David Fuller and Eoin Treacy's Comment of the Day
Category - General

    Central Banks Promise Stability as OECD Sounds Alarm

    This article by Simon Kennedy and Lucy Meakin for Bloomberg may be of interest to subscribers. Here is a section:

     

    Already on Friday, Federal Reserve Chairman Jerome Powell opened the door to cutting interest rates to contain what he called the “evolving risks” to economic growth from the virus. The Paris-based OECD now expects the weakest global growth this year since the 2009 recession, and said a “long lasting” epidemic would risk a worldwide recession.

    The prospect of central banks’ action temporarily halted the worst rout in stocks since that crisis. But the selloff resumed on Monday, with U.S. futures falling and Treasuries rallying.

    Money markets now see the Fed lowering its main rate by 50 basis points this month, and give a 70% chance the European Central Bank will pare its by 10 basis points.

    Economists at Goldman Sachs Group Inc. predicted the Fed will ultimately slash by 100 basis points in the first half of the year. The BOE will cut by 50 basis points and the ECB by 10 basis points, it said.

    There is even speculation that the Fed will move before its policy makers gather on March 17-18, and some economists see the potential for international policy makers to coordinate cuts for the first time since 2008. Investors increasingly bet the central banks of Australia, Canada and Malaysia will ease at meetings already scheduled for this week.

    “Global central bankers are intensely focused on the downside risks,” Goldman Sachs economists led by Jan Hatzius said in a report on Sunday. “We suspect that they view the impact of a coordinated move on confidence as greater than the sum of the impacts of each individual move.”
     

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    Email of the day - on palladium:

    Thank you for Friday’s big picture video, there were a number of very useful things for me as a journalist.

    Can you also give your analysis for palladium? You mentioned on a number of occasions that a $200 reaction represents consistency of a trend. It was about $350 on Friday. Also, reaction has unwound much of the last break-up. What are the prospects?

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    Kolanovic Says $150 Billion Systematic Selling Drove Stock Rout

    This article by Lu Wang for Bloomberg may be of interest to subscribers. Here it is in full:

    About $150b worth of stock selling from computer-driven traders and options hedgers drove the S&P 500’s worst two-day slump since 2015, according to JPMorgan strategist Marko Kolanovic.

    * The unloading is largely over, Kolanovic wrote in a note to clients on Wednesday
    * While the spread of the coronavirus sparked risk-off, traders who watch market trends and volatility for trading signals acted as “significant drivers” of the rout as the S&P 500 broke key support levels
    * Exacerbating the sell-off was the dwindling liquidity as a measure known as market depth dropped by more than 50% * The selling trend from commodity trading advisers, or CTAs, now seen over, as S&P 500’s 200d (~3045), 6m (2900) and 12m (2800) signals are not likely being breached
    ** CTA’s equity exposure fell from ~85th percentile last week to ~40th percentile now
    ** “Selling will likely stop here”
    ** “A move higher could prompt CTAs to buy back equity exposure, so we think risk from CTAs is skewed to the upside.”
    * Volatility targeters, such as variable annuities and risk parity funds, are likely to continue selling over the next few days to account for the pickup in equity price swings that were too large to be offset by bond moves
    ** Selling pressure expected to ease once their exposure drops to 35th percentile, vs 75th percentile before the sell-off
    * Expected inflows from pension funds, which rebalance monthly and will need to buy stocks to return to prior asset allocation levels following the latest decline, are helping support the market
    ** That demand estimated to equal to 1-2% upside for the market
    * “Option hedgers and CTAs are now more likely to buy than sell, and volatility targeters are still selling but at a lower pace, so we think a short term bounce-back is getting likely given month-end flows”

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    Gold Joins the Virus Bloodshed With Biggest Slide Since 2013

    This article by Justina Vasquez and Ranjeetha Pakiam for Bloomberg may be of interest to subscribers. Here is a section:

    “It’s bloodshed,” Commerzbank AG analyst Carsten Fritsch said by phone Friday. “It first started with forced selling from equity investors who also sold their gold positions to cover their losses in equities and also to cover margin calls. Gold investors don’t want to sell but are forced to cover the losses in other asset classes.”

    Spot gold fell the most intraday since June 2013, according to Bloomberg generic pricing. The metal was down 4.5% at $1,571.05 an ounce as of 1:35 p.m. in New York. Other precious metals including silver and platinum also dropped, with palladium sliding the most since 2008.

    Fear over the economic fallout from the coronavirus has unnerved markets, sending the S&P 500 index toward its worst week since 2008. The outbreak has further undercut investor demand for raw materials, which was already wavering because of increasing supplies and concerns over global trade wars. Returns from commodities have plunged on worries that the fast-spreading virus will crush demand for raw materials, fuel and food across the globe.

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    Kass: Danger but Opportunity as Well

    Thanks to a subscriber for this article which may be of interest. Here is a section:

    So, let's examine the non consensus view - some reasons why I have started to do some buying:

    * China has moved on. Coronavirus cases are down and its stock market is well off the lows. (Interestingly, today the China H share Index and the Hang Seng closed up on the day.) Will this be the blueprint for the rest of the world as well?

    * When China sneezes... The last two major selloffs in U.S. equities were China-induced (devaluation fears and a trade war with the U.S.) - these proved to be great buying opportunities.

    * A point of maximum fear? There are many examples of this - Dr Roubini in the Financial Times, Mohamed El-Erian on CNBC, etc. "This time is different." But will it be?

    * Market structure systematics created a perfect storm. We entered into this selloff with CTAs near record long with a need to sell substantial sums of stocks if the market inflected. This has more or less been absorbed now.

    * Corporate buyback bids could trump systematic supply at this point.

    * Volatility has spiked and the market may be pricing "guaranteed" panic.

    * Speculation is no longer running amok and the "everything bubble" has been pierced. Stocks like SPCE, downgraded by Credit Suisse this morning (and many others) are in free fall now - erasing much of the recent gains as speculators run to the hills.

    * As discussed in yesterday's "After The Fall" and "Brokedown Palace", stocks are swiftly moving towards oversold as market and economic expectations have quickly soured.

    * If the old narrative comes back - it looks more sold than ever with yield gap support (and a 10 year U.S. note yield of 1.31%) coupled with a President Trump reelection (despite Sanders' ascent) at the highest probability this year.

    * If financial TV and "talking heads" are viewed as a contrary indicator - the confident Bulls of only 1-2 weeks ago have confidently reversed their bullish views and now see little opportunity to buy.(Reminding us of Divine Ms M's wonderful phrase, "Price has a way of changing sentiment.") 

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    Junk Bond Sell-Off Deepens With Energy Hit the Hardest By Virus

    This article by Paula Seligson for Bloomberg may be of interest to subscribers. Here is a section:

    Energy led the decliners as oil prices fell below $47 a barrel, while bonds of rental car Hertz Global Holdings Inc. slumped as much as six cents on the dollar. Leveraged loans tied to American Airlines Group Inc. and Travelport Worldwide Ltd. also slipped. The high-yield CDX index, which trades on price, was down a full point at one stage.

    High-yield bond investors are trying to assess the big unknown: whether the coronavirus will be just a short-term problem if it can be contained, or, far worse, turn into a pandemic that could pose a long-term drag on the economy and spark a recession.

    “The sell-off is accelerating,” said William Smith, a portfolio manager at AllianceBernstein. “Initially we were seeing more weakness in liquid securities, but today there are multiple situations where bonds are down more than five points.”

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