Chief Investment Officer
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.
A new fragmented world order can render some of today's infrastructure obselete, but it also calls for massive new investments across the globe, which requires a new set of strategic and tactical investment strategies.
Steen Jakobsen,
Chief Investment Officer
As globalisation turns to fragmentation, China seems set on playing a role in the global economy, while simultaneously working towards proofing its own economic situation from external shocks and crises.
Redmond Wong,
Market Strategist
The recent bank runs and ensuing challenges are reminicent of something we've seen before. Will it end like the S&L crises of 1986 and 1995?
Chris Dembik,
Head of Macroeconomic Research
Equity markets need to recalibrate to another - fragmented - global world. What's your view on equities in this market - are they going up or down?
Peter Garnry,
Head of Equity Strategy
With every development comes new opportunites, some of which could be in India. Have you considered the country as a part of your diversification strategy?
Charu Chanana,
Market Strategist
A collar is an option strategy that allows some protection while maintaining some upside potential. What investment would you like to use a collar strategy for?
Hans Oudshoorn,
Trainer Academy
There are arguments to be made for many commodities to have upside. Which are you paying the most attention to this quarter?
Ole S. Hansen,
Head of Commodity Strategy
In a very challenging macro environment, which currencies do you think will come out on top?
John J. Hardy,
Head of FX Strategy
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)
