Chief Economist & CIO
Summary: Yesterday was a true Black Thursday, with record carnage in many European bourses and the worst session in decades in the US. The ECB Lagarde press conference yesterday was widely seen as disaster. And despite massive US Fed liquidity provision, all assets declined yesterday on a brutal dash for cash.
Global markets are now driven by investors moving to cash or T-bills as they are not looking to hedge, diversify or for a safe haven, but to protect their principal. This is not about the return on the money, but getting the money returned. This is classically a late cycle development, but needs a catalyst to reverse, which we believe will only come through a global coordinated policy response. Something Mr. Trump has done his best to destroy over the last four years and hence very difficult.
What instruments to watch?
What is going on?
Black Thursday: a weak session turned into a veritable crash yesterday as ECB President Lagarde’s announced new measures and especially here press conference were widely viewed as a disaster and triggered one of the worst drops in a number of European bourses in history. Italy’s FTSEMIB ended the day down -16.9%, the German Dax down -12.2% and the EuroStoxx50 down -12.4%.
Is Lagarde the “anti-Draghi”? Rather than providing some support for the market with a commitment to do whatever it takes to encourage stability, ECB President Lagarde spooked the market in the press conference by saying that it isn’t the ECB’s job to “close spreads” and that her ECB would not be “whatever it takes, part two”. In the wake of her comments, the Italian Bond Future, BTP, was limit down, an indication of how ECB disappointed on the magnitude of the response.
Historic drop in the S&P 500: yesterday was the fifth worst day for the S&P500 in its history since the mid-1920’s and the worst since the October 1987 crash. The market failed to bounce even as the New York Fed announce special repo operations totaling some $1.5 trillion yesterday and promised additional trillions in liquidity.
Risk-on today? The measures yesterday from the Fed saving the money market funds and the repo market seem to have backstopped the system for now. In addition Spain and Italy have instituted short sale bans. STOXX 50 futures are up almost 6% from the session lows joining Asian equity markets.
Credit ETFs have historic discount: several ETFs tracking benchmark indices in credit and high yield bonds have historic discounts showing the liquidity stress. Under the right dynamics and risk coming back traders might today try to close that NAV discount setting the market up for a rally in credit today.
US is just now shutting down: widespread sporting event bans and bans on gatherings of various size are going into effect across the US. Disney shut its theme parks and New York City has declared a state of emergency. The US jobless claims for February 29 show no uptick in claims from recent averages.
Dash for cash: US long bonds failed once again to provide a safe haven as yields at the long end of the curve were sideways and even slightly higher in the case of the 30-year US benchmark. Likeways, gold prices collapsed some $60 yesterday.
Corporate credit carnage: corporate bonds were under enormous selling pressure yesterday as the LQD ETF of investment grade bonds sold off some 5% and is down -12.3% from its cycle high of just four days ago.
What we are watching next?
Today it is critical to find out whether the market deleveraging has reached a near-term climax as authorities will scramble to bring measures to soothe nerves.
Fiscal in the driver’s seat. The first key is for EU commission and EU national officials to come out as a united front and announce an abandonment of 3% budget deficit rules and a commitment to avoid a collapse of banks and businesses. Likewise in the US, where Congress and the Trump administration must shoot something big and effective at the market today.
What is our trading focus?
Extraordinary volatility make trading anything here difficult…
Credit and credit spreads remains the focus point. If things don’t change we could have credit event soon. All the signs are there. Keep close eye on: HYG, JNK and even LQD ETF’s (the first two are high yield ETFs and the last an Investment Grade ETF).
Commodities may try to find some support today. Especially crude oil which helped kick off the global rout on Monday. While the market is coming to terms with the biggest demand and supply shocks in recent memory, the market may take some comfort that we did not challenge Monday’s low yesterday.
Calendar (times GMT)
1400 – US Mar. Preliminary University of Michigan Sentiment – this is an interesting one to watch after the recent surveys were near all-time highs – the size of the shock lower will point to the risk of weak consumer activity.
2024: The wasted year
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
