S&P 500, US Treasuries, US Dollar Talking Points
- US equites saw an aggressive sell-off last week; and the early week bounce has largely been faded-out already.
- While the S&P 500 remains at a key area of support, risk aversion remains aggressive, as evidenced by a deep drop in US Treasury yields.
- A brutal amount of uncertainty remains, as fear of a panic appears to be creating panic itself, even as details remain unknown about both the R0 and the mortality rate of Coronavirus.
S&P 500 Rally Gets Faded Despite FOMC Emergency Cut
This week can’t close fast enough, at least for equity bulls. It’s been a dizzying turn-of-events over the past two weeks as the S&P 500 has fallen from a fresh all-time-high down to a key area of chart support, plotted around the August 2019 swing-low. This entails a pullback of 16% in a very short period of time, sparking concern that a larger risk-off move may be on the horizon.
S&P 500 Daily Price Chart: 4.5 Months of Gains Wiped Away
The initial force of the pullback, the bulk of which showed up last Monday-Thursday, was so threatening that the Federal Reserve did something this week that rarely happens: An out-of-meeting emergency rate cut by 50 basis points. The last time such a move happened was the Financial Collapse; but through all of the proceeding risks that have been faced since then, no such move or situation had shown up. Until now.
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Perhaps ironically this seemed to only scare market participants even more than they already were. Equities quickly sold off on Tuesday, and caught a mercy-bounce on Wednesday. But, through it all, a level of resistance held buyers at bay until that selling pressure could re-appear on Thursday and drive into the Friday morning NFP release.
S&P 500 Two-Hour Price Chart
SPX500 on Tradingview
This begs the question as to whether the S&P 500 is on the cusp of a larger, deeper reversal; or whether we see a similar return of the ‘buy the dip’ mentality that’s become commonplace in the backdrop since the Global Financial Collapse. With Central Banks rushing to support global markets in times of stress, the prevailing thought has been that the very same forces that control monetary policy and, in some cases, currency issuance would usher in whatever strategy they needed in order to keep global markets from collapsing.
Never has this been more at question than now, as US Treasuries have put in a significant rally to the point of pushing yields to deep all-time-lows in both 10 year notes and 30 year bonds. Just the move in the 10-year this week is jaw-dropping; but the 30-year has been shocking as well.
US Treasury 10-Year Note Yields, Monthly Chart: Plummeting to All-Time-Lows
Emergency Rate Cuts Did Nothing Positive for the Risk Trade
Shockingly, the Fed rushing to the aid of markets has, thus far, produced very little by way of positive results and, arguably, has helped to create even more uncertainty than what was showing before.
This also indicates that the current risks permeating through markets are unlikely to be quelled with a mere 50 bp loosening; and likely, markets want to hear the Fed remark on the possibility of QE in order to replace their ‘Not QE’ strategy of supporting the repo market.
Thickening the drama – the FOMC meets in two weeks, and tomorrow marks the start of the bank’s blackout period – so no FOMC members will be able to discuss monetary policy with the media until after the rate decision on March 18th. This leaves markets, particularly equity markets, in a rather vulnerable state as a huge amount of uncertainty remains around Coronavirus.
So, while the S&P 500 does have a case to be made for support at current levels; the prospect of holding over the weekend is even more daunting than usual as a number of uncertainties remain and it doesn’t appear as though global markets have much confidence that the Coronavirus situation is yet under control.
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The one major response to those emergency cuts were a strong sell-off in the US Dollar, which plunged down to a fresh yearly low after hitting a three-year-high just two weeks ago. This is a clear-case of macro markets hurriedly pricing-in a significantly more loose and passive Federal Reserve.
US Dollar Weekly Price Chart
A Note on Coronavirus
Markets abhor uncertainty. And that’s pretty much all that Coronavirus is, at this point: Pure unbridled uncertainty.
Data out of China is difficult to incorporate for creating assumptions; we just don’t know how many actual cases are there nor are we certain of mortality rate. Outside of China, we’re largely looking at a very small sample size, so that, too, would be difficult to use in basing mathematical assumptions of how impactful the continued spread of the virus might be.
But perhaps more importantly – this doesn’t appear to be what’s freaking markets out at the moment. What has been more pertinent, and far more certain, is that businesses have slowed down as Coronavirus has spread. This can be evidenced in Chinese economic data and it’s likely to start showing elsewhere with some degree of lag behind the spread of the virus.
So, even if Coronavirus turns out to be a ‘nothingburger,’ business has, in fact, already slown down because of the fear. And the fear of panic can create panic itself, which is likely why global markets are already on edge.
So the argument here isn’t around the medical aspect of Coronavirus, although if we do find a higher ‘R0’ or a larger mortality rate, the declines will likely worsen. At this point, the big fear is the damage that’s already been done and we’re likely going to continue to see that in economic data until confidence is restored that the US Government has a cohesive plan to head-off the continued spread of the virus.
Ahead of the weekend – the S&P 500 finds itself at an area of support. News and headlines over the weekend will likely determine whether this support holds or whether the index punches down to a fresh low.
S&P 500 Daily Price Chart
SPX500 on Tradingview
— Written by James Stanley, Strategist for DailyFX.com
Contact and follow James on Twitter: @JStanleyFX