Category: Market Action

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Another day in the Attack of the Coronavirus:

Stocks plunged on Thursday, falling more than 3 percent for the fourth time in the past two weeks, as investors began to consider that the economic damage caused by the fast spreading coronavirus could be much worse than they had initially expected.

Stocks have traded in wild swings for days, initially triggered by the appearance of large numbers of infections outside of China, where the outbreak originated.

That market volatility continued for a fourth day this week, with the S&P 500 falling more than 3 percent on Thursday afternoon. The index has gained or lost more than 3 percent six times in the past two weeks.
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Worry about long-term growth also pushed the yield on 10-year United States Treasury notes to a new low of 0.9 percent. Because of their relative safety, government bonds are in high demand during bouts of panic over the economy.

TXPR closed at 580.50, down 0.55% on the day. Volume today was 2.33-million, lowest of the past six trading days days.

CPD closed at 11.56, down 0.77% on the day. Volume of 99,390 was the lowest of the past nine trading days.

ZPR closed at 9.17, down 0.43% on the day. Volume of 340,283 was lowest of the past six trading days.

Five-year Canada yields were down 18bp to 0.74% today. Eighteen basis points! That’s awesome.

We had a bit of a respite from constant losses today, as it appears the BoC policy rate cut was fully anticipated. TXPR was actually up 7bp on the day!

PerpetualDiscounts now yield 5.35%, equivalent to 6.96% interest at the standard equivalency factor of 1.3x. Long corporates now yield 3.04%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened slightly (and perhaps spuriously) to 390bp from the 385bp reported February 26.

The Fed slashed its policy rate today:

The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate by 1/2 percentage point, to 1 to 1‑1/4 percent. The Committee is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Loretta J. Mester; and Randal K. Quarles.

This had mixed results:

Stocks in the United States rallied for about 15 minutes after the rate cut, but worries about the Fed’s impotence in the face of economic risks from the coronavirus quickly fueled a market sell-off. By late Tuesday, stocks were sharply lower and bond yields had plummeted to previously unthinkable lows as investors sought a safe place to park their money.

The S&P 500 fell about 2.8 percent, undoing some of Monday’s 4.6 percent surge. The yield on 10-year Treasury notes dipped below 1 percent.

Interest rates are now set in a 1 percent to 1.25 percent range, and Jerome H. Powell, the Fed chair, signaled that further moves were possible. “The virus and the measures that are being taken to contain it will surely weigh on economic activity, both here and abroad, for some time,” Mr. Powell said at a news conference, adding the Fed was “prepared to use our tools and act appropriately, depending on the flow of events.”

But the market’s negative reaction may reflect a recognition that cutting interest rates or engaging in other types of fiscal stimulus will do little to contain the virus that has sickened more than 90,000 people, with major outbreaks taking hold in South Korea, Japan, Iran and Italy.

So now all eyes are on the Bank of Canada:

The Canadian dollar fell against the greenback on Tuesday, giving up much of the prior day’s rally, as the Federal Reserve cut interest rates in an emergency move that investors see the Bank of Canada matching at a policy decision on Wednesday.

At 2:50 p.m. (1950 GMT), the Canadian dollar was trading 0.4% lower at 1.3371 to the greenback, or 74.79 U.S. cents. The currency, which on Friday hit its weakest intraday level in nearly nine months at 1.3465, traded in a range of 1.3319 to 1.3387.
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Canadian government bond yields tumbled across a steeper yield curve in sympathy with U.S. Treasuries. The 10-year yield was down 14.9 basis points at 0.953%, its lowest level since October 2016.

The Canada five year yield was down 15bp to 0.90%. On February 21, just before the Great Coronavirus Panic of 2020, the yield was 1.30%. That’s a fast decline, particularly when considering that the year-end value was 1.69%!

So, the Canadian preferred share market got hit again today; and I’m afraid that the constant repetition isn’t helping my comprehension of the correlation at all! I’m just glad I don’t have to provide any valuations of accounts today – the quote quality is disgraceful. Who knows where anything is priced? But don’t worry – jobs at the Toronto Exchange are protected.

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TXPR closed at 585.84, down 0.71% on the day. Volume today was 2.94-million, highest of the past thirty days, ahead of second-place February 28.

CPD closed at 11.71, down 0.51% on the day. Volume of 417,130 was the highest of the past 30 days, more than double second-place February 27.

ZPR closed at 9.37, down 1.16% on the day. Volume of 474,263 was fourth-highest of the past 30 days, with the top three all occurring last week.

Five-year Canada yields were down 2bp to 1.05% today.

Equity markets did well today, thanks to the Greenspan Put:

Stocks surged in the final minutes of trading on Monday, snapping back from one of the worst weeks for global markets since the 2008 financial crisis as investors seized on promises that the world’s governments would step in to help if the global economy was slammed by the outbreak of the coronavirus.

