Last week, coronavirus, Super Tuesday, and an emergency rate cut by the Fed translated to wild equity market gyrations and a stunning plunge in treasury yields well below record lows. The surprise rate cut by the Fed pulled the rug out from underneath the USD (-2.22%) as both Euro (+2.36) and Yen (+2.63%) rallied sharply. Oil (-8.15%) moved to further price in a significant drop in economic activity while industrial metals and grains held their ground. Gold (+4.58%) rallied in sympathy with the risk off trade which has seen equity market volatility triple since middle February. While we expect continued volatility looking forward, our base case at this point remains firmly in the ‘buy the dips’ camp as Chinese stimulus, U.S. monetary stimulus, and the global manufacturing cycle are likely to ultimately overcome global pandemic economic concerns.
- While it certainly didn’t feel like it, the S&P 500 and the DJIA both posted gains last week but are down approximately 13% off the February 19th high. Notably, China is up 2% since Feb 19th and nearly flat on the year.
- Oil markets cratered over the weekend on OPEC anxiety and Saudi Aramaco dropping the gauntlet on a price war setting up the biggest one-day drop since the Gulf War in 1991. The entire treasury yield curve moved below 1% for the first time in history.
- China reported a slowing number of new coronavirus cases last week (99) for a total of 80,651. Global cases rose to 101,927 with 3,488 deaths. The ultimate economic impact of global containment strategies and modified human behaviors remain unknown to all.
- Risk markets benefited from some tangible mid-week Joementum stemming from his victory in South Carolina and Super Tuesday. Biden probability surged from 7% to 76% inside of a month.
- In a 10-0 vote Tuesday, the FOMC made a rare inter-meeting rate cut in response to CoVid-19 outbreak. This was the eighth inter-meeting cut since rate decisions were synced to FOMC meetings in 1994 and the first we’ve seen since 2008.
- Market rate expectations are very aggressive, suggesting 3 more cuts over the next 2 meetings, leaving us a 75% probability of ZIRP this month. Money has been flooding into short dated treasuries (out of the REPO market) in droves due to the expectation of aggressive looming rate cuts from the Fed.
- All UST maturities under 30yrs are less than 1% while the 10yr and 30yr are at all time low yields. The spread between S&P 500 dividend yield and 10yr UST yield of 1.4% is its highest since 2006.
- Mortgage rates plumbed all-time lows in sympathy with treasury yields. MBA mortgage application composite index surged 15.1% w/w driven by a 26% surge in refi applications.
- Bespoke noted before this volatility regime began, the S&P daily volatility was +/-0.40% but has been nearly 3% since mid-February and that 7 of the last 10 trading days have been ‘all or nothing’ days (+/- 400 AdvDecl).
- High yield spread levels (505) aren’t as much of a concern as rate of change (biggest two day widening since 2010). The drastic fall in UST yields means actual yields haven’t increased substantially for large parts of the market.
- Nearly $5t has been erased from the U.S. equity market since February 19th. It should come as no surprise the leading market cap losers are MSFT, GOOGL, AAPL, AMZN, and FB.
Economic Release Highlights
- February payrolls (273,000 vs 250,000) far exceeded expectations and came with an 80,000 upward revision to Dec/Jan numbers.
- February’s ISM Manufacturing Index sustained January’s 3.1 point surge, coming in near consensus forecast (50.1 v 50.4).
- February’s PMI Manufacturing Index hit expectations (50.7 vs 50.8). While the reading is down one point from January, it remained in expansionary territory despite CoVid-19 outbreak.
- February PMI Services and Composite readings of 59.4 and 49.6 both came in right at consensus estimates. Both registered notable declines from the 53.4 level in January.
- February’s ISM Non-Manufacturing Index handily beat expectations (57.3 v 55.0), adding to January’s move higher to 55 driven by new order activity.