and Toyota will start next week. Nissan will close U.S. plants starting Friday.”
March 15 – Reuters (Elizabeth Dilts): “The United States’ biggest banks will stop buying back their own shares, and will instead use that capital to lend to individuals and businesses affected by the coronavirus, an industry trade group said on Sunday.”
March 18 – Financial Times (Richard Henderson): “The US stock market could be losing one of its most solid sources of support, as big banks lead a wave of companies putting share buybacks on hold. Goldman Sachs and Morgan Stanley were among eight banks this week to announce a pause in share repurchases until the third quarter, saying they would use the funds instead ‘to provide maximum support’ to the coronavirus-hit economy. Airlines including American and Delta have also frozen buyback programmes… Some analysts worry that by putting programmes on hold, companies are removing a pillar that the stock market has come to depend on…. Fewer buybacks ‘could amplify the downturn’, said Lee Spelman, head of US equity for JPMorgan Asset Management. ‘Corporate buyback programmes have been the incremental buyer of equities over the last 10 years — it’s been an extremely important factor for the market.’”
March 14 – Bloomberg: “Price swings in the US equity market this week were more extreme than they’ve been since Herbert Hoover was president. The S&P 500 Index moved at least 4% in each of the five days, falling three times and rising twice. The last such stretch of moves of that magnitude occurred in 1929… The last time a 9% rout gave way to rally of at least that much the next day was in 1931 during the height of the Great Depression.”
March 18 – Bloomberg (Lananh Nguyen): “The New York Stock Exchange will temporarily shut its trading floors starting Monday and move to fully electronic trading after an employee and a person who worked on the floor both tested positive for coronavirus this week.”
March 18 – Bloomberg (Reade Pickert): “U.S. new-home construction exceeded forecasts in February… Residential starts decreased 1.5% to a 1.599 million annualized rate, from an upwardly revised 1.624 million pace in January… The median forecast in a Bloomberg survey was 1.5 million. Applications to build, a proxy for future construction, declined 5.5% to a 1.46 million rate on fewer permits for multifamily units.”
March 18 – Bloomberg (David Papadopoulos): “Stocks, corporate bonds, oil, silver. And now racehorses, too. The month-long wipeout in financial asset prices extended into the thoroughbred world Tuesday, when the Ocala Breeders’ Sales Company began its traditional two-day auction of young horses in Ocala, Florida. By essentially every major metric, sales figures were way down from a year ago. The highest price of the day came in at $650,000, a drop of 68% from the $2 million that was doled out on a two-year-old colt last year.”
Fixed-Income Bubble Watch:
March 19 – Bloomberg (Olivia Raimonde): “In less than two weeks, the amount of distressed debt in the U.S. alone has doubled to a half-trillion dollars as the collapse of oil prices and the fallout from the coronavirus shutters entire industries. In all, U.S. corporate bonds that yield at least 10 percentage points above Treasuries, as well as loans that trade for less than 80 cents on the dollar, have swelled to $533 billion… On March 6, the total was $214 billion. If you count all company debt globally, including loans to small- and mid-sized companies that rarely if ever trade, the distressed pile could top $1 trillion, estimates from UBS Group show.”
March 13 – Wall Street Journal (Ben Eisen): “Investors have been dumping mortgage bonds at a rapid clip, as interest rates plunge on concerns about the coronavirus pandemic and spur a flurry of refinancings that is creating bottlenecks through the mortgage system. Mortgage-backed securities… trade in one of the most liquid bond markets in the world, and investors typically deem the securities to be nearly as safe as government bonds. The Federal Reserve holds large portfolios of both on its balance sheet… The differential between the yield on a mortgage-backed securities index tracked by Tradeweb and the 10-year Treasury yield jumped to about 1.5 percentage points from less than 0.5 points a week earlier, hitting its largest point in years.”
