Thursday, March 19, 2020

The Median US Stock Is Now Down 50% From Its Highs As World Loses $25 Trillion In A Month

From Zero Hedge:

Global stock and bond markets have seen $25 trillion of 'paper' wealth erased in the last month, wiping out all the gains from the Dec 2018 crash lows....
Source: Bloomberg
Global bonds are actually still up around $5 trillion while global stocks have lost around $5 trillion since the Dec 2018 lows, and a lot of those losses come from the US markets where the median stock is now down 50% from its highs... (because the Value Line index below is based on a geometric average the daily change is closest to the median stock price change)
Source: Bloomberg
As Washington signs and promises more and more bailouts and helicopter money drops, USA sovereign risk is starting to get a little spooked...
Source: Bloomberg
Systemic risk remains extremely elevated...
Source: Bloomberg
Which makes sense when the world's largest banks are seeing their credit risk explode like it did ahead of the Lehman crisis...
Source: Bloomberg
And despite the endless liquidity from global central banks and polititicians, financial conditions are tightening at their fastest rate ever...
Source: Bloomberg
And the real 'fear' trade is now at its most extreme since the peak of the Lehman crisis...
Source: Bloomberg
Policy Fail - The Dollar rallied for the 8th straight day, soaring to a new record high despite The Fed opening unlimited FX Swap Lines...
Source: Bloomberg
This is the largest 8-day rally in the DXY Dollar Index... ever! Greater even than when Soros broke The Bank of England in Sept 1992...
Source: Bloomberg
But The Fed will "never give in"...

Since the COVID-19 Malrarkey began, Chinese stocks remain the leaders (down only 12%), while Europe is the laggard...
Source: Bloomberg
US equity markets soared today (thanks to the biggest short-squeeze in 7 years), but failed to erase yesterday's gains... (NOTE Nasdaq just tagged unch from Tuesday and then rolled over - algo-tom-foolery)...
On the week, it's still a shitshow with The Dow worst, down 13%...
Today saw "Most Shorted" stocks soar 8% - the biggest short-squeeze since August 2013...
Source: Bloomberg
Directly virus-affected sectors rebounded today...
Source: Bloomberg
VIX fell notably today, testing below 70 ahead of tomorrow's Quad-Witch option expiry...
Meanwhile, Boeing credit risk continues to soar (as questions rise about whether they should be bailed out or not)...
Source: Bloomberg
And Ford suspended its dividend and withdrew its guidance sending its credit risk soaring...
Source: Bloomberg
Credit markets were not buying what stocks were selling today...
Source: Bloomberg
Treasury yields were mixed with the long-end higher and rest of the modestly lower (despite a huge range)... (10Y yields briefly dipped below 1.00% today)
Source: Bloomberg
Another late-day purge in yields pushed 30Y to end higher on the day...
Source: Bloomberg
Munis were massacred today - 10Y yield spiking 47bps!! (MUNI-BOND OUTFLOW ALMOST THREE TIMES PREVIOUS RECORD)
Source: Bloomberg
EUR tumbled today to 3 year lows today in biggest loss since Jan 2001 (bigger than Jun 2016 Brexit vote loss)
Source: Bloomberg
And Cable crashed to the weakest since 1985...
Source: Bloomberg
Cryptos had a big day with Bitcoin Cash outperforming...
Source: Bloomberg
Today's commodity markets were dominate by oil's biggest rally ever...however, given the carnage in crude, WTI is still down 20% on the week...
Source: Bloomberg
Today was oil's biggest daily gain... ever. Bouncing off a $20 handle and helped by talk of Trump intervention, WTI was up around 25%!! However, in context, it doesn't look like much (apart from the insane $2 spike at settlement for a 35% surge intraday)...
Oil and the dollar both rallied together late on...
Source: Bloomberg
Gold was modestly lower on the day but silver actually managed gains, bouncing off $12 again..
And on a somewhat related note, is this the other reason why gold has been sold?
Source: Bloomberg
Volatile day in PMs with Palladium best and Platinum worst...
Source: Bloomberg
Finally, as Bloomberg notes, anyone referring to the past month’s plunge in U.S. stocks as a crash has history on their side. The S&P 500 Index’s volatility for the 10 trading days ended Wednesday was 122%, according to data compiled by Bloomberg.
Source: Bloomberg
Only two periods have produced higher readings: the aftermath of the 1929 Black Tuesday crash and the 1987 Black Monday crash. The volatility gauge climbed more than 17-fold from Feb. 19, when the S&P 500’s latest bull market ended, through Wednesday.
The FRA-OIS spread spiked once again today signaling major tensions in the liquidity markets remain...
Source: Bloomberg
And global basis swaps spiked again (led by JPY) as the dollar shortage worsened today...
Source: Bloomberg
In other words - whatever The Fed is doing - "It's Not Working!"
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Wednesday, March 18, 2020

