Category: Briefings

Summary and Price Action Rundown

Global financial markets are staging a recovery this morning as investors anticipate forceful fiscal measures aimed at cushioning the unprecedented economic impact from the pandemic and note easing signs of systemic stress following strong monetary policy action. S&P 500 futures are “limit up,” indicating a 5.1% rally at the open. Traders suggest that investor sentiment is finding support from more aggressive Fed accommodation, glimmers of hope from slightly decelerating Italian contagion figures, and expectations of a prompt resolution to the fiscal stimulus holdup on Capitol Hill. Coming off its worst week since 2008, the S&P 500’s year-to-date downside is now 30.8% and its decline from mid-February’s record high is 33.9%. EU and Asian equities also posted robust gains overnight. Amid the easing risk aversion, Treasury yields are ticking higher, with the 10-year yield at 0.80%, while EU sovereign bonds remain steady. Importantly, the dollar is falling back from multi-year highs. Lastly, oil prices are bouncing further above last week’s nearly multi-decade lows, with Brent crude up above $28.

Expectations of US Fiscal Support Help Steady Market Nerves

Investor sentiment remains fragile but tentatively more upbeat today as Congress and the White House work toward a third US spending bill aimed at providing government support to households and businesses during the pandemic, though analysts fret that even this massive package may prove to be too little, too late. Senate Democrats continue to hold out for amendments to the latest stimulus bill aimed at providing support to workers, companies, and the economy in general during the sharp contraction of activity amid the pandemic response. The latest reports indicate that House Speaker Pelosi would likely accept a version agreed between Senate Democrats and the White House, but that House Democrats have crafted their own version of the bill featuring $2.5 trillion in government support for workers and businesses. The House version features moratoriums for mortgage, car, and credit card payments, breaks for public housing rent, $10k in student loan forgiveness, and a freeze on foreclosures and evictions. This follows the rapid expansion of the size of the fiscal package last week from $1.3 trillion to roughly $2 trillion last week, as Congress and the Trump administration reacted to the soaring estimates of economic damage. Investors are struggling to comprehend how much fiscal firepower might be necessary to even partially cushion severe impact of the pandemic on the balance sheets of businesses and households, but more than $2 trillion represents a strong counterweight to this unfolding national solvency crisis. Meanwhile, President Trump’s latest remarks convey anxiousness to restart more normal economic activity, though most of the restrictions and lockdowns are mandated at the state level.

 Signs of Easing Market Stress Amid Unprecedented Fed Support Measures

As the liquidity crisis that the Fed is attempting to quell remains intertwined with the slower-moving but intensifying solvency crisis brought on by the pandemic, the FOMC answered the call yesterday to more directly support credit markets and reinforce fiscal backstops to key sectors. Yesterday morning, the Fed announced extensive new measures to support the economy that will provide up to $300 billion in new financing for employers, consumers, and businesses. The Fed will also now be able to purchase Treasury securities and agency mortgage-backed securities in unlimited amounts in order to support smooth market functioning along with increasing buying of agency commercial mortgage-backed securities. They created two facilities to support credit to large employers and established a third facility to support the flow of funds to consumers and businesses, along with facilitating credit availability for municipalities. Investment grade credit rallied yesterday and traders noted some signs of better market functioning, although high yield debt remained under significant pressure. Meanwhile, analysts are citing diminished evidence of stress in offshore dollar funding markets (more below), while short-term funding (repo) and interbank markets similarly appear more orderly. Commercial paper and municipal bonds will be monitored for evidence of improvement.

Additional Themes

Data Shows Massive Economic Contraction – March purchasing managers’ indexes (PMIs) for the EU, Japan, and UK reflect unprecedented deterioration (readings below 50 denote contraction). The EU composite PMI plummeted to 31.4 after registering 51.6 in February, with the service sector showing the sharpest contraction at 28.4 versus 52.6 last month. Factory activity also saw a quickening decline, sinking from 49.2 in February to 44.8. Earlier, Japan’s March services PMI cratered to 32.7 from 46.8 and manufacturing slid to 44.8 from 47.8, putting the composite reading at 35.8. UK services slumped to 35.7, manufacturing was 48.0, and the composite crashed to 37.1 from 53.0 the prior month. US PMIs are due later today.

