Just how illiquid and volatile is this market? Consider this: one day after the S&P Emini future was locked limit down for hours on Monday morning tumbling 5%, on Tuesday the same futures contract initially tumbled 1.9%, dipping below 2,700, before soaring higher by an unprecedented 180 points, and moments ago hit the “limit up” level of 2,879, established each day by the Chicago Mercantile Exchange, while Dow futures were up almost 1,000 points, cutting yesterday’s record point drop in half.

One day earlier, the S&P 500 tumbled 7.6% during Monday’s cash session and the Dow Jones plunged more than 2,000 points – its biggest drop since the Financial Crisis – weighed down by a crash in oil prices following a price war between Saudi Arabia and Russia in markets already rattled by the spreading coronavirus. In fact shortly after Monday’s close, S&P futures contracts briefly slipped to 20% below their high – signaling a bear market.

It wasn’t just S&P futures that hit circuit breakers: the 10Y Treasury future likewise hit a limit down on Tuesday, after surging limit up the day before, demonstrating the wild gyrations that have gripped the market.

As a result, the 10Y yield was just shy back to its Friday closing level of 0.76% after crashing as low as 0.31% on Monday.  Elsewhere, Japanese government bonds also tumbled after an auction of five-year debt flopped.

What sparked the overnight euphoria? Why, “hope” of course. Speaking at a White House news conference, Trump late on Monday said he plans to announce “major” actions to support the economy including a payroll-tax cut and “very substantial relief” for businesses hit by the virus at a press conference on Tuesday following discussions with lawmakers.

“Looks like it includes a possible payroll tax cut,” said Matt Maley, an equity strategist at Miller Tabak & Co. “We might need to see more details before any rally gains any sustainability, but this should at least stabilize things overnight.”

Oil also recouped some losses from its biggest one-day decline since the Gulf War in 1991, supported by expectations for a settlement to the price war and potential U.S. output cuts. Following a record plunge in Brent and WTI which dragged the price of US oil down to $30.37, WTI rebounded more than 10%, rising to $34.22, even as Saudi, the world’s biggest oil exporter, escalated tensions with plans to supply 12.3 million barrels per day (bpd) in April, well above current production levels of 9.7 million bpd, Saudi Aramco CEO Amin Nasser said on Tuesday.

Brent futures also rose more than 10%, hitting a session high of $37.75 a barrel. Both benchmarks plunged 25% on Monday, dropping to their lowest levels since February 2016 and recording their biggest one-day percentage declines since Jan. 17, 1991, when oil prices fell at the outset of the first Gulf War.

As a result of the sharp Tuesday rebound, oil majors Exxon Mobil and Chevron both climbed more than 7% in premarket trading, while Occidental Petroleum, Apache and Marathon Oil all jumped between 20% and 29%.

The euphoria spilled over across the globe, with Europe’s Stoxx 600 Index also jumping, though most benchmarks weren’t close to recovering their historic losses from Monday. The Stoxx 600 Oil & Gas index rises as much as 8.1%, extending an earlier recovery from Monday’s plunge as crude prices rise. Index heavyweights Shell (+12%), Eni (+11%) and Total (+9.3%) lead the gains. The index dropped the most on record on Monday after the breakdown of OPEC+ talks on supply cuts triggered a price war between Saudi Arabia and Russia.

Earlier in the session Asian stocks rebounded after their worst sell-off since 2011 as a series of government actions boosted market sentiment on riskier assets. The benchmark MSCI AsiaPacific Index erased an earlier decline and most markets in the region climbed after U.S. President Donald Trump said he will seek a payroll tax cut and “very substantial relief” for industries that have been hit by the coronavirus. China President Xi Jinping’s visit to the virus epicenter of Wuhan showed the government’s confidence that the epidemic is contained. In Japan, optimism over government measures to combat the economic impact of the outbreak helped the Topix index erase a slide of as much as 4.2% and post its best day in a month. The nation’s central bank purchased a total of 101.4b yen of exchange-traded funds, matching record daily purchases it made on March 2, March 6 and March 9.

