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Short sellers on Wall Street are aware of a single risk that could spoil their party: A surprise rate cut or even liquidity injection from the Federal Reserve. That's according to IPO Edge Editor-in-Chief John Jannarone, who joined Cheddar TV live at the closing bell late Thursday as the S&P 500 and Dow Jones Industrial […]
(Bloomberg Opinion) -- Financial-market volatility is painful. From mom-and-pop investors suddenly seeing red in their 401(k) plans to large institutions scrambling to hedge their gigantic portfolios, this past week has been record-setting in any number of ways. The one example that’s bound to be repeated often: The S&P 500 Index plunged the most since 2008. Minds tend to wander in the same direction when hearing that particular year. So let me just say this right now: There’s virtually no evidence that the world is veering toward another financial crisis. The rapid decline in Treasury yields and the fastest correction ever in stocks is, at least as of now, purely a market-driven phenomenon. That’s bound to strain some mutual funds, no question. Maybe some hedge funds, too. But it’s hardly apocalyptic. Here are just a couple of examples of scary charts that truly don’t reflect anything about the health of the financial system; rather, they are just another way of measuring the quick sell-off in equity markets.First there’s the often-cited market “fear gauge,” the CBOE Volatility Index (VIX). It jumped to as high as 49.48 on Friday, the highest level since the so-called Volmageddon episode in early 2018. Then there’s the fact that the Bloomberg U.S. Financial Conditions Index has been absolutely crushed in recent days and reached its lowest level since early 2016. But the inputs to this index are largely market-based, like the levels of the S&P 500 and the VIX, as well as yield spreads between Treasuries and corporate bonds rated triple-B and below investment grade, which have both widened significantly.So what sorts of metrics are worth watching to determine whether a banking crisis is unfolding beneath the market chaos? Some traders look to the London interbank offered rate and other money-market benchmarks. There, the three-month Libor plunged 11.8 basis points on Friday to 1.46275%, the steepest one-day drop since December 2008. This isn’t what you would expect to see if financial institutions were facing any sort of turmoil, given that it’s the rate at which large global banks lend to one another. The drop merely reflects expectations of significant central-bank easing in the near future. A spread known as FRA/OIS, which measures market expectations for the gap between Libor and the Overnight Index Swap Rate, are rising a bit but still remain comfortably below levels seen in each of the past two years and certainly nowhere near the levels of the crisis.Then, of course, there’s the Federal Reserve. There’s a lot of frustration that policy makers haven’t yet indicated that interest-rate cuts are imminent. “I wouldn’t want to prejudge the March meeting,” St. Louis Fed President James Bullard said on Friday, mimicking comments earlier this week from other policy makers. “We are going to want to monitor events right up until the meeting.” This could be contributing to the market’s angst.Still, few can dispute that the central bank has made significant strides to insulate the banking system from market stress. The Fed’s balance sheet expanded rapidly in the final months of 2019, which, somewhat ironically, had been cited by some investors as the reason behind the surge in equity prices. Stocks may be tumbling, but reserves at the Fed sure aren’t: They reached $4.18 trillion earlier this month, up from $3.76 trillion at the end of August. Expanding out to include the European Central Bank, the Bank of Japan and the Bank of England, their balance sheets as a percentage of gross domestic product remains close to a record. It’s an open question whether that’s a good thing for the health of their respective economies, but it makes it easier for the banking sector to withstand a severe slowdown.That’s not to say financial system is impenetrable. September’s repo meltdown served as a stark reminder of what can happen when critical market plumbing stops working. The Fed was able to step in, though, and it’s mostly functioning normally now.There’s still room for improvement. That’s why it was such a big deal this week that JPMorgan Chase & Co. said it plans to borrow funds through the Fed’s emergency lending facility from time to time this year in an exercise designed to break the stigma attached to it. The discount window is intended to provide emergency liquidity to banks that otherwise have healthy balance sheets. Randal Quarles, the Fed’s vice chairman for banking supervision, has said better access to the window would reduce demand for excess reserves at the Fed which in turn would enhance liquidity in repo and other money markets.I have written before about how the financial crisis caused a fundamental shift in who shoulders market risk now. Instead of Wall Street banks holding troves of corporate bonds and other risky assets, and stepping in when the markets are chaotic, they’ve tended to reduce their inventories