'A Ticking Time Bomb': Coronavirus Crisis Looms In Africa

From Zero Hedge:

The Covid-19 outbreak has now been confirmed in 30 out of Africa's 54 countries.
Bruce Bassett, a data scientist at the University of Cape Town, warned that a virus crisis in Africa is about to begin and could decimate low-income communities across the continent, reported Science Magazine.
"My concern is that we have this ticking time bomb," said Bassett, adding that Africa's handling of the pandemic could be underwhelming due to the weakest health care systems in the world.
He said social distancing would be hard to enforce across overpopulated cities and slums in some of the world's poorest countries.
"We really have no idea how COVID-19 will behave in Africa," said HIV researcher Glenda Gray, president of the South African Medical Research Council.
WHO Director-General Tedros Adhanom Ghebreyesus said last month that the fast-spreading virus will strike Africa and trigger a health crisis. 
Since Africa confirmed its first case in Egypt on February 14, and by early March, there were several cases in Algeria and Nigeria. Now cases across the continent have exploded to 450. 
Current cases aren't an accurate representation of reality, and most are laggard, due to the lack of test kits on the continent. 
At the moment, the most affected region is North Africa, where community spreading has been underway for more than a month.
Egypt has recorded 196 cases and four deaths; South Africa recorded 62 cases and no deaths.
In east Africa, there are over 20 cases across the six countries, but the issue is that many of these countries lack test kits.
Senegal has been the most hard-hit West African country with 26 cases, many of which originated from a citizen who traveled to Italy.
As confirmed cases in Africa have increased in the last several weeks, dramatic steps have been taken to reduce air traffic to and from virus crisis regions, such as Asia, Europe, and the Middle East.
South Africa has revoked 10,000 visas issued to people from China and Iran, two countries that have some of the highest confirmed cases and deaths.
South Africa's health minister Zweli Mkhize told reporters this week that community spreading is underway: 
"The reality is this: For now, individuals that have been infected thus far are people who can afford going on holiday abroad or they travel for business. Those individuals also have accommodation for self-quarantine," the minister said.
"However, when this outbreak starts affecting our poor communities, where families do not have enough rooms or spaces to quarantine those affected, we will experience a crisis."
Mkhize said enforcing a lockdown in all communities would "be very hard." 
Some experts are worried that the fast-spreading virus has moved across Africa undetected:
"We have to ask the question: How strong are our monitoring systems, especially those in rural areas or with limited technology? That is a reality on the continent, and perhaps why we have not yet seen a surge in cases," public health researcher Dr. Shakira Choonara told AP News.
Professor Cheryl Cohen, with South Africa's National Institute for Communicable Diseases, warned that confirmed cases and deaths could exponentially rise in the weeks ahead.
The world must prepare for the next outbreak zone, which is Africa, where the health care system could easily be overpowered by the virus and lead to soaring mortality rates. 
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Satellite Images Show Massive Decline In Pollution Over Italy Amid National Lockdown

