Contagion
February 24, 2020
–Markets have finally caught coronavirus, with ESH -81 at 3258.00 and mini-Nasdaq -283 at 9175. The ten year yield is 1.42, just about 6 bps from the all-time low. ESH should have initial support 3225 to 3250, while NQH should hold above 9000. On Friday 0EH 9875 straddle settled 15.5 vs 9878 in EDH21. This morning the contract is 9.5 higher at 9887.5. On Friday FFG0/FFG1 settled -52.25, indicating two eases on the year. Market action today suggests that may be an undershoot. Several Fed papers and officials have suggested that the Fed shouldn’t ‘keep its powder dry’ in a crisis, but rather should move swiftly and aggressively. Brainard echoed the point in her Thursday speech. “This finding leads the authors to conclude that these policies should be deployed quickly and aggressively in the future through a plan that is communicated in advance.” I don’t know if we can say the ‘plan’ has been communicated precisely, but the message the market has relied on is: ‘the Fed has our backs’.
–Today’s news includes Chgo Fed Natl Activity Index, expected -0.90 from -0.35 and Dallas Fed Mfg, expected to pop up to +11 from -0.2. We saw last week with Philly Fed (strong) and Markit PMI’s (weak) that the market doesn’t care about rear-view strong data, but is hand-wringingly concerned about signs of weakness. On top of that, we have Bernie gaining strength just like the virus or a swarm of locusts. In a fairly recent interview with Bloomberg news, Druckenmiller was asked about a hedge in case Bernie wins. His response: “There’s no hedge, you just sell everything.”
–When things get a bit crazy, it’s not uncommon to see ten year vol 5.5 to 5.8 and thirty-yr above 10. On Friday I marked April 10y at 4.8 and USJ at 9.4. The bold will be looking for places to sell treasury calls against record low yields and high vols, but it may still be early.
–Gold rocking this morning with GCJ up $35/oz to $1684. By the way, from 1934, when Roosevelt devalued the dollar by raising the price of gold from $20.67 to $35, through the post-WWII Bretton Woods Agreement when $35 was again mandated as the price, through 1987, gold held at $35… today’s net change. In August 2011 it exceeded $2000.