Dollar Depreciation Welcome – Analysts are crediting the Fed’s aggressive measures for taming the rampant dollar in overseas trading thus far today. The greenback is off its multi-year peak.

Summary and Price Action Rundown Global financial markets are under pressure this morning as Congressional wrangling further delays US fiscal measures aimed at cushioning the unprecedented economic impact from the pandemic over the coming months. S&P 500 futures point to a 2.6% loss at the open, with the downtrend continuing, though at a somewhat more moderate pace so far after registering the largest one-week decline since 2008. Heading into today’s opening bell, the index is down 15.0% over the past week, which puts year-to-date downside at 28.7% and the decline from mid-February’s record high at 31.9%. EU equities are also posting losses this morning while Asian stocks were mixed overnight. Amid the ongoing risk aversion, Treasuries remain bid, with the 10-year yield at 0.81%, while EU sovereign bonds are steadying after rallying significantly late last week following aggressive measures by the European Central Bank on Wednesday. The dollar is strengthening again, re-approaching multi-year highs. Lastly, oil prices are sliding back toward last week’s nearly multi-decade lows, with Brent crude back below $26 per barrel. Markets Under Pressure as US Fiscal Stimulus Stalls Risk aversion remains heightened this morning as the third US spending bill aimed at providing government support to households and businesses during the coming peak of the pandemic bogs down in Congress, while analysts ponder whether even this $2 trillion package will prove to be too little, too late. Senate Democrats held up a vote over the weekend on the latest stimulus bill aimed at providing support to workers, companies, and the economy in general during the sharp contraction of activity amid the pandemic response. Citing differences over the bill’s allocations, Democrats are intent on redirecting more dollars toward workers than companies. House Leader Pelosi is working to draft an alternative version, which analysts estimate could be finished midweek. This follows the rapid expansion of the size of the fiscal package last week from $1.3 trillion to roughly $2 trillion last week, as Congress and the Trump administration reacted to the soaring estimates of economic damage of the pandemic and sought to avoid having to immediately start on a fourth stimulus bill. Meanwhile, reports suggested that once the spending bill is finalized, actual disbursement of the checks could take months instead of weeks. With social distancing giving way to more draconian lockdowns in a growing number of areas, alongside a grim tally of new cases and fatality figures, particularly in Italy, investors are struggling to comprehend how much fiscal firepower might be necessary to even partially cushion severe impact of the pandemic on the balance sheets of businesses and households. This gradually unfolding solvency crisis will remain a challenge for the coming months, even as central bank liquidity injections appear to be addressing at least some of the most acute liquidity and systemic stresses. Investors Monitor Gauges of Systemic Stress for Signs of Easing With the Federal Reserve and European Central Bank (ECB), among other global central banks, enacting forceful measures to ease liquidity strains and address systemic risks last week, analysts are highly attuned to nascent signs of improvement. This morning, risk aversion remains extreme, but some gauges of systemic risk are showing signs of stabilization after a week of unprecedented central bank measures. Analysts are citing diminished evidence of stress in offshore dollar funding markets, while short-term funding (repo) markets and interbank markets similarly appear incrementally more orderly. Commercial paper and municipal bonds will be in the spotlight this week as traders suggest that additional Fed support may be needed. Over the weekend, St. Louis Fed President Bullard and Minneapolis Fed President Kashkari both indicated that the Fed stands ready to do more. For context, the Fed continued to augment its liquidity facilities on Friday, announcing an expansion of its money market mutual fund program to include some municipal bonds and upping the its injections into short-term funding markets to up to $1 trillion per day through month-end. This comes after a series of rapid and forceful easing efforts throughout last week, including a 100 basis point (bps) rate cut to the zero bound, $700 billion in quantitative easing, expanded dollar swap lines with overseas central banks, and liquidity support facilities for commercial paper markets, primary dealers, and money market mutual funds. Other global central banks engaged in extraordinary easing last week as well, including the European Central Bank, Bank of England, Reserve Bank of Australia, and the Bank of Japan. Additional Themes Economic Impact Estimates Continue Rising – St. Louis Fed President Bullard warned that US growth in the second quarter could contract by 50% and unemployment could hit 30%. Oil Prices Deeply Depressed – Some suggestions that US producers could join with OPEC to restrict crude output were met with a cool response from the industry, as dwindling prospects for support have sent oil prices back near the nearly 18-year lows they hit last week.