In a clear illustration of the disruptive effect that the coronavirus has had on Italy, satellite imagery has shown a massive decrease in air pollution over the country as the government struggles to gain an upper-hand on the crisis by placing all residents under strict quarantine measures on a national level.
The imagery compares air pollution levels, specifically nitrogen dioxide emissions, between January 1 and March 11, and is based on data from the Copernicus Sentinel-5P satellite. Images taken over China in February also revealed a drop in pollution.
In a press release, the European Space Agency (ESA) noted that the reduction has been particularly striking in northern Italy, which “coincides with its nationwide lockdown to prevent the spread of the coronavirus.”
Copernicus Sentinel-5P mission manager Claus Zehner said:
“The decline in nitrogen dioxide emissions over the Po Valley in northern Italy is particularly evident. Although there could be slight variations in the data due to cloud cover and changing weather, we are very confident that the reduction in emissions that we can see coincides with the lockdown in Italy, causing less traffic and industrial activities.
These measurements, globally available thanks to the free and open data policy, provide crucial information for citizens and decision makers.”
Josef Aschbacher, ESA’s Director of Earth Observation Programs, added:
“Copernicus Sentinel-5P Tropomi is the most accurate instrument today that measures air pollution from space.
These measurements, globally available thanks to the free and open data policy, provide crucial information for citizens and decision makers.”
ESA ✔@esa
New data from @CopernicusEU  reveal decline of air pollution, specifically NO2 emissions, over Italy. This reduction is particularly visible in northern Italy which coincides with its nationwide lockdown to prevent spread of the 👉http://www.esa.int/ESA_Multimedia/Videos/2020/03/Coronavirus_nitrogen_dioxide_emissions_drop_over_Italy …
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On Monday, Italian authorities reported an additional 349 deaths resulting from the novel virus, raising the total death toll from the outbreak to at least 2,158.
The figures from the Italian Civil Protection Department show that the number of infections is continuing to rise, climbing 12 percent from Sunday to reach 23,073.
The government’s unprecedented and stringent measures are meant to curb the lethal spread of the virus, which was initially met with a lack of preparedness and confusion on the part of state authorities and an ill-informed population.
On Monday, the Italian government approved an economic aid package for up to €25 billion (nearly $28 million USD), including aid for workers who risk losing their jobs and baby-sitting vouchers for parents, in a bid to help struggling Italian businesses and families cope with the prolonged national lockdown.
CoViD-19 first emerged last December in Wuhan, China, and has since spread to roughly 150 countries and territories, causing the World Health Organization (WHO) to declare the outbreak a pandemic.
World Health Organization Director-General Tedros Adhanom Ghebreyesu told reporters:

“More than 132,000 cases of Covid-19 have now been reported to the WHO from 123 countries and territories; 5,000 people have lost their lives – a tragic milestone.
Europe has now become the epicenter of the pandemic, with more reported cases and deaths than the rest of the world combined, apart from China. More cases are now being reported every day than were reported in China at the height of its epidemic.
...Our message to countries continues to be: you must take a comprehensive approach.
Any country that looks at the experience of other countries with large epidemics and thinks ‘that won’t happen to us’ is making a deadly mistake. It can happen to anyone.”
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Tuesday, March 17, 2020

Fed Launches Primary Dealer Credit Facility Which Will Accept Stocks As Collateral

From Zero Hedge:

Earlier today, when discussing the launch of the "Lehman crisis playbook" in response to the Global Covid Crisis, we listed the alphabet soup of measures the Fed may launch which are a replica of the measures adopted in the aftermath of the Lehman collapse. These included the AMFL, the MMIFF, the TAF and last but not least, the PDCF, or Primary Dealer Credit Facility, which as Rabobank said "would provide overnight funding to primary dealers, similar to the way the discount window provides a backup source of funding for depository institutions."
Just three hours later, at 6pm ET, the Fed, as expected, announced the establishment of a Primary Dealer Credit Facility (PDCF) "to support the credit needs of households and businesses." What the Fed really meant is that it is now launching a way for dealers to monetize the stocks they own, as the facility will be collateralized, among others, by "equity securities."
As the Fed announced, the PDCF "will offer overnight and term funding with maturities up to 90 days and will be available on March 20, 2020" and will be in place for at least six months and may be extended as conditions warrant.
But here is the punchline:
Credit extended to primary dealers under this facility may be collateralized by a broad range of investment grade debt securities, including commercial paper and municipal bonds, and a broad range of equity securities.
This means that as of this moment, equities - which are worth zero in a worst case scenario - are eligible collateral for Fed liquidity.
Here are some more details on the eligible collateral:
Collateral eligible for pledge under the PDCF includes all collateral eligible for pledge in open market operations (OMO); plus investment grade corporate debt securities, international agency securities, commercial paper, municipal securities, mortgage-backed securities, and asset-backed securities; plus equity securities.
That said not all equities are eligible as collateral: "the following equities would not be eligible: exchange traded funds (ETFs), unit investment trusts, mutual funds, rights and warrants"
Who will determine the value of the soon-to-be-bankrupt stocks pledged as collateral?
The pledged collateral will be valued by Bank of New York Mellon according to a schedule designed to be similar to the margin schedule for lending by the Discount Window, to the extent possible.
For those who many not remember, the PDCF was one of the biggest bailout abortions of the financial crisis, one which we discussed extensively in describing how dealers abused the Fed as they pledged totally worthless stocks for which they got "par" value. For more see:
We now look forward to Congress never asking Powell the only question that matters: how on earth are stocks "money good" securities and hard value collateral.
We also look forward to the market asking just which Primary Dealer(s) is in such dire financial straits that it now needs what is effectively a bailout from the Fed (we have a few ideas).
The 2-page term sheet of the PDCF is below (pdf link).
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Global Financial Crisis 2.0: CPFF Down, AMFL, MMIFF, PDCF And TAF On Deck