March 19 – Bloomberg (Danielle Moran): “Municipal-bond prices fell in early trading, extending a nearly two-week slide that’s put the market on pace for its steepest losses since 1984. Benchmark 10-year yields rose 9 bps to 2.02%. Those on the shortest-dated securities — which are the easiest to unload for fund managers who have been raising cash to meet withdrawals — rose to 13 bps to 1.8%, nearly four times what it was last week.”
March 17 – Financial Times (Joe Rennison): “US leveraged loan prices have sunk to their lowest level since the financial crisis, as investors reassess the ability of companies to keep servicing heavy debts in light of the coronavirus outbreak. The average leveraged loan in the US — a type of credit typically used by low-rated, heavily indebted companies — has sunk to just 84 cents on the dollar… That is its weakest since August 2009, eclipsing a 2016 mini-crisis associated with a drop in the oil price. Issuance of such loans has exploded to about $1.2tn outstanding in recent years, as investors starved of income have been happy to take greater risk.”
March 18 – Bloomberg (Kelsey Butler): “The U.S. direct lending market is largely shuttered, as private debt firms take aim at answering investor queries and seeing how much of their credit portfolios may be impacted by the coronavirus pandemic. Financing transactions that were far along in the process before the global rout… are likely to still get completed, but new deals are on ice for now, according to an informal survey of five U.S.-based direct lenders. ‘The level of shock of what’s happened really in the past week is so severe that people are trying to pick themselves up off the ground and figure out what the next step is,’ said William Brady, head of alternative lender and private debt group at law firm Paul Hastings.”
March 16 – Bloomberg (Adam Tempkin): “Tumbling interest rates are throwing a wrench into the collateralized loan obligation market that could eventually lead to dust-ups between different stakeholders, market watchers say. At the heart of the issue is the plunging London interbank offered rate. Buyers of CLOs, which are tied to the gauge, are increasingly factoring the prospect of negative fixings into their due diligence as the Federal Reserve slashes its benchmark to near zero and three-month Libor sinks below 1%.”
March 18 – Bloomberg (Justina Lee): “A burgeoning Wall Street strategy that’s been pitched as a shelter from storms is proving anything but in this once-in-a-century market turmoil. Known as ‘alternative risk premia,’ the world’s biggest asset managers and investment banks have packaged up exotic hedge-fund strategies and peddled them to pension funds and wealthy individuals. Make them transparent, accessible and, above all, cheap, and investors will flock, the thinking goes. All told these funds have an estimated $200 billion overall riding everything from short volatility to trend-following. But in their first major stress test, these strategies are faltering. A Societe Generale SA index of the 10 largest products has dropped a record 8% over the past three weeks. A gauge of similar multi-asset strategies sold by investment banks plummeted 17% in February, the most since 2009…”
China Watch:
March 15 – Financial Times (Don Weinland and Xinning Liu): “China’s industrial output contracted at the fastest pace on record in the first two months of this year and urban unemployment hit its highest rate ever in February, as the coronavirus brought the world’s second-largest economy to a standstill. The official data — some of the worst official figures ever reported by China — suggest President Xi Jinping’s attempts to expedite an economic recovery in late February have not had the desired effect. Industrial output tumbled 13.5% in the first two months of this year…”
March 15 – Reuters (Yawen Chen and Huizhong Wu): “Property investment in China fell at its fastest pace on record in the first two months of the year, as home sales, construction and other economic activity all nosedived due to the coronavirus outbreak… Real estate investment, which mainly focuses on the residential sector but includes commercial and office space, fell 16.3% in the first two months of the year. The was the worst contraction since Reuters records based on official data began in 2008…”
March 16 – Reuters (Ryan Woo, Se Young Lee, David Stanway and Andrew Galbraith): “Goldman Sachs said… China’s economy will likely shrink 9% in the first quarter, underscoring how the coronavirus has disrupted normal business activities… Goldman cut its estimate for China’s first-quarter gross domestic product growth to a 9% contraction, from a previous forecast of 2.5% growth, citing ‘strikingly weak’ economic data in January and February… It also lowered its full-year GDP forecast to 3% growth from an earlier estimate of 5.5%.”