Also on Tuesday, Japan announced a second package of measures worth about $4 billion in spending to cope with the fallout to the economy of the coronavirus outbreak, focusing on support for small and mid-sized firms. The package, totalling 430.8 billion yen ($4.1 billion) in spending, shows how much pressure policymakers are under to bolster fragile growth and stem the risk of corporate bankruptcies, as event cancellations and a slump in tourism threaten to hit the broader economy hard.

Measures to contain the coronavirus continue to undermine prospects for corporate earnings, and raise the danger of a funding crisis, while the oil price crash threatens a swath of defaults among producers. Italy added nationwide travel restrictions to its effective lockdown of the northern region of the country.

“While things feel like the end-of-days I’d stay risk averse in the near-term, but expect bear market rallies,” Chris Weston, head of research at Pepperstone Group, said.

In FX,the dollar staged a strong rebound, as safe havens were sold off. The yen dropped by more than 2% against the dollar and Treasuries were sold amid a global bond selloff as expectations grow that governments will introduce stimulus to combat the coronavirus outbreak. Sterling halted five days of gains and the euro fell for the first time in four days as gilts and bunds sold off. The U.K. government is due to unveil its budget on Wednesday, a major fiscal set piece that’s now likely to unleash some short-term stimulus to combat the coronavirus.

Market Snapshot

• S&P 500 futures up 3.9% to 2,850.75
• MXAP up 0.6% to 150.63
• MXAPJ up 1.2% to 493.26
• Nikkei up 0.9% to 19,867.12
• Topix up 1.3% to 1,406.68
• Hang Seng Index up 1.4% to 25,392.51
• Shanghai Composite up 1.8% to 2,996.76
• Sensex down 5.2% to 35,634.95
• Australia S&P/ASX 200 up 3.1% to 5,939.60
• Kospi up 0.4% to 1,962.93
• STOXX Europe 600 up 1.9% to 346.02
• German 10Y yield rose 10.0 bps to -0.756%
• Euro down 0.5% to $1.1392
• Italian 10Y yield rose 34.7 bps to 1.253%
• Spanish 10Y yield rose 5.4 bps to 0.318%
• Brent futures up 4.9% to $36.04/bbl
• Gold spot down 1.1% to $1,662.66
• U.S. Dollar Index up 1% to 95.83

Top Overnight News

• Italy became the first country to attempt a nationwide lockdown as cases topped 9,000 overnight and officials said the government may try to boost a planned stimulus package in Europe’s worst-hit nation. Spain shuttered schools in Madrid after infections surged; China reported 19 new infections, the lowest since Jan. 18, and President Xi Jinping visited Wuhan in a sign the country sees the outbreak is under control
• New Zealand central bank Governor Adrian Orr said the country is in a strong position to weather a global economic shock, including the ability to cut interest rates
• Orders for Japanese machine tools fell last month to the lowest level in seven years, signaling that already-weak manufacturing investment has taken another hit from the coronavirus
• The Bank of Russia said it would begin selling foreign currency on Tuesday ahead of schedule after the rout in oil prices made the ruble the worst-performing currency in the world
• Sweden’s Riksbank signaled it’s preparing liquidity measures to protect the largest Nordic economy from the fallout of the coronavirus, but said interest-rate cuts aren’t likely to play a role in any emergency package
• At least three buyers of Saudi Arabian oil requested between 30% and 50% more supplies than they had originally planned in April after the world’s biggest exporter slashed its prices, according to people familiar with the matter
• A Deutsche Bank AG employee in Frankfurt and another at KKR & Co. in London contracted the coronavirus, setting off swift measures to contain potential outbreaks

