Covid-19 finally blasted markets last week resulting in the fastest selloff from all-time highs on record while treasury yields plunged to record lows. Clear evidence that the outbreak in China has lept borders (globally 82,000 cases and 2,800 deaths) has fanned fears of an emerging global pandemic. While data in China suggests a plateau, South Korea, Iran, and others (U.S., Mexico, Nigeria, New Zealand, Italy) are now cycling. The CDC indicated some level of disease clustering in the U.S. is highly likely given the global footprint and that social containment measures (cancelled events, school closures, etc..) should be expected. That said, warmer weather, containment measures, and eventually commercial vaccines should ultimately prevail – the key question being whether that happens outside of a global recession. While there will clearly be a negative economic impact from Covid-19, the fall in interest rates, supportive central banks, respectable wage growth, and a booming U.S. housing market should soften the blow at the margin with our base case still avoiding recession.

Market Anecdotes

  • Last week could be categorized as utter chaos in equities (-11.5%), commodities (-10.5%), rates, and credit markets with signs of capitulation selling becoming clear.  Interestingly, the USD has stayed relatively contained throughout due to the collapse in long rates and pricing of rate cuts.
  • Total net cases of Covid-19 in China continue to decline as more people have recovered than the number infected – the ratio has improved from 4x to 10x since February 10th.
  • South Korea and Iran have seen cases rise dramatically while the remainder of Europe and Asia are closely monitoring their own backyards.
  • Powell’s address on Friday reflected confidence in the U.S. economy with a corresponding nod to prevailing risks and indication that the Fed will use its tools to support the economy.
  • Cleveland Fed President Mester suggested economic impact in the U.S. is currently evident on the supply side, but not yet impacting aggregate demand in effort to curtail market expectations for rate cuts.  Fed funds futures markets disagree.
  • European stocks suffered the same fate, falling 13% over seven sessions which is only surpassed by Black Monday, GFC, and the 2011 U.S. debt downgrade.
  • The VIX hit its highest level since China floated the yuan in 2015 and the high premiums paid in the spot market have the VIX curve trading in nearly unprecedented backwardation.
  • High yield spreads gapped from 3.66% to 4.65% over the week, their largest move since 2011.  However, exenergy spreads and the absolute level of yields remain at reasonable levels.
  • 1-year UST yields (1.35%) joined the 10yr (1.12%) and 30yr (1.65%) at record lows last week.  Despite the collapse in rates, real yields are still well above record lows.  Yield curve slopes (3m/10yr -0.14%) (2yr/10yr 0.27%) are flashing rate cuts but not necessarily recession.
  • Last week was the eighth time since 1990 that gold, UST, and VIX were all two standard deviations above their 50-DMA.

Economic Release Highlights

  • January YoY headline and core PCE registered 1.7% and 1.6% respectively, again lacking any inflationary concerns.
  • January MoM personal income (0.6% vs 0.3%) came in higher than forecast while consumer spending (0.2% vs 0.3%) was relatively in line.