The S&P 500 jumped 4.6 percent, the biggest single-day leap since late December 2018. The rally followed news that central bankers from the world’s biggest economies would join a conference call with Group of 7 finance ministers on Tuesday to discuss a response to the outbreak, fueling expectations among investors that governments might lower interest rates in tandem.
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Early Monday, both the Bank of Japan and Bank of England pledged to monitor markets closely and safeguard financial stability. Later, the International Monetary Fund and the World Bank issued a joint statement saying that the groups stood ready to help “address the human tragedy and economic challenge” posed by the virus, and the European Central Bank said it “stands ready” to respond to signs of a slowdown.

The conference call will take place tomorrow:

Finance ministers and central bank chiefs from G7 countries will hold talks Tuesday amid rising global uncertainty over the coronavirus epidemic, the US Treasury said Monday.

US Treasury Secretary Steven Mnuchin and Federal Reserve Chairman Jerome Powell “will lead a call with their G7 counterparts tomorrow morning,” the department confirmed in a statement.

The Bank of Canada is expected to join in:

Expectations of a Bank of Canada interest-rate cut this week have rapidly moved from unlikely to imminent as global governments and central banks begin to respond en masse to the escalating economic threat from the COVID-19 virus.

With Canada’s top central bankers in closed-door deliberations for Wednesday’s regularly scheduled interest-rate decision, bond-market indicators show traders have now fully priced in a quarter-percentage-point cut in the Bank of Canada’s key overnight rate, to 1.5 per cent from 1.75 per cent. A week ago, market pricing indicated only 30-per-cent odds of a cut.

The September hiccup in the US repo market was discussed on September 20 and September 23. Now Gara Afonso, Marco Cipriani, Adam Copeland, Anna Kovner, Gabriele La Spada, and Antoine Martin of the New York Fed weigh in with a staff report titled The Market Events of Mid-September 2019:

This paper studies the mid-September 2019 stress in U.S. money markets: On September 16 and 17, unsecured and secured funding rates spiked up and, on September 17, the effective federal funds rate broke the ceiling of the Federal Open Market Committee (FOMC) target range. We highlight two factors that may have contributed to these events. First, reserves may have become scarce for at least some depository institutions, in the sense that these institutions’ reserve holdings may have been close to, or lower than, their desired level. Moreover, frictions in the interbank market may have prevented the efficient allocation of reserves across institutions, so that although aggregate reserves may have been higher than the sum of reserves demanded by each institution, they were still scarce given the market’s inability to allocate reserves efficiently. Second, we provide evidence that some large domestic dealers likely experienced an increase in intermediation costs, which led them to charge higher spreads to ultimate cash borrowers. This increase was due to a temporary reduction in lending from money market mutual funds, including through the Fixed Income Clearing Corporation’s (FICC’s) sponsored repo program.

At 2015.40, the HIMIPref™ FixedReset (Discount) total return subindex is getting perilously close to the August 28, 2019, low point of 1936.03.

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Well, let’s just be grateful that February is a short month:

Stocks tumbled for a seventh consecutive day on Friday, with the S&P 500 index falling about 0.8 percent, bringing its loss for the week to more than 11 percent. It was the worst weekly decline for stocks since the 2008 financial crisis. In early October that year, the S&P 500 fell about 18 percent.

The Dow Jones industrial average fell more than 1 percent on Friday.
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Here’s how the major indexes around the world fared this week:

S&P 500 in United States: ⬇️ 11%

Dow Jones in United States: ⬇️ 12%

FTSE 100 in Britain: ⬇️ 11%

DAX in Germany: ⬇️ 12%

KOSPI in South Korea: ⬇️ 8%

Hang Seng Index in Hong Kong: ⬇️ 4%

Nikkei 225 in Japan: ⬇️10%

I see the TSX Composite was down 2.72% today, and down 8.68% on the week.

And in the Treasury market:

The yield on the benchmark 10-year United States Treasury bonds fell to a record low of 1.16 percent in trading Friday morning, down from 1.9 percent at the start of the year and 2.7 percent one year ago. From Japan to Germany to Australia, every other major economy is experiencing a similar shift.

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TXPR closed at 590.00, down 1.74% on the day and the Total Return version down 4.30% on the week and 3.38% on the month. Volume today was 2.61-million, second-highest of the past thirty days, behind only January 30.

CPD closed at 11.77, down 1.51% on the day. Volume of 127,586 was the fourth-highest of the past 30 days … each of the three bigger days happened this week.

ZPR closed at 9.48, down 0.42% on the day. Volume of 734,205 was second-highest of the past 30 days, behind only February 24.

Five-year Canada yields were down 6bp to 1.07% today.

There is renewed speculation about a Fed rate cut:

Federal Reserve officials signaled a willingness to cut interest rates if the coronavirus outbreak worsens, laying out a scenario in which the central bank might respond as infections and quarantines spread globally.