Summary and Price Action Rundown Global financial markets rebounded overnight as the historical volatility of earlier this week begins to ebb following bold moves by central banks in the US, EU, and elsewhere, though investors remain focused on the need for fiscal efforts to address the unprecedented economic fallout from the pandemic over the coming months. S&P 500 futures indicate a 3.2% rally at the open, which would build on yesterday’s choppy and hesitant gain. Heading into today’s opening bell, the index is suffering its worst week since 2008, with losses of 11.1% thus far, putting year-to-date downside at 25.4% the decline from mid-February’s record high at 28.9%. EU equities are rebounding 5.1% this morning while Asian stocks posted solid gains overnight. Despite the improving tone in equities, Treasury yields are continuing lower, with the 10-year yield at 0.98%, while EU sovereign bond markets are extending the rally ignited by the European Central Bank’s muscular actions on Wednesday night. Encouragingly, the dollar’s sharp appreciation trend is retracing from yesterday’s multi-year highs. Lastly, oil prices are recovering from their historical midweek swoon, with Brent crude back above $30 per barrel. Global Central Banks Work Overtime to Calm Panicked Markets Policymakers have been forced to take increasingly radical steps this week to confront the interlocking public health, economic, and financial crises brought on by the pandemic, with the European Central Bank (ECB) and Federal Reserve, among other central banks, stepping in to ease liquidity strains and address systemic risks. This morning, markets are displaying some tentative stabilization after a week of unprecedented central bank measures to quell the most acute stresses. After intervening in bond markets to stem the rout in Italian debt, the ECB announced a €750 billion Pandemic Emergency Purchase Program (PEPP) on Wednesday night, with ECB President Lagarde stating that there are “no limits” to their commitment to steady EU financial markets, echoing her predecessor Mario Draghi’s “whatever it takes” stance that helped quell the EU debt crisis in 2012. The PEPP greatly ups the ECB’s firepower and will not be bound by the same strictures as prior ECB quantitative easing programs, with Greek debt being eligible alongside other loosened constraints. The Fed had come in on Sunday night with its own “shock and awe” measures, cutting rates 100 basis point (bps) to the zero bound and announcing a $700 billion quantitative easing program, alongside other efforts to boost dollar liquidity in the US and overseas. Over subsequent days, the Fed announced liquidity support facilities for commercial paper markets, primary dealers, and money market mutual funds, while expanding its dollar swap lines with overseas central banks in an effort to address the offshore dollar liquidity crunch. Other global central banks engaged in extraordinary easing this week, including the Bank of England, Reserve Bank of Australia, and the Bank of Japan. Investors Ponder Unprecedented Economic Damage from the Pandemic The severe impact of the pandemic is unfolding in dramatically worsening growth, business confidence, and labor statistics from around the world, with yesterday’s deteriorating US unemployment data just the tip of the iceberg. The number of Americans filling for unemployment benefits, known as initial unemployment claims, spiked by 70K to 281K in the week ended March 14, with the tally well above consensus expectations of 220K and clearly attributable to the impact the outbreak. This was up from 211K in the previous week, which is the level where claims have stayed for much of the last three years. However, worse is still to come. By tracking initial claims being filed at the state level this week, economists are warning that the claims data released next Thursday could show that as many as 2 million Americans newly filed for unemployment insurance, a completely unprecedented rise in claims. This comes as economists continue to downgrade their growth outlooks, with a global recession now a “base case” for a number of them and others predicting that the recession has already arrived, while the second quarter is at risk of registering a “depression” level plunge in growth. Additional Themes Oil Prices Bounce from Nearly 20-Year Lows – Oil prices are jumping again today after plumbing roughly 18-year lows midweek, as traders noted President Trump’s remarks yesterday indicating that his administration is working to resolve the ongoing oil price war between Saudi and Russia, although reports this morning suggest that Russia is not ready to back down. For context, the precipitous sell-off has been driven by expectations that the pandemic will crush global demand for crude, with the price war that began late last month between Saudi Arabia and Russia compounding the pressure. Longer Duration Treasuries Being Considered – Reports yesterday indicated that the Trump administration is again considering ultra-long Treasury bonds, at 25 and 50-year tenors. The cool reaction from market participants to similar proposals over recent years has been a key factor in the Treasury shelving them, but the current circumstances might see the stars aligning.