Asian equity markets eventually traded mostly higher as markets began to pick up the pieces from the recent oil-triggered devastation, which resulted in losses of over 7% among most major US indices for the worst performance on Wall St. since 2008. Nonetheless, US equity futures found some reprieve overnight despite briefly dipping into bear market territory with the rebound helped by hopes of policy action with President Trump set to discuss payroll tax relief with congress and to hold a press conference on economic measures to respond to the coronavirus which he suggested will be major steps, while Japanese is to submit a 2nd package of steps on coronavirus to parliament. ASX 200 (+3.1%) and Nikkei 225 (+0.9%) gained in which the former shrugged off opening losses of around 4% led by the recovery in the energy and financials sectors, while the Japanese benchmark also nursed losses helped by favourable currency moves. Hang Seng (+1.4%) and Shanghai Comp. (+1.8%) were initially indecisive after continued PBoC liquidity inaction but eventually surged following a further reduction in China’s additional coronavirus cases and President Xi’s visit to the Wuhan coronavirus epicentre for the first time since the outbreak which was seen to be symbolic of China’s progress in its battle against the epidemic. Finally, 10yr JGBs slipped below 155.00 as it tracked the pullback in USTs after the recent safe-haven surge and as equity markets stabilized, while prices were also pressured after weaker results at the 5yr JGB auction.

Top Asian News

• Korea Extends Ban to 10 Days for ‘Overheated’ Short Sale Stocks
• Wake-Up Call For Rich Buyers as Asia Bank Bond Goes to Zero
• China Biologic, Suitor Said in Advanced Talks on Take- Private

European stocks consolidate [Eurostoxx 50 +4.0%] following the prior session’s detrimental sell-off sparked by further coronavirus woes and considerable downside in energy markets. Overnight, APAC bourses reflected a similarly conciliatory tone as stocks recovered following a mixed open – with desks pointing to hopes of US stimulus announcements in the form of payroll tax relief. European bourses got off to a shaky start with futures erasing a chunk of its overnight gains ahead of the cash open before reversing course to fresh session highs at the time of writing. The Italian bourse is conforming to the broad gains in the region despite Italy’s country-wide lockdown. The index remains buoyed by a raft of Italian stimulus including a ramp-up in measures to EUR 10bln from EUR 7.5bln. Meanwhile, sectors trade in positive territory and reflect a “risk-on” mood as cyclicals fare better than defensive. The energy sector outperforms following the prior session’s hefty losses and as the oil complex rebounds, with similar action seen in financials. Stoxx 600 movers largely reflect an inverse of yesterday. Oil giants Shell (+12.5%), Total (+9.0%) and BP (+8.5%) amongst the top gainers. On that front, Exane BNP remains of the view that cash dividends will continue to see support despite yesterday’s sharp sell-off in oil and energy names, with preferred names remaining BP, Total and Equinor. In terms of more micro-movers, Deutsche Post (+6.3%) shares are supported amid an increase in YY Q4 revenue and a reaffirmance of its 2022 guidance. Italian-listed Diasorin (+17.4%) rose to the top of the FTSE MIB as the Co. completed its studies regarding a launch of coronavirus tests by end-March.

Top European News

• M&G Clients Pull Cash as It Begins Life Without Prudential
• Riksbank Targets Liquidity Aid, Not Rate Cuts, as Virus Spreads
• Germany Won’t Blink on Fiscal Easing Until Crisis Hits Home
• Bank of Russia to Sell Foreign Currency After Oil Plunge

In FX, still flanking the G10 ranks, but the Norwegian Krona is now in pole position and Yen at the back of the pack in contrast to Monday when oil prices were tanking and risk aversion rife. Eur/Nok has recoiled further from nigh on 11.0000 to sub-10.7550 at one stage and almost oblivious to significantly weaker than expected inflation data or a downbeat regional survey even before the full extent of the coronavirus contagion has been taken into consideration. Conversely, Usd/Jpy has rebounded from near 101.00 yesterday to just over 105.00 as broad sentiment stabilises alongside crude, despite more exchanges between Saudi Arabia and Russia on the supply front.