“We could cut rates if we got a global pandemic that actually develops with health effects that seem to be approaching the same level as seasonal influenza, but that doesn’t look like the baseline as of today,” James Bullard, president of the Federal Reserve Bank of St. Louis, said during a speech in Florida on Friday. Mr. Bullard does not vote on rate moves this year, but he is one of 17 regional and Washington-based officials who participate in policy discussions.

… and Powell released a statement:

The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.

The decline in oil prices has taken its toll on oil stocks which has taken a toll on OSP.PR.A, which I have recommended that shareholders retract. The NAVPU was a mere 8.73 as of February 27 … and maybe even less today, eh? So, unless there’s a March Miracle, this thing’s going to default … not technically, because technically preferred shares don’t default, but, well, for all intents and purposes …

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So today a coronavirus jumped out from behind a bush and attacked:

Global markets tumbled for a sixth consecutive day on Thursday, dragging down the S&P 500 more than 10 percent in just a week, reflecting rising fears over the coronavirus that is spreading quickly around the world.

The S&P 500 fell 4.4 percent on Thursday, the worst single day slide for the market since August 2011. The index is on pace for its worst weekly performance since the 2008 financial crisis. Stocks in Europe and Asia were also hard hit on Thursday.
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The collapse in investor confidence spread far beyond stocks. Crude oil fell more than 4 percent, as investors weighed the chance of growing economic paralysis related to travel restrictions, factory shutdowns and other measures to stop the outbreak.

Bond markets broadcast deep pessimism about the economy, as money flooded into Treasury markets, pushing prices sharply higher, and yields — which move in the opposite direction — to once-unthinkable depths. That drop, in part, reflects investors’ expectations that the Federal Reserve may have to cut interest rates to bolster the economy.

Meanwhile in Toronto:

The Toronto Stock Exchange, TSX-Venture Exchange and TSX Alpha will remain closed for the rest of the day following a “technical halt” that began mid afternoon, according to a TMX Group spokeswoman.
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The company said the market, which was halted shortly before 2 p.m., will remain in a “pre-open” state until further notice in order to allow traders to manage orders.

Those who might be concerned about the implications of this are urged to remember that the Competition Bureau and the OSC have devoted many hours to preventing a foreign takeover of the TMX, relieving anxiety that anybody might lose their job over this.

TXPR closed at 600.45, down 0.96% on the day. Volume was 1.79-million, about average in the context of the past thirty days.

CPD closed at 11.95, down 1.20% on the day. Volume of 183,615 was the highest of the past 30 days, ahead of second place February 26.

ZPR closed at 9.52, down 1.45% on the day. Volume of 487,610 was third-highest of the past 30 days, behind only February 24 and January 27.

Five-year Canada yields were down 9bp to 1.13% today.

There was a respite from the losses today:

Stocks on Wall Street were unsteady on Wednesday, dropping slightly after rebounding from back-to-back losses this week that had wiped more than 6 percent off the S&P 500.
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Oil prices edged lower. West Texas intermediate, the American benchmark, dipped under $50 a barrel. Brent crude, the international benchmark, was under $55 a barrel at 12 p.m.

The yield on the 10-year Treasury note fell even further on Wednesday after closing at a record low of 1.335 percent on Tuesday, a sign that investors expect growth in the United States to slow.

PerpetualDiscounts now yield 5.27%, equivalent to 6.85% interest at the standard equivalency factor of 1.3x. Long corporates now yield 3.00%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened dramatically to 385bp from the 360bp reported February 19.

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Attack of the corona virus … Day 2:

A day after its worst one-day slide in two years, the S&P 500 closed down 3 percent on Tuesday, a decline that put the index deeper in the red for 2020.
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Investors moved into the safety of government bonds, pushing their prices up and yields down. The yield on the 10-year Treasury note closed at a record low of 1.335 percent and the 30-year bond also dropped to a record of 1.81 percent — two signals that investors expect growth in the United States to slow.
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In comments on Tuesday, [Federal Reserve] Vice Chairman Richard H. Clarida signaled that Fed was not yet ready to act, though it is monitoring economic developments related to the virus.

But in recent days, the market-based probability — derived from prices in the Fed funds futures market — of a rate cut at the Fed’s April meeting jumped to over 60 percent, according to data from CME. Last Wednesday, when markets were at record highs, the market was putting odds of a cut at the April meeting at less than 25 percent.

TXPR closed at 607.70, down 0.70% on the day. Volume was 1.83-million, about average in the context of the past thirty days.

CPD closed at 12.13, down 0.82% on the day. Volume of 109,537 was the fourth-highest of the past 30 days.

ZPR closed at 9.72, down 1.32% on the day. Volume of 301,864 was fifth-highest of the past 30 days.

Five-year Canada yields were unchanged at 1.22% today.

So … players are still using preferred shares to speculate on interest rates. Damned if I understand it.