Last week, global equities ended roughly flat at 0.5% (MXWD) — the smallest week-over-week return since the start of 2020. It sure didn’t feel that way though, with 2-week volatility now in the 50s for the S&P 500 versus mid-single digits at the start of the year. The VIX at 42, Friday’s closing level, seems cheap! Emerging equities (MXEF) led, while International Developed markets (MXEA) trailed, though all three major geographies had roughly the same weekly return. Chinese equities continued their run, up 5.0% last week, but as of Monday’s opening were no longer positive on the year.

The S&P 500 (SPX) was +0.65% on the week, but down 7.7% YTD as of Friday. That was last week’s news, though. The story changed again Sunday night, as Russia and Saudi Arabia entered into an oil price war.

Oil shock plunges market at Monday’s open
Oil prices sank more than 20% on Monday, sending an already coronavirus-vulnerable stock market sharply down 7% at opening, tripping the circuit breaker and prompting the NYSE to halt trading for fifteen minutes.

Credit gap widens | The fear is most palpable in the credit markets, where liquidity is practically non-existent and prices seem to be moving based on random acts of scared individuals. Last week, traders were already likening the price action in the U.S. long-end to that of an emerging market country. Despite the plunge in government bond rates, High Yield credit was down 1.8% YTD in price terms last week.

At Monday’s opening, High Yield sank even lower, raising concerns about defaults and bankruptcies, especially in the High Yield energy market, which likely won’t come out of this unscathed. Liquidity may also be impacted by some segregation of trading desks taking place right now, which can decrease the strength of the underlying infrastructure supporting decision-making.

There’s the potential for policy stimulus. Facilities and Central Bank action from the U.S. and Europe could smooth this process, but stimulus likely won’t occur in a big enough fashion to arrest this spiral, at least for now.

Emergency Fed rate cut rare event
The Fed delivered an emergency 50 basis point rate cut last Tuesday morning — a rare event. There have been just eight intra-meeting moves on record and each time the Fed has followed with a similar move at the next scheduled meeting. That means the Fed will likely cut rates another 50 bps (or more) at the March 18th meeting, or even sooner. This is fully priced by the market, which has rates back at 0% in the U.S. by the end of 2020.

Massive move in U.S. bond rates
Friday brought another week of fresh record-lows in 30-Year and 10-Year Treasury yields as both fell 39 bps last week. The 10-Year is down a whopping 116 bps so far this year, having closed at .77% on Friday.

What’s curious is that almost all of declines in yields over the past two weeks of trading have occurred during overnight sessions, suggesting investors from Japan and Europe are buying U.S. bonds as a potential hedge against slowing global growth due to coronavirus, the oil shock, or other concerns. For this reason, just as we did when the yield curve inverted last August, we’re cautioning against reading too much into U.S. growth from these moves in interest rates. A U.S. recession may not be in the cards.

Watching ahead: Coronavirus response, U.S. Presidential race, and consumer confidence
The coronavirus continues to dominate market psychology. Last week, investors would have been hard pressed to say which actual news was motivating their actions — market moves are the news. As European cases continued to increase, Italy moved to lock down Lombardy (about 16m people). In the U.S., cases are quickly rising on both coasts. To find some stability, the market may need to see a more reassuring and decisive official U.S. response to the outbreak. We believe the lack of a decisive and cohesive response from the world (ex-China) is contributing to market volatility.

Last week, investors seemed to overlook the fact that the U.S. Presidential race just got a lot more market friendly. Biden is back, with almost 80% in the betting odds to win the nomination according to Predict It.  We’ll be watching Tuesday’s primary contests, especially in Michigan and Washington.

Finally, February jobs numbers in the U.S. were very strong. While the numbers are pre-virus, they shouldn’t be too easily dismissed. The economy was on firm footing before the virus and oil shocks, which points to the potential for a faster recovery. When you consider strong jobs growth and low unemployment in light of lower oil prices and rock bottom mortgage rates in the U.S., things don’t look as bleak for the U.S. consumer or the U.S. market.

What else are we watching? The oil shock gives the European Central Bank (ECB) more cause to take action at its meeting on Thursday. And we’ll be interested to see how the UMich Consumer Sentiment Index looks on Friday, as it will be the first official “read” of consumer sentiment now that markets are selling off and coronavirus cases are on the rise in the U.S.