over the past decade. That means asset managers, which are far less essential to the underpinnings of the global economy, will be increasingly on their own when losses start to mount. That’s a healthy development.As Bloomberg News’s Sebastian Boyd put it, in 2008 “reasonable minds could wonder out loud whether we were watching the death throes of global capitalism.” You wouldn’t be rational saying that today. Investors are witnessing the outbreak of a virus that governments around the globe are struggling to contain, which in turn has caused pockets of the global economy to grind to a standstill. Germany is quarantining 1,000 people. Switzerland is banning large events, including the Geneva car show. Milan looked like a ghost town. In such an environment, is it any wonder that the share prices of global companies have repriced, or that sovereign debt markets are bracing for a severe hit to growth?The coronavirus has infected markets, the economy and the habits of people worldwide. But if it’s any consolation, the financial system is proving so far to be immune.To contact the author of this story: Brian Chappatta at email@example.comTo contact the editor responsible for this story: Daniel Niemi at firstname.lastname@example.orgThis column does not necessarily reflect the opinion of Bloomberg LP and its owners.Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.For more articles like this, please visit us at bloomberg.com/opinionSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
Vermont Senator Bernie Sanders may be surging in the polls ahead of Super Tuesday, but some on Wall Street have made their own conclusions on what November will bring: four more years of President Donald Trump. Ninety-five percent of participants in a Deutsche Bank survey of investors, economists and other market participants released earlier this month said Trump, a Republican, was either "extremely likely" or "slightly likely" to win the general election. The latest Reuters/Ipsos poll, conducted Feb. 19-25, showed Sanders with a seven percentage-point lead over Trump in a hypothetical general election matchup.
The CBOE Volatility Index , widely considered to be Wall Street's fear gauge, scaled a two-year high in the last session as U.S. indexes confirmed their entry into correction territory, with investors dumping riskier assets amid fears of a pandemic. Plus500, which facilitates trading of contracts for differences (CFDs) internationally, pointed to "heightened volumes of trading across global financial markets" in the recent period, without disclosing the time frame. The positive trading update is just weeks after the company posted a plunge in 2019 profit as a regulatory clampdown on high-risk financial market betting hampered trading activity.
Stocks and oil prices tumbled again on Tuesday and the benchmark U.S. debt yield hit a record low on growing concern about the effects of the spread of coronavirus on the global economy. The market sell-off followed the largest losses in stocks in over two years on Monday and accelerated after the U.S. Centers for Disease Control and Prevention said Americans should begin to prepare for community spread of the disease. The World Health Organization, however, has said the epidemic in China, where it began in December, peaked between Jan. 23 and Feb. 2 and has been declining since.
So far this year, it hasn’t taken much of a blow to knock investor sentiment back down after bubbling up – and that’s a good sign for stocks, according to at least one strategist.
When worries over the coronavirus shook U.S. stocks out of a period of quiet trading last week, investors wondered if the outbreak was the “Black Swan” event that would trigger a sharp decline. The sharp snapback has revived concerns among some investors that market participants are growing overly confident that easy money policies from central banks will underpin prices, despite serious risks to global growth from the coronavirus. Two deaths have been reported outside mainland China, in Hong Kong and the Philippines, prompting countries to quarantine hundreds of people and cut travel links with China.
Stocks closed lower on Tuesday afternoon after reports that the U.S. would not be rolling back tariffs on China until after the 2020 presidential elections. One expert is pessimistic that relations between the two countries will improve anytime soon.
With the end of the year and the decade fast-approaching, Wall Street strategists have begun to deliver their expectations about where the stock market will close out 2020.
U.S. stocks extended last week’s gains Monday morning as ongoing optimism over trade deals helped push risk assets higher. The S&P 500 and Nasdaq each opened at fresh record highs.
Confidence is soaring among small business owners. But one group of small business owners is becoming more pessimistic about America’s economy — small business manufacturers.
Elevated net short positions in Cboe Volatility Index futures are reminiscent of a similar spike in 2017, when prolonged calm in U.S. stocks prompted a rush into short-volatility exchange-traded products. The index has risen past 14.
President Trump's latest comments on the trade war front should serve up a valuable lesson to investors.