• USD – The Dollar has benefited from the relative calm in financial markets, partly instilled by US pledges via President Trump and Treasury Secretary Mnuchin to unveil big fiscal support measures, which in turn have flipped Treasuries back into bear steepening mode and eroded some appeal from safer currency and other havens. Hence, the DXY has pared losses from yesterday’s new 94.650 ytd base and briefly topped 96.000 within a 96.006-95.199 range.
• CHF/EUR/GBP/NZD/AUD – All softer vs the Greenback due to the aforementioned turnaround in mood from extreme depression, with the Franc below 0.9300 again, Euro sub-1.1400, Cable under 1.3100 and Antipodeans losing a degree of their yield appeal from 0.6600+ and 0.6350+ respectively overnight. The Aussie also had drops in NAB business conditions and confidence to digest, while the Kiwi is absorbing comments from RBNZ Governor Orr indicating that there is more room to reduce the OCR (to zero or even negative if needed) rather than resorting to unconventional policy easing.
• CAD/SEK -The Loonie is deriving some comfort from oil finding a base (for the time being at least) between 1.3706-1.3608 extremes vs its US counterpart and the Swedish Crown has regrouped amidst more Riksbank guidance steering away from a reversal in the repo rate in favour of QE if it need to take emergency policy action. Eur/Sek hovering around 10.7200 from 10.8100+ earlier and like the Nok cross not unduly bothered about data (household consumption).
• EM – Respite after the rout, and with the Rouble not just gleaning traction from Brent clawing back outsize declines, but also the CBR’s intervention to stop the Rub depreciating in line with other regional Central Banks and bodies attempting to stem the tide.

In commodities, a day of respite, consolidation and potential short covering in the energy markets following yesterday’s violent Saudi-induced sell-off. WTI front month futures found an overnight base at ~USD 30/bbl and Brent April contracts touched APAC lows of just under USD 33.50/bbl – ahead of Saudi-fuelled lows around USD 27.40/bbl and USD 31.45/bbl respectively. Prices could also be experiencing some underlying support from OPEC delegates downplaying the expanding rift between Saudi and Russia, as they noted it is too early to give up on the alliance. That being said, Saudi Aramco’s CEO stated that it will supply its customers with 12.3mln BPD of oil starting April 1st – a number higher than the touted step-by-step increase as per sources, which noted the Kingdom could raise output to 11mln BPD before ramping production. As such, energy futures came under belated pressure and have been pushed to session lows of USD 30.20/bbl for WTI and USD 35.00/bbl for Brent, but nonetheless remain in positive territory following the gap higher at the reopen of electronic trade. Prices then found mild reprieve amidst comments from the Russian Energy Minister as he noted Moscow does not rule out join action with OPEC, despite also noting that Russian companies may boost oil output by up to 300k BPD and has potential to increase by 500k BPD – in fitting with comments from Russia’s Rosneft yesterday. Novak also noted of the next joint meeting to take place in May/June; OPEC’s website has scheduled this for June 10th. Sources stated that Russian Energy Ministry has called a meeting with Russian oil companies for tomorrow which is expected to discuss future co-operation with OPEC. Elsewhere, it’s worth noting that the monthly EIA STEO has been delayed to tomorrow to incorporate the recent oil market events. Onto metals, spot gold remains under pressure amid the overall risk tone in the market and as the Buck recoups some of its recent losses, with the yellow metal still above 1650/oz but notably below the USD 1680/oz overnight high. Copper prices meanwhile rebound with a vengeance after the prior session’s aggressive downside amid the risk tone and APAC stimulus measures (specifically from Japan), with the red metal back on a 2.5/lb handle.

US Event Calendar

• 6am: NFIB Small Business Optimism, actual 104.5, est. 102.8, prior 104.3

DB’s Jim Reid concludes the overnight wrap

That we were in some kind of mini crisis yesterday was confirmed by the sheer fact that the S&P 500 hit a down -7% circuit breaker only shortly after opening. For context, the last time the S&P 500 circuit breaker was triggered was December 1st 2008 and then the index finished down -8.93%. Yesterday, the index recovered after trading resumed before selling off again in the afternoon to close at -7.60%, which was the worst day since that last circuit breaker day on December 1st 2008. In the daily history of the S&P back to 1928, there have only been 18 worse days than yesterday out of 24,501 trading sessions. The index is now down -18.9% from the all time highs and even a small move by recent standards could end up taking us into the 20% “bear market” levels that some use. This would grab a few headlines.

