Investors pressed the fear and panic button in an unprecedented fashion this week with equity markets posting red numbers not seen since October 2008. Markets from treasuries to oil to stocks to bonds seized up as panic ensued over coronavirus and the economic impact of containment measures which have effectively put several world economies into induced comas. Monetary authorities around the world responded in force last week while fiscal measures are quickly being mobilized. Both financial markets and economies need to see containment measures begin to impact net new case counts, similar to Asian nations, for rational pricing and sound forecasting to surface. Additionally, fiscal packages need to forcefully fill the economic gaps created by CoVid reactions and containment measures. Until then, asset prices, market liquidity, and social policies will continue to be driven by speculation on relatively unreliable data. While we are still weeks away from more reliable containment indications and the ensuing forecasts, our base case remains that we will mobilize to strengthen the healthcare infrastructure, hyper-innovate the bio-science response, and successfully implement containment measures. The only certainty we see at this time is markets are not functioning properly which places a premium on discipline and long-term perspectives as we evaluate rebalancing and tactical opportunities.
Market Anecdotes
- The Fed re-started their commercial paper facility & primary dealer credit facility. This is in addition to cutting rates to zero, restarting bond purchases (including municipal bonds), announcing additional US dollar swap lines, and easing bank rules & reserve requirements.
- The Fed created the Money Market Mutual Fund Liquidity Facility (MMLF), a secured loan facility designed to assist money market funds in temporary need of liquidity.
- The ECB announced a EUR750b bond buying program (PEPP) with no limitations on specific nations (re: Greece).
- The BoJ announced a plan to increase stock purchases and offer companies 0% interest loans.
- On Thursday, the BoE announced a rate cut to 0.10% and ramped up its QE program from￡445 to￡645 ($752b).
- Municipal bond market remained in disarray last week. Record selling pressure given expectations of declining revenue and increasing costs have cash strapped municipalities concerned. Some bond ETFs gapped to over 7% discounts of their underlying NAV.
- The S&P 500 closed 32% off last month’s record high, the steepest and fastest decline of that magnitude going back to 1928 and the fastest move into bear market territory on record.
- Monday’s S&P 500 was the worst day since Black Monday and its third worst day on record while the R2000 and NASDAQ chalked their worst declines on record. The VIX closed at 82, far exceeding the prior record high of 62 in 2008.
- In an interesting development, OPEC officials met with U.S. shale producers in an attempt to foster a truce between the world’s three largest producers amidst the Russia-Saudi price war. The U.S. contingent has been invited to the upcoming OPEC meeting in June.
Economic Release Highlights
- February retail sales fell 0.5% in what is likely the beginning of 2-3 difficult months for retailers.
- The March Housing Market Index (homebuilder sentiment) maintained a decent reading of 72, losing only 2 points to some of the highest readings we’ve seen in 35 years. February housing starts of 1.599mm and existing home sales both handily beat consensus estimates.
- The January JOLTS release of 6.963mm job openings exceeded estimates providing some comfort that the recent decline in openings may have been indicating a slowing job market.
- Initial jobless claims of 281k last week are too early to be showing CoVid impact.
- February industrial production beat estimates (0.6% vs 0.4%).
- March Philly and NY Fed readings on business conditions are showing CoVid-19 effects. March Empire State general conditions experienced its largest drop on record, falling 34.4 points from 12.9 in February to -21.5.