March 19 – Reuters (Kevin Yao): “China is set to unleash trillions of yuan of fiscal stimulus to revive an economy expected to shrink for the first time in four decades amid the coronavirus pandemic…, according to four policy sources. The ramped-up spending will aim to spur infrastructure investment, backed by as much as 2.8 trillion yuan ($394bn) of local government special bonds, said the sources. The national budget deficit ratio could rise to record levels, they added.”
March 18 – Bloomberg (Denise Wee): “Chinese property developers, the biggest junk bond issuers in Asia, are at growing risk of default as the coronavirus outbreak squeezes funding channels, according to PricewaterhouseCoopers. In China, 90% of apartments are sold before construction is completed, making developers ‘reliant on pre-sales as part of their overall financing,’ PwC said in a report… That strategy has taken a hit after large swathes of the country were locked down to stop the spread of the virus, shuttering showrooms and display units… China’s builders raised a record $76.8 billion of dollar-denominated bonds last year…”
March 19 – Bloomberg: “Chinese dollar bonds extended their sharp declines Thursday, led by the country’s heavily indebted property developers… The sharp losses have led to margin calls on some of the notes for investors who funded their purchases with borrowed funds, according to some traders. Here are some of the biggest decliners… on Thursday: China Evergrande Group’s $1 billion 12% bond due in 2024 plunged 10 cents on the dollar, the biggest fall on record, to 62 cents. The bond was priced at par in mid-January. Since last week, it has fallen by 30 cents… Yuzhou Properties Co. saw its $400 million dollar 7.7% note due 2025 tumble 17 cents, also marking its largest drop since it was issued in February, to 60 cents. It has slid by 35 cents since last week. Country Garden Holdings Co.’s $450 million 5.625% note sold in January sank for a seventh day, losing 5.7 cents to 69.2 cents, a record low.”
March 19 – Bloomberg (Daniela Wei): “Almost half of China’s listed consumer companies don’t have enough cash to survive another six months, underscoring the urgent task Beijing has to re-start its economy and get shoppers spending again. Restaurants are in the worst shape as the coronavirus outbreak has kept consumers at home, with about 60% unable to cover labor and rental costs, according to data compiled by Bloomberg and company reports covering 50 listed firms. Among jewelry and apparel companies, almost half don’t have the cash to last the six months unless demand rebounds sharply…”
March 15 – Bloomberg: “China home-price growth stalled last month and sales plunged as large swathes of the country were locked down amid the height of the coronavirus outbreak. New-home prices in 70 major cities… rose just 0.02% in February from January… That’s the smallest increase since April 2015… Home sales had the steepest plunge since at least 2013, down 35% by value in January and February from a year earlier…”
March 17 – Financial Times (Sun Yu): “Chinese farmers face a daunting planting season as they grapple with a shortage of labour, seed and fertiliser in the wake of a nationwide lockdown to control the spread of coronavirus. A Qufu Normal University survey last month of village officials in 1,636 counties found that 60% of respondents were pessimistic or very pessimistic about the planting season. The dismal mood has raised fears of a food shortage in the world’s most populous nation after disease control measures, led by traffic restrictions, took a toll on farming activity.”
Central Bank Watch:
March 20 – Bloomberg (Christopher Condon): “The Federal Reserve, along with central banks in Europe, Japan, the U.K., Canada and Switzerland, announced a coordinated action Friday to beef up dollar liquidity swap line arrangements in another move designed to keep dollar liquidity ample around the world. The move will take effect Monday, March 23 and will continue at least through the end of April. ‘To improve the swap lines’ effectiveness in providing U.S. dollar funding, these central banks have agreed to increase the frequency of seven-day maturity operations from weekly to daily,’ the Fed said…”
March 18 – Reuters (Balazs Koranyi and Francesco Canepa): “The European Central Bank launched 750 billion euro emergency bond purchase scheme in a bid to stop a pandemic-induced financial rout from shredding the euro zone’s economy and raising fresh concerns about the currency bloc’s viability… Under pressure to act to bring down borrowing costs for indebted, virus-stricken countries such as Italy, the ECB launched a new, dedicated bond-purchase scheme, bringing its planned purchases for this year to 1.1 trillion euro with the newly agreed buys alone worth 6% of the euro area’s GDP. ‘Extraordinary times require extraordinary action,’ ECB President Christine Lagarde said after an emergency policy meeting… ‘There are no limits to our commitment to the euro. We are determined to use the full potential of our tools, within our mandate.’”