Summary and Price Action Rundown

Global financial markets have fluctuated sharply overnight as US and EU central banks enacted even more forceful stimulus and support measures to quell the immediate market panic, though investors remain focused on the need for fiscal efforts to address the unprecedented economic fallout from the pandemic over the coming months. S&P 500 futures point to a 1.5% loss at the open, which represents only a moderate decline in the context of recent weeks but follows a swing of 8 percentage points overnight between solid gains to steep losses. Amid wild swings over the past week, the S&P 500 is down 25.8% on the year, and 29.2% below its mid-February record high. EU equities are only slightly lower this morning while Asian stocks registered another session of moderate downside overnight. Treasury yields are slightly lower, with the 10-year yield at 1.14%, while EU sovereign bond markets are rallying after the European Central Bank’s muscular actions last evening (more below). Meanwhile, the dollar continues to march to multi-year highs. Lastly, oil prices are retracing some of yesterday’s plunge, with Brent crude climbing above $26 per barrel.

Federal Reserve and European Central Bank Work to Calm Panicked Markets

Policymakers have been forced to take increasingly radical steps this week to confront the interlocking public health, economic, and financial crises brought on by the pandemic, with the European Central Bank (ECB) and Federal Reserve stepping in again last night to address rising systemic risks. After intervening in bond markets yesterday to stem the rout in Italian debt, the ECB announced overnight a €750 billion Pandemic Emergency Purchase Program (PEPP), with ECB President Lagarde stating that there are “no limits” to their commitment to steady EU financial markets, echoing her predecessor Mario Draghi’s “whatever it takes” stance that helped quell the EU debt crisis in 2012. The PEPP greatly ups the ECB’s firepower after last week’s €150 billion expansion and Lagarde’s seemingly reluctant tone underwhelmed market participants. The PEPP will not be bound by the same strictures as prior ECB quantitative easing programs, with Greek debt being eligible alongside other loosened restraints. Later in the evening, the Fed announced the Money Market Mutual Fund Liquidity Facility, to help ease the stress of spiking redemption demands in these vital segments of the financial market. This follows deployment of support programs for commercial paper markets and primary dealers.

 Fiscal Firepower in Focus as Economies Freeze

While central banks work to counter the immediate systemic financial shocks, governments are scrambling to enact fiscal support measures that will keep their economies on life support through the coming weeks and months of pandemic lockdown. The Trump administration has stepped up its efforts on the fiscal front this week (“going big”), with Treasury Secretary Mnuchin outlining the basics of a massive follow-up package to the emergency spending bill that he hammered out with House Speaker Pelosi last week, which the Senate passed yesterday afternoon. This third stimulus bill is set feature up to $1.3 trillion in spending, encompassing direct payments for households, assistance for small and medium sized businesses, and liquidity for impacted industries, alongside $300 billion in tax payment deferrals as the April 15 deadline is pushed back for three months. Mnuchin dismissed concerns over the ballooning federal deficit though some analysts warned that Treasuries and other sovereign bond markets might react adversely to the coming flood of supply. Also, National Economic Council Director Kudlow indicated that the US government might eventually consider taking equity stakes in companies in need of support. Meanwhile, Berlin’s reluctance to deploy its fiscal headroom is now giving way, as the government readies a package of €550 billion to support Germany’s economy.

Additional Themes

Economists Brace for Spike in US Unemployment Claims – With economic data around the world beginning to show the intensifying impact of the pandemic, analysts are pointing to US initial jobless claims for last week as potentially an early indicator of mass layoffs that anecdotal evidence suggests may have already begun. Also, a survey of German business confidence sank to is worst level in a decade. This comes as major Wall Street banks continue to downgrade their economic outlooks, with a global recession now a “base case” for a number of them, while the second quarter is at risk of registering a “depression” level plunge in growth.

Oil Steadying Near Almost 20-year Lows – Oil prices plummeted to around 18-year lows yesterday, with the deepening sell-off being driven by fears that the coronavirus will result in a global recession and massively decrease demand for crude, compounded by the continuing price war between Saudi Arabia and Russia. The oil price slide is also being felt in the high-yield market, with an ETF of so-called “junk” bonds falling to its worst level since spring of 2009. Energy companies are among the biggest issuers of junk bonds, accounting for more than 11% of the market.