Indeed, futures markets had shown the S&P 500 trading in a bear market very early this morning, however, markets have since made a u-turn. S&P 500 futures are now up +3.06% as we go to print while the likes of the Nikkei (+0.39%), Hang Seng (+1.81%) Shanghai Comp (+1.33%) and Kospi (+0.32%) have also reversed heavy losses at the open. Oil has also rebounded with WTI and Brent prices up +7.71% and +7.55%, respectively, while in rates 10y yields are up +13.5bps. Typical safe havens like the Yen, which were very strong yesterday, are also weaker. It’s not entirely clear what’s driving the rebound, however, last night President Trump suggested that he would seek fiscal measures which are likely to include a payroll tax cut and “very substantial relief” for industries that have been hit by the virus. He also said that he wants to help hourly wage earners who could lose pay by staying home.

Back to yesterday where energy and specifically HY energy was the other big talking point. Cash HY spreads in the US finished +104bps wider. To put that into context, since 1996 there have only been 2 more worse days. HY energy spreads were +333bps wider alone and are now at 1,432bps. The peak they reached in 2016 was 1,984bps and spreads started this year at 714bps. It’s liquidity that is now the biggest concern though and it’s worth highlighting that HY ETFs were hit by the circuit breaker yesterday as well. Given that credit ETFs have been defended by some as liquidity enhancers and not destroyers then this would have shocked a few. As for IG, it’s more insulated from the energy issues, however, cash spreads were still +39bps wider in the US. In Europe, HY and IG cash was 94bps and 29bps wider, respectively. In CDS, CDX IG and HY also widened 28bps and 108bps, respectively, the most since September 2011 and August 2012 up to which point data is available in the Bloomberg. EU crossover and main widened 82bps and 25bps and since 2013 they have only been wider for a day or so in early 2016.

Yesterday, Craig and Nick published a note questioning whether the latest oil news is a Minsky moment for HY. With energy the largest sector in US HY, huge stress raises the overall risk profile of the asset class, especially for more passive funds. This leads to outflows, which subsequently forces funds to raise cash, which is typically focused on easier to sell credits, which tend to be larger and in some cases more defensive, thus leading to a broader sell-off across other sectors. Charter – a very large BB+ telco – was a good example of that yesterday, where 10y bonds fell 3pts. This liquidity concern raises the risk HY spreads could blow a lot wider than even our bearish forecast of 750bps (360 at the start of the year, 356 before the last two week sell-off and 668 now). See the full note from yesterday here and our latest spread forecasts view from last week here.

In terms of other stats from yesterday, the NASDAQ (-7.29%) and DOW (-7.79%) also had their worst days since December 1st 2008 (-8.93%) and October 15th 2008 (-7.87%) respectively. In Europe, the moves were even more severe. The FTSE MIB for example was hit to the tune of -11.17%, which was the worst day since June 24th 2016 (-12.48%) – the only time the index has fallen more. The DAX (-7.94%) and CAC (-8.39%) had their worst days since September 11th and October 6th 2008 respectively, while the FTSE 100 (-7.69%) had its worst day since October 15th 2008, when it tumbled -7.16%. Meanwhile, the VIX touched as high as 62.12 before closing at 54.46 – albeit still the highest since the financial crisis. As for oil itself, Brent closed -24.10% and WTI -24.59%. In fairness both were off their early intraday lows of over -30%, however these were still the worst days since January 17, 1991, when Operation Desert Storm began, with US-led coalition forces bombing Iraq. Given the move in oil, it follows that the Oil and Gas sector of the STOXX 600 was the worst performer, down -16.83%. Banks were the second largest laggard, down -10.72%, as yields across the continent drove lower. It was a similar story in the US, with Energy the worst performing industry, down -20.1%, followed by Banks down -14.4%. Similarly the best performing sector in both regions were Retail in Europe and Food & Staples Retail in the US, both were still down over 2% to show how broad-based the selloff was. In fact, in the US only 9 constituents of the S&P 500 finished up on the day.