Authored by Rabobank US rates strategist Phillip Marey
Today the Fed finally relaunched its Commercial Paper Funding Facility (CPFF). Through this facility the Fed finances a special purpose vehicle that purchases 3 month commercial paper from eligible users. In this way the Fed takes over the role of money market mutual funds and other buyers of commercial paper that stopped purchasing in recent days.
Going forward, with money market mutual funds in need of liquidity we may also see the return of AMLF and MMIFF, while the need for overnight funding by primary dealers could be met by PDCF. An extension of USD liquidity swap line arrangements with a wider set of central banks may also be necessary. And if the stigma attached to the discount window remains a problem, we could also see the return of TAF.
Introduction
Markets were screaming for it, but finally today the Fed relaunched the Commercial Paper Funding Facility (CPFF) in order to deal with the freezing up of the US commercial paper market. At present, the coronavirus outbreak is hitting the cashflow of  businesses, who therefore need to raise cash. At the same time, the money market mutual funds – the regular buyers of commercial paper – are also trying to raise cash in anticipation of outflows from the MMMFs by investors. In other words, the commercial paper market had increasingly become dysfunctional. The reintroduction of the CPFF brings in the Fed as a large buyer of commercial paper and should help stabilize the market.
How does it work?
Through this facility the Fed finances a special purpose vehicle (SPV) that purchases 3 month commercial paper from eligible users. In this way the Fed takes over the role of money market mutual funds and other buyers of commercial paper that stopped purchasing in recent days. This also reduces the pressure on banks providing credit to issuers unable to sell commercial paper anymore. By providing a liquidity backstop for issuers of commercial paper the Fed hopes to stabilize the commercial paper market. Note that through this channel the Fed is also able to provide liquidity to businesses, not only depository institutions which already have access to the Fed’s discount window.
Technicalities
The CPFF2020 will be structured as a credit facility to an SPV authorized under section 13(3) of the Federal Reserve Act, with the approval of the Treasury Secretary. The New York Fed will commit to lend to the SPV on a recourse basis and will be secured by all the assets of the SPV. The US Treasury Department will provide $10bn of credit protection to the New York Fed  in connection with the CPFF, using the Exchange Stabilization Fund.
The SPV will purchase 3 month USD denominated commercial paper (including asset-backed commercial paper) from eligible issuers through the New York Fed’s primary dealers. Eligible users are US issuers of commercial paper, including those with a foreign parent company. The SPV will only purchase paper that is rated at least A-1/P-1/F-1.
There is a limit per issuer to the amount the SPV may own at any time, which is the maximum amount of USD denominated commercial paper the issuer had outstanding on any day between March 16, 2019 and March 16, 2020.
Pricing will be based on the then-current 3 month overnight index swap rate plus 200 bps.
The SPV will cease purchasing commercial paper on March 17, 2021, unless the Board extends the facility.
Why did it take so long?
In recent days markets were screaming for CPFF. Why wasn’t CPFF included in Sunday’s emergency package when the Fed cut rates to zero, launched a new large scale asset purchase program, and set the discount window and USD swap lines  wide open? It looks like post-crisis legislation, in particular the Dodd-Frank Act of 2010, has made it more difficult for the Fed to invoke section 13(3) of the Federal Reserve Act, which is a ‘unusual and exigent circumstances’ clause. In particular, the Fed needs the approval from the US Treasury Secretary. Today, Mnuchin sent a letter to Powell giving him permission to start CPFF2020. It seems that Congress has tied the Fed’s hands and this has not been beneficial to market functioning as we found out in recent days. Perhaps something to reconsider once this crisis is over.
What’s next?
In our FOMC Preview Crash to zero, published last Thursday, we said that the Fed might soon reach for liquidity tools they used during the financial crisis. Three special lending facilities we explicitly mentioned were the Commercial Paper Funding Facility (CPFF), the Money Market Investor Funding Facility (MMIFF) and the Primary Dealer Credit Facility (PDCF). The first was relaunched today.
The second (MMIFF) was designed to provide liquidity for money market mutual funds, stimulating them to extend the term of their money market investments. Instead of scrambling for overnight assets because of liquidity fears, this would help maintain demand for term securities in the money market. Although no loans were made under the MMIFF, the facility could be useful this time. While CPFF helps issuers of commercial paper, money market mutual funds are still in need of liquidity. A related facility, which peaked at $140bn in 2008, was the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) which provided funding for depository institutions purchasing asset-backed commercial paper from money market mutual funds. The third (PDCF) would provide overnight funding to primary dealers, similar to the way the discount window provides a backup source of funding for depository institutions.
Another facility we would like to mention is the Term Auction Facility (TAF), which is basically a discount window without the stigma. On Sunday, the Fed tried to make the discount window more attractive by slashing the primary credit rate to 0.25% and encouraging banks to use the discount window, but if these incentives would fail to get banks to the discount window – because of the stigma attached to it – then relaunching TAF could help alleviate bank funding strains. In fact, today Loretta Mester (Cleveland Fed) mentioned TAF in addition to CPFF.
We also discussed a special lending facility that never went away: the USD liquidity swap line arrangements with 5 other central banks: the Bank of Canada, the Bank of England, the ECB, the Bank of Japan and the Swiss National Bank. In our view, the Fed could make its dollar liquidity swap lines available to a wider set of central banks if necessary.
And as we have argued before, the sooner the Fed introduces a standing repo facility the better.
For now, the Fed will have to adjust its repo operations on a daily basis. Besides these liquidity tools, the Fed still has room to expand its large scale asset purchase program and it could also hold down longer-term rates by strengthening its forward guidance on the target range for the federal funds rate.
All in all, the Fed is not done yet.

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