Summary and Price Action Rundown

Global financial markets are relapsing to the downside this morning as investors ponder whether even the radical stimulus and support measures being enacted by central banks and governments will be sufficient to counteract the unprecedented economic fallout from the pandemic. S&P 500 futures are under pressure and point to a retracement of yesterday’s 6.0% rally, triggering another “circuit breaker” trading halt. The index is struggling to rebound even after shedding 12.0% on Monday, the worst percentage point loss since “Black Monday” in 1987. Amid wild swings over the past week, the S&P 500 is down 21.7% on the year, and 25.3% below its mid-February record high, as investors come to grips with the unprecedented ramifications of the pandemic and question the potential for government measures to counterbalance the multifaceted economic and financial impact. EU equities are down nearly 6% while Asian stocks posted more moderate downside overnight. Prospects for muscular fiscal stimulus are pushing Treasury yields higher, with the 10-year yield above the key 1.00% level, but EU sovereign bond markets are selling off in a less orderly manner (more below). Meanwhile, the dollar continues to march to multi-year highs. Lastly, oil prices are continuing their swoon, with international benchmark Brent crude sinking below $28 per barrel.

Heightened Uncertainty Persists Despite Bold Policy Efforts to Cushion the Economic Shock

With policymakers enacting ever more radical measures to confront the interlocking public health, economic, and financial crises brought on by the pandemic, investors are grappling with questions over the sufficiency, as well as the potential side-effects, of such policies. Monday’s panicky price action, even after powerful easing on Sunday evening by the Federal Reserve, shifted the onus back to the Trump administration and Congress, as investors confront the fact that broad swaths of the US economy, businesses and workers alike, will need direct and significant financial support from the government to make it through the coming weeks and months. In response, the Trump administration stepped up its efforts on the fiscal front yesterday (“going big”), with Treasury Secretary Mnuchin urging the Senate to quickly pass the emergency spending bill that he hammered out with House Speaker Pelosi last week and outlining the basics of a massive follow-up package. Mnuchin indicated that this third stimulus bill would feature up to $1.2 trillion in spending, encompassing “checks to Americans… in the next two weeks,” assistance for small and medium sized businesses, and liquidity for impacted industries, alongside $300 billion in tax payment deferrals as the April 15 deadline is pushed back for three months. Mnuchin downplayed concerns over the ballooning federal deficit and reportedly warned Republican lawmakers that unemployment could reach 20% in the absence of fiscal countermeasures. Meanwhile, analysts are noting a leaked US government report suggesting that the pandemic response could last 18 months and may require direct intervention in private sector by the executive branch, which is authorized during wartime conditions. While the US Treasury market appears to be absorbing the prospect of enormously increased supply, investors are noting dislocations in EU sovereign bond markets overnight, with sharp selloffs in the periphery, particularly Italy, but also in safe have German bunds. The European Central Bank is reportedly intervening to calm Italian bond market this morning.

 Some Easing of Systemic Stress Signals Amid Forceful Fed Moves

With the Federal Reserve enacting increasingly muscular liquidity programs, analysts are noting signs of selective improvement. After the extraordinary easing announced on Sunday night, including a steep rate cut and a return to quantitative easing (large scale asset purchases), the Fed has continued to activate crisis-fighting programs. Yesterday, it upped liquidity injections into short-term funding markets, announced support measures for the commercial paper market (with backing from the Treasury), and activated a lending program for primary dealers, accepting a wide range of collateral for the loans. Analysts are noting positive effects in US short-term funding markets, although repo rates remain choppy, and signs of interbank pressures and overseas dollar scarcity have moderated. However, credit markets remain consistent with a broad and worsening solvency crisis, and the commercial paper (CP) market is also experiencing continued stress despite Fed intervention.

Additional Themes

Increasingly Evident Economic Fallout from the Outbreak – In Germany, the ZEW Economic Sentiment Index plunged by 58.2 points to -49.5 in March, the lowest level since December 2011. Meanwhile, US February retail sales dropped 0.5% month-on-month (m/m), which was the largest decline in sales since December 2018. Economists expect a worldwide recession.

