Mar 13, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

Happy Friday (the 13th)! Was this email forwarded to you? Sign up here. (Today's Smart Brevity count: 1,175, 4.4 minutes.)

📷This week on “Axios on HBO”: Rep. James Clyburn, the Democratic “kingmaker” largely credited for Biden’s surge, warns the U.S. "could very well go the way of Germany in the 1930s" (clip); plus much more. Tune in Sunday 6 pm ET/PT on all HBO platforms. 

🎙“Learning music by reading about it is like making love by mail.”- See who said it and why it matters at the bottom.

1 big thing: The world needs Donald Trump to save it

Illustration: Aïda Amer/Axios

The Fed has clearly gotten the message being sent from financial markets — "OMFG!!!" — and has acted accordingly.

State of affairs: The U.S. central bank is responding to the COVID-19 outbreak as if the country is in a crisis, first by declaring an emergency 50 basis point rate cut last week, and on Thursday by announcing $1.5 trillion in injections to the systemically important repo market, on top of already increased funding injections.

  • Congress and the White House are not on the same page and have committed what one former Fed official called "gross negligence" with their response so far.

Why it matters: A recession is starting to shift from possible to overwhelmingly likely with the only question being how bad things will get.

What's happening: "At best the Fed can buy time in the markets and put a floor in the selloff, but a fiscal response is required," Nela Richardson, investment strategist at Edward Jones, tells Axios. "This is a biological event. This problem did not start in the financial markets and the solution won't be found there."

  • Danielle DiMartino Booth, CEO of Quill Intelligence and a former adviser to the Dallas Fed, is expecting "crisis era" policies from the Fed, but Thursday's market selloff — the worst since 1987's historic Black Monday — shows just how limited the central bank is.
  • "The Fed loaded and fired a bazooka and it was not a big enough shock to stanch the bloodletting in the stock and more importantly, credit markets," she tells Axios.

Between the lines: The wave of red on Wall Street — the S&P 500 has fallen 27% from its record high, set just weeks ago — is not an assessment of the economy, Jim Paulsen, chief investment strategist at The Leuthold Group, says.

  • "There is no explanation for why the market is falling 5-10% a day," he tells Axios. "We’re not trading on any kind of reason or sanity, it’s just emotion and panic at the moment."

The bottom line: "The Fed will soon be largely sidelined," Mark Zandi, chief economist at Moody's Analytics, says in an email. "The onus for saving the economy from recession is now squarely on the Trump Administration and Congress to provide a large, timely and well thought out fiscal stimulus."

Asked how confident he is it would get done, Zandi echoed the response of most economists who have spoken to Axios since the market meltdown began.

  • "Not confident at all. Recession is more than likely."
Bonus: All eyes on the U.S.
Data: FactSet; Chart: Axios Visuals

Overseas stocks performed even worse than the U.S. on Thursday.

  • Europe’s benchmark index fell 11.5%, its worst day in history; Brazil’s Bovespa dropped as much as 20%, extending this year’s loss to nearly 50% in dollar terms; Canada’s benchmark TSX index lost 12%, for its worst day since 1940.
  • MSCI's All Country World Index, which tracks stock exchanges in 49 countries, fell by 9.5% and is now at its lowest level since early 2017.

The big picture: The losses are mounting because there has not yet been a coherent global policy response and perhaps, more importantly, nothing from the world's largest economy, analysts say.

  • "Market psychology is focused on a U.S. fiscal response, perhaps as a shorthand for U.S. leadership domestically and internationally in this moment of crisis," Marc Chandler, managing director at Bannockburn Global Forex, said in a note to clients.
  • Further, he added in a conversation with Axios: "The focus continues to be on the U.S. because the virus outbreak is growing fast and we seem to be behind the curve. We’re still the key country."
2. Catch up quick

Finance ministers from the Group of Seven rich nations reiterated a pledge to use "all appropriate policy tools" to respond to the coronavirus outbreak, but offered no concrete steps or proposals. (Reuters)

Chinese auto sales fell 79.1% last month compared to the same period last year, with just 310,000 vehicles sold nationally as demand was pummeled by the COVID-19 outbreak. (WSJ)

Saudi Arabia has stepped up its push to squeeze Russian oil out of key markets by offering its own cheap supply, sources said. (Reuters)

3. QE easing's return sends bond yields soaring
Data:; Chart: Axios Visuals

Longer-dated U.S. Treasury yields have bounced higher in recent days, with the benchmark 10-year note fully reversing course and rising to more than double its lowest level on Tuesday.

What's happening: The announcement of $1.5 trillion in repo injections on Thursday by the New York Fed followed two announcements about increasing the amount of cash it was injecting in its repo operations this week. The deluge has given yields a significant bounce.

  • Just this week the Fed has raised the amount of money it is pumping into the market daily from $100 billion to $150 billion and then to $175 billion, to go along with $45 billion in two-week operations and $60 billion in purchases for a "range of maturities."
  • "It looks like QE (quantitative easing)," Priya Misra, head of global rates strategy at TD Securities, told Reuters. "It is QE."

By the numbers: Yields on the 10-year Treasury note rose as high as 0.91% Thursday, 60 basis points higher than the low touched on Monday. Yields on the 30-year bond similarly jumped, touching a high of 1.50%, up 80 basis points from Monday's low of 0.70%.

  • Both Monday levels were record lows.
4. $1.5 trillion may be just the beginning
Data:; Chart: Axios Visuals

The Fed's actions on Thursday appear to have had a significant impact on the bond market and the currency market, where the dollar has reversed its slide against most major currencies after touching monthslong lows earlier this week.

  • The dollar index, which measures the greenback's value against six global peers like the euro and Japanese yen, rose 1% Thursday.

Where it stands: The inability of Congress and the White House to deliver on a fiscal stimulus plan has not come as a complete shock to most observers. And if they aren't able to get it together, the Fed is not completely handcuffed, analysts say.

  • The trillions of dollars it has pledged to help markets so far could be a drop in the bucket.

What they're saying: Julia Coronado, president of MacroPolicy Perspectives, points out that the Fed could invoke what it terms "unusual and exigent circumstances" and begin accepting things like corporate bonds as collateral for cash.

Plus, banks have called for the Fed to roll back regulations and they are listening, Vincent Reinhart, a former Fed researcher and current chief economist at Mellon, tells Axios in an email.

  • "Under the radar, Vice Chair [Randal] Quarles is likely easing supervisory policy to encourage lending.”

The big picture: Central bankers and economists have argued forcefully over the past year that "Unprecedented policies will be needed to respond to the next economic downturn," as members of the BlackRock Investment Institute put it in August.

  • The BlackRock report was authored by former Fed vice chair Stanley Fischer, former Swiss central bank chief Philipp Hildebrand, former Bank of Canada deputy governor Jean Boivin and other ex-central bank leaders.

The intrigue: The paper called on policymakers to introduce "helicopter money," which would essentially mean central banks giving money directly to the public.

Why it won't' happen: Helicopter money would mean the Fed taking the extraordinary step of going over the head of America's duly elected politicians to take action.

  • If enacted, it could give Congress the right to end the Fed — the very antithesis of everything chair Jerome Powell has been fighting for since he was confirmed.
Dion Rabouin

Quote: "Learning music by reading about it is like making love by mail."

Why it matters: Luciano Pavarotti said the quote above. The famous tenor performed in his last opera, "Tosca," at the New York Metropolitan Opera on March 13, 2004.