Update (1145ET): The market - just like yesterday - is staging a comeback after Kudlow spoke, perhaps in the hopes that The fed will indeed do an emergency rate-cut...
Nasdaq briefly went green...
Fed Speakers were active this morning and definitely didn't suggest that a Sunday night rescue was planned (despite Kevin Warsh's urging)...
0830ET Kaplan: "I'll be prepared to make a judgement as we go into the March meeting, I am trying to keep my attention on what's going on in the underlying economy."
0905ET Bullard: "Further policy rate cuts are a possibility if a global pandemic actually develops with health effects approaching the scale of ordinary influenza, but this is not the baseline case at this time... Longer-term U.S. interest rates have been driven lower by a global flight to safety, likely benefiting the U.S. economy." Bullard added that "even with the current stock market price drop, equities have been on a long upswing."
1030ET Bullard spoke again reaffirming that US GDP Forecasts "don't look very severe" and The Fed is "willing to react if virus has major impact but will want to wait and monitor events until the next meeting."
CNBC's Steve Liesman also summed things up well:
"At what level of interest rates would I be willing to go to a rock concert and risk infection?"
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With global markets in freefall, the S&P opening 3% lower and cementing its worst week since the global financial crisis; the Dow (or is thar Down Joanes) plunging more than 4,000 points this week, traders (especially levered ones) are left with just one option to stave off a career (and personal fortune)-ending margin call: praying, though not to god but rather to the Fed.
To be sure, the Fed itself has given enough reasons for this: on Monday the biggest uber-dove in history, former Minneapolis Fed and the Fed's only negative "dot" ever, Narayana Kocherlakota penned a Bloomberg op-ed saying the Fed should cut not once but twice, and do it on an emergency basis ahead of the March FOMC meeting.
Then, this morning, one day after he penned a similar Op-Ed, former Fed Governor Kevin Warsh - who has finally crushed his "hawkish" facade as he guns to replace Powell as the Fed's Chair - echoed Kocherlakota when he said he expects the Fed and other central banks around the world to act soon in response to the coronavirus outbreak. Warsh, no longer even pretending to give a rat's ass about efficient markets and price discovery that is independent of Fed manipulation, recommended the Fed act as quickly as Sunday to assuage financial markets that have been in an aggressive swoon all week as the virus has spread.
“Chairman Powell needs to reach out to his counterparts around the world and buy some time. That’s what a quarter-point could do.” Former Fed Gov. Warsh says the Fed should respond quickly to coronavirus fears: “I think the sooner they cut the better.” https://t.co/tNbNRvhiz5 pic.twitter.com/hg6HUXNiSE— CNBC (@CNBC) February 28, 2020
Adding fuel to the speculative fire that a coordinated central bank action is coming is that the Bank of Korea shocked markets when it did not cut rates on Thursday, with some readers suggesting that the only reason it did not "was to preserve ammo to cut with other CBs this weekend."
Needless to say, the market expects all this and more, with Eurodollar options now suggesting some traders are expecting more than 1 rate cut at the March meeting, amid rising bets