Boeing and US Airlines Request Government Support – An industry group has put forth a suggestion for up to $58 billion in aid and Boeing is seeking $60 billion in government support.

Summary and Price Action Rundown

Global financial markets are attempting to stabilize this morning amid increasingly forceful stimulus and support measures from central banks and governments, though historic levels of volatility and some heightened indications of systemic risk persist. S&P 500 futures have been choppy this morning but remain in positive territory despite surrendering more significant gains overnight. The index is still struggling to rally even after shedding 12.0% in yesterday’s session, the worst percentage point loss since “Black Monday” in 1987, while the past week has featured multiple sessions with moves of over 9%. Amid these wild swings, the S&P 500 is down 26.1% on the year, and 29.5% below its mid-February record high, as investors come to grips with the unprecedented ramifications of the pandemic and question the potential for government measures to counterbalance the multifaceted economic and financial fallout. Equities in Asia were mixed but relatively steady overnight while EU stocks have retreated from their earlier highs of the day. Treasuries are pausing their rally, with the 10-year yield rising to 0.81%, while the dollar is reaccelerating to the upside amid overseas demand. Oil prices remain depressed, but international benchmark Brent crude is edging above $30 per barrel.

Policy Countermeasures Arrayed to Quell Market Panic

With the intensifying magnitude of the pandemic forcing investors to contemplate potentially severe economic and personal hardship over the coming months, policymakers are seeking to enact even more radical measures to confront the interlocking public health, economic, and financial crises. Yesterday’s panicky price action, even after powerful easing on Sunday evening by the Federal Reserve, shifted the focus back to the fiscal and public health response, as investors grapple with the fact that broad swaths of the US economy, businesses and workers alike, will need direct and significant financial support from the government to make it through the coming weeks and months. Though some analysts cited President Trump’s remark that countermeasures against the virus could last into late summer months as adding to yesterday’s pessimism, others noted that contemplation of such an adverse outlook should help stiffen the resolve and focus the efforts of US policymakers. On the public health side, travel restrictions and quarantines continued to tighten in the US and overseas, with increasing numbers of cities and states ordering restaurants, cafes, and bars to close. On the fiscal front, Treasury Secretary Mnuchin is urging the Senate to quickly pass the emergency bill that he hammered out with House Speaker Pelosi last week. Mnuchin is reportedly set to propose a third stimulus bill that would offer $850 billion in economic support, though much of the total is said to be a payroll tax cut, a proposal which received a chilly reception on Capitol Hill last week. In addition to any such broad stimulus, analysts expect that large-scale industry bailouts will also be necessary.

 Some Easing of Systemic Stress Signals Amid Forceful Fed Moves

With the Federal Reserve enacting major liquidity programs on Sunday, short-term funding and interbank markets appear calmer, though some significant fundamental strains remain evident in global financial markets. Analysts have been monitoring significant and rising pressure in short-term funding markets (which first emerged in September), overseas dollar liquidity, credit market metrics, commercial paper markets, and interbank funding. The Fed’s actions on Friday and over the weekend appear to have had a positive effect on US short-term funding markets, although repo rates remain choppy, and some signs of interbank pressures have moderated, while major US banks have agreed to tap the Fed’s discount window in unison in an attempt to facilitate its wider use (as in 2008). Still, overseas dollar liquidity gauges have worsened further. Also, credit markets remain consistent with a broad and worsening solvency crisis, particularly in some of the most impacted sectors, like energy, which is suffering further damage from the Saudi versus Russia oil price war. The commercial paper (CP) market is also experiencing continued stress, with some analysts suggesting that the Fed should begin to directly purchase CP in an effort to unfreeze this key source of corporate funding.

Additional Themes

Boeing and US Airlines Request Government Support – With President Trump expressing an intention to support US airlines, an industry group has put forth a suggestion for up to $58 billion in aid of various kinds, including tax rebates and grants. Airline stocks moderately outperformed the broader S&P 500 yesterday but have suffered outsized year-to-date losses between 40% and 60% for the major US carriers. Boeing is also seeking government aid.

Increasingly Evident Economic Fallout from the Outbreak – While US data has only evidenced a minor impact of the outbreak thus far, the New York region manufacturing activity gauge for March crashed from 12.9 to -21.5, its worst level since 2009, providing a grim harbinger of the economic damage to come. Today’s retail sales and industrial production numbers for February are expected to remain steady before almost certainly contracting steeply this month.

