Highest volatility since 1987 Black Monday Crash
In a historic week of trading equities ended lower, led by the U.S., down 8.7% (SPX), while International Developed lagged at -18.4% (MXEA). Emerging ended the week down 11.9% (MXEF). Since this is index data, only the U.S. includes the huge Friday rally.
The newsflow has been shocking, and the horrible liquidity environment — worse than 2008 — has amplified it. Over the span of just last week, S&P 500 futures had two limit down sessions and one limit up, while the intraday circuit breakers on US equities were triggered twice. At market open Monday morning, the Level 1 circuit-breaker was tripped again, even on the heels of Sunday’s Fed action.
This level of market volatility is truly unprecedented. Last week, the S&P 500’s realized volatility was approximately 131% — about 2.5x the week prior and higher than any week during the 2008 Global Financial Crisis [Graph 1]. The only time it’s been higher was during 1987’s Black Monday Crash, when the S&P 500 fell 20.5% in a single day!
Correlation broke between equities & fixed income
The correlation between equities and fixed income broke in a big way last week. Yields ended higher on the week, but had an incredible round trip that continued straight through to this Monday morning [Graph 2]. The 10-Year Treasury closed two Fridays ago at .76%, traded down to .31% on March 9th and ended the week at 1.01% – a 1.15% total range! The curve steepened to almost 2-year highs.
Credit and funding markets stressed
Credit markets exploded last week and the horrible liquidity environment got even worse. Spreads widened (Investment Grade +24 and High Yield +118, both the highest readings since the 2016 growth scare). Even in the ETF space, there is considerable volatility. This pain hardly improved on Friday despite the equity rally, suggesting to us that whole industries will need more fiscal support to get through this than what’s in the current House bill.
Central banks slash rates, Fed cuts to zero
Central banks slashed rates in a frenzy last week, with three majors — Canada, UK, and Norway — cutting rates 50 basis points (bps) in emergency actions and many more pumping liquidity into their banking systems.
Then, in an emergency announcement Sunday evening, the Fed cut 100 bps to 0-0.25%. It also restarted quantitative easing (QE) in the form of purchasing $700 billion of U.S. Treasuries and mortgage-backed securities. To put this in perspective, the first QE during the 2008 Global Financial Crisis was only $600 billion. The Fed also made some technical tweaks to policy. This decision stands for their regularly scheduled meeting on Wed.
What to watch ahead
Novel coronavirus enters new stage
The coronavirus has entered a new stage. Economies around the world are locking down, and as of Friday’s news conference, the U.S. government is prepared to act forcefully by declaring a national emergency. While this caused the Friday rally in equities, we’d caution against the all-clear. Credit and funding have yet to improve, and if anything, degraded on Friday. We’re watching this space closely.
House bill first step, more needed
The House bill will pass this week and be signed into law. Markets are rightly reassured that the U.S. is now taking this situation seriously. While this was a good first step, more government help will be needed as states close schools, companies force workers to stay home, and municipalities enact quarantine or isolation measures. With the House out of session, it may be some time before a second bill gets passed.
G7 Video conference and more data coming out
The G7 is holding an emergency video conference later today. We’ll be watching what comes out of that meeting. China retail sales and IP also come out today. US jobless claims will be released on Thursday.
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