In terms of rates yesterday the -22.2bps rally for 10y Treasuries means yields closed at 0.54% and have effectively halved from last Wednesday. That was also the biggest rally for 10y Treasuries since August 8th 2011 even if at one point we were down -44.8bps to 0.31% on the day. 2yr and 30yrs notes finished the day down -12.5bps and -29.2bps, respectively, at 0.38% and 0.995. Yesterday was the first time in history that the entire US yield curve traded below 1%. 10yr and 2yr Bunds yields both fell -14.6bps to all-time lows at -0.86% and -1.00%, respectively. 10yr BTPs rose +35bps as markets worry about the extreme intention levels.

Further to our comment on oil and inflation expectations from yesterday EU and US 5yr5yr inflation swaps fell -8.9bps and 17.8bps to 0.95% and 1.52% yesterday – clearly the lowest on record. Central banks are going to have an impossible job lifting this on their own. Perhaps the only way is fiscal stimulus and ultimately helicopter money.

Talking of stimulus, as we approach the ECB meeting on Thursday our economists have adjusted their expectations. They continue to expect a new targeted liquidity facility (e.g., a short-term LTRO aiming to boost SME lending in affected regions) but they have brought forward the 10bp deposit rate cut from April to March. They expect the “or lower” guidance to remain, signalling that rates could fall further. They also now expect a policy to supplement general liquidity conditions. The signs of rising bank funding costs in an environment of supposedly high excess liquidity increases the risk of tighter lending conditions. What is less clear is how the ECB does this. A TLTRO-based policy may be easier, but a passive means of expanding the ECB balance sheet may be less effective. Private asset purchases might be more effective, but their costs bring limits. Low yields mean sovereign purchases are not obviously needed, but would inject market confidence if seen as policy coordination.

The greatest market impact would come from “fiscally-equivalent” policy options, such as taking more risk by expanding private asset purchases or coordinating monetary and fiscal policy. To do either, Lagarde may have to sacrifice Council unity. That is possibly a step too far. If the ECB under-delivers, markets will have to wait until the Eurogroup on 16 March to judge whether we have policy rotation (a positive outcome) or a combined policy disappointment (a negative outcome). See their report here for more.

In terms of the latest on the coronavirus, Italy is in complete lockdown now as the number of confirmed coronavirus cases in the country reached 9,172 with fatalities now at 463. Italian PM Conte said at an unscheduled news conference yesterday evening that it is the country’s “darkest hour,” and ordered the nation to “stay at home” as he explained that “we are forced to impose sacrifices.” Now the restrictions will affect 60mn citizens viz a viz 16mn on Sunday and just 50,000 before that. However, how effectively such measures can be implemented remains a question with the initiatives in the north appearing to have yielded limited results as people are still able to move around freely. Elsewhere, Santa Clara County in California announced that its public health officer has issued a mandatory ban on gatherings with more than 1,000 people in an attempt to protect the community from the spread of the virus. It’s set to take effect on Wednesday and last for three weeks. The decision is likely to disrupt National Hockey League and Major League Soccer games in the coming weeks, likely the first time that the coronavirus will impact events in the major US sports leagues. In a sign that travel companies are continuing to reel under the virus fallout, Qantas announced overnight that it has cut almost a quarter of its international flights for six months, grounded most of its giant A380 jets and slashed management pay.

If you’re looking for some good news the virus outbreak in Korea may be slowing in a manner similar to what we have seen in China (outside of Hubei where the data is likely cleaner). Over the past the week the daily growth in cases has been 19%, 14%, 11%, 8%, 9%, 8%, and 5%. We saw a similar slowdown at a similar part of the outbreak curve in China. This could show that Korea’s containment practices and aggressive testing are working to stunt the wider passage of the coronavirus. Whether the western world can match their progress remains to be seen. We’re probably 10-14 days behind them so we’ll soon see.

In terms of the day ahead, data couldn’t be much more of an afterthought at the moment however for completeness we’ll get January industrial production prints in France and Italy this morning as well as the final Q4 GDP revisions for the Euro Area. There’s no data due in the US. Clearly all the focus is on how the market functions following the moves yesterday.