Summary and Price Action Rundown

Global financial markets are again under severe duress this morning as historic levels of volatility translate into more disorderly trading conditions and rapidly rising systemic risks despite the increasingly proactive response from central banks and governments to restore calm. S&P 500 futures are frozen at a 4.8% “limit down” decline at the open, with ETFs suggesting a loss of over 9%. This would retrace Friday’s huge countertrend 9.3% rally that followed Thursday’s plunge of 9.5%, which was the heaviest percentage point decline for the index since “Black Monday” in 1987. Amid these wild swings, the index is down 16.1% on the year, and 19.9% below its mid-February record high, as investors come to grips with the unprecedented ramifications of the pandemic and ponder the ability of government measures to address the multifaceted economic and financial fallout. Equities in Asia posted more moderate losses overnight but risk aversion has re-intensified during EU trading. Treasuries are again reflecting safe-haven demand, with the 10-year yield at 0.76%, while the dollar is dipping below its recent multi-month top. Brent crude is again spiraling below $31 per barrel.

Global Financial Markets Relapse Despite Powerful Fed Easing

Although the US public health and economic policy response to the pandemic has become increasingly energetic over the past week, price action this morning indicates that the intensifying magnitude of the economic shock from the outbreak and the impact on investor confidence is threatening to overbalance all current policy countermeasures. Disorderly price action overnight has put the spotlight back on the Fed, the Trump administration, and Congress as investors ponder what measures beyond those already enacted might quell the panic. Last week, the halting US policy response through Thursday saw extreme market volatility devolve into panicked and disorderly trading, implicating 2008-like systemic risks (more below). On Friday, the Fed’s enormous liquidity injection of $1.5 trillion into short-term funding markets (with expectations of more to come), and an increasingly focused response from the Trump administration, alongside agreement on a bipartisan spending package, headed off a market seizure and sent risk assets higher to close a challenging week on a positive note. However, sentiment deteriorated over the weekend as investors contemplated a sudden stop of the US and global economy that could last for weeks, if not months, as stricter quarantines and travel restrictions were rolled out across the US, EU, and elsewhere. Last evening, the Fed executed a surprise 100 basis point (bps) rate cut and announced a $700 billion quantitative easing program, alongside other measures to boost dollar liquidity in the US and overseas. With this huge magnitude of monetary accommodation failing to steady market nerves, at least so far, skeptical analysts are pointing to the inability of liquidity measures to address the economic reality that broad swaths of the US economy, businesses and workers alike, will need direct financial support from the government to make it through the coming weeks and months.

 Signs of Heightened Systemic Stress

Alongside extreme equity market volatility and panicked Treasury trading, significant fundamental strains are appearing in global financial markets, drawing comparisons with the global financial crisis. Analysts have monitoring significant and rising pressure in short-term funding markets (which first emerged in September), overseas dollar liquidity, credit market metrics, and interbank funding. For context, systemic risks, like those that manifested themselves in the global financial crisis in 2008, involve threats to the functionality of markets and availability of liquidity, as opposed to standard market stress, which results in sometimes deeply adverse, but still orderly, price action. The Fed’s actions on Friday and over the weekend appear to be having some positive effects on dollar liquidity overseas, while analysts are monitoring US short-term funding markets to see if Friday’s improvements persist. Credit markets, however, indicate a broad and worsening solvency crisis, particularly in some of the most impacted sectors, like energy, which is suffering further damage from the Saudi versus Russia oil price war. The commercial paper (CP) market is also experiencing stress, with some analysts suggesting that the Fed should begin to directly purchase CP in an effort to unfreeze this key source of corporate funding. EU financials, a perennial weak link in the global systemic risk chain, are also evidencing increasing credit pressure, as the cost to insure against default of European subordinated bank debt reaches levels last seen in 2012.

Additional Themes

Chinese Economic Data Reflects Severe Coronavirus Impact – Over the weekend, China’s January-February economic releases were deeply negative. Industrial production fell 13.5% year-on-year while retail sales and fixed asset investment cratered 20.5% and 24.5%.

Economists Forecast US Recession – Goldman Sachs has joined other economists in forecasting stagnant growth in the first quarter (1Q) and a steep contraction in 2Q.