March 15 – Financial Times (Wolfgang Munchau): “With a single remark about bond yields, the fairy dust was gone. Last week, Christine Lagarde, the European Central Bank president, blew away the 2012 guarantee given by her predecessor, Mario Draghi, to do ‘whatever it takes’ to preserve the euro. A few days earlier, European heads of government had refused to co-ordinate their fiscal policies. Some market participants added the two together and concluded that the probability of another eurozone crisis has risen. Italian bonds sold off so quickly that their yields rose by a record daily amount. The reality of Europe’s fiscal and monetary policy is more subtle than what I just described, but the inference is correct. The future of the eurozone has indeed become more uncertain.”
March 17 – Financial Times (Tommy Stubbington): “By now it should be clear that monetary policy cannot cure coronavirus. But central bankers can certainly aggravate the market symptoms. That is the accusation being levelled at Christine Lagarde after a remark she made last week that triggered a sell-off in parts of Europe’s bond markets. It is not the European Central Bank’s job, the president said, to ‘close the spread’ between the bonds of different member states. Clearly, some traders thought it was, judging from the subsequent slide in Italian debt. Despite an apology to her colleagues, and some swift backpedalling in public, borrowing costs continue to rise. Italian 10-year yields hit a nine-month high of more than 2.3% on Tuesday, which is the last thing Rome needs as it considers extra spending to try to contain the pandemic crisis. Just two weeks ago, Italy could borrow for a decade at just 1%.”
March 18 – Reuters: “Australia’s central bank cut interest rates for a second time this month on Thursday after an out-of-schedule policy meeting and made a foray into quantitative easing for the first time to help blunt the economic fallout from the coronavirus pandemic. The Reserve Bank of Australia (RBA) reduced its cash rate to an all-time low of 0.25% and said the board would not tighten policy until it achieves its employment and inflation goals.”
Europe Watch:
March 18 – AFP (Tom Barfield and Michelle Fitzpatrick): “Germany is facing its biggest challenge ‘since the Second World War’ in the fight against the coronavirus, Chancellor Angela Merkel said… In a dramatic television appeal, Merkel said everyone played a part in slowing down a pandemic that has raced across the globe and triggered unprecedented peace-time lockdowns. ‘The situation is serious. Take it seriously. Not since German reunification, no, not since the Second World War has our country faced a challenge that depends so much on our collective solidarity,’ she said.”
March 16 – CNBC (Jill Petzinger): “Chancellor Angela Merkel said in a televised press conference… that drastic measures needed to be put in place to try and slow down the spread of coronavirus in Germany. Merkel laid out a list of all the types of businesses, venues, events, and gatherings that would be forbidden in all of Germany’s 16 states, after state leaders and the federal government met today to agree on a unified attempt to contain the spread of the virus. ‘These are measures that have never been taken in our country’ said Merkel, adding that the scale of the shutdown ‘is not what we want to do, but what scientists say [we should do].’”
March 17 – Bloomberg (William Horobin and Ania Nussbaum): “France is ready to use the ultimate weapon to protect its biggest companies from the market turmoil set in motion by the coronavirus: nationalization. With European Union leaders pulling out all the stops to try to get control of the situation and France tearing up its budget plans to promise billions of euros in support for the economy, Finance Minister Bruno Le Maire said the state will intervene in any way necessary to protect the country’s economic assets. ‘I will not hesitate to use all the means available to me,’ Le Maire said. ‘That can be capitalization, that can be by taking stakes, I can even use the term nationalization if necessary.’”
EM Watch:
March 16 – Reuters (Ali Kucukgocmen and Daren Butler): “Turkey’s central bank cut its key interest rate by 100 bps… Marking its seventh straight cut in an aggressive bid to leave one recession behind and possibly head off another, the bank cut its benchmark one-week repo rate to 9.75% from 10.75%, pushing real rates deeper into negative territory.”
Asia Watch:
March 18 – Bloomberg (Ishika Mookerjee and Abhishek Vishnoi): “Stocks in Asia tumbled anew as anxiety about global recession grips investors. Circuit breakers were set off in multiple markets even as global governments and central banks are seen taking unprecedented measures to stem a public health crisis. Trading halts were triggered from Manila and Jakarta to Seoul and Karachi. Shares in the Philippines tanked as much as 24% after resuming trading from a two-day shutdown… South Korea’s Kospi fell as much as 9.5%, while Indonesian benchmark plunged 5% before tripping a suspension for the fourth time in six days.”
Japan Watch:
March 17 – Reuters (Daniel Leussink): “Japan’s exports slipped for a 15th straight month in February as U.S. and China-bound shipments declined… Imports from China fell at their fastest pace since 1986 after the virus, which has killed more than 7,000 people worldwide, led to a widespread shutdown of production in the region’s largest economy.”
Leveraged Speculation Watch:
March 14 – Financial Times (Jennifer Ablan, Ortenca Aliaj, and Miles Kruppa): “The founder of the world’s largest hedge fund has admitted his Bridgewater Associates was caught wrongfooted during this month’s coronavirus-led market turmoil, as its flagship fund dropped about 20% for the year following sharp reversals in stocks, bonds, commodities and credit. ‘We did not know how to navigate the virus and chose not to because we didn’t think we had an edge in trading it. So, we stayed in our positions and in retrospect we should have cut all risk,’ said billionaire investor Ray Dalio in a statement to the Financial Times.”
March 17 – Financial Times (Laurence Fletcher, Jonathan Wheatley and Robin Wigglesworth): “Two of the world’s biggest emerging markets-focused hedge funds have suffered large losses as stocks and bonds in the developing world were caught up in the coronavirus-induced rout. Guillaume Fonkenell’s… Pharo Management, which has around $10bn in assets, has suffered a drop of about 13% this month in its $5bn Gaia fund…. Pharo’s $5bn Macro fund is down about 9%. And… Autonomy Capital, which was founded by Robert Gibbins and manages around $6bn in assets, has lost 17%…”
March 20 – Bloomberg (Katia Porzecanski, Nishant Kumar and Joshua Fineman): “The coronavirus outbreak is wreaking havoc on yet another corner of finance: hedge funds that wager around deal-making. Funds focusing on merger arbitrage are posting losses as plummeting share prices are causing deal spreads to widen sharply. Investors are fretting that some of the biggest deals could collapse or be renegotiated. That’s meant a swift reversal of fortune for many managers. After event-driven funds gained 8.2% last year, they’ve plunged 18% this year through mid-March, according to Credit Suisse Group AG’s prime services.”
Geopolitical Watch:
March 17 – Bloomberg: “China took the unprecedented step of expelling more than a dozen U.S. journalists from three American newspapers, escalating a wider battle with the Trump administration as the coronavirus pandemic threatens to drag the global economy into a recession. China’s foreign ministry… said U.S. reporters at the New York Times, Wall Street Journal and Washington Post must hand in their media cards within 10 days, calling the move a response to U.S. caps on Chinese media imposed early this month… The journalists are prohibited from relocating to work in Hong Kong and Macau, semi-autonomous regions that in theory enjoy greater press freedoms and control over immigration policy. China also asked five U.S. media outlets to submit detailed personnel and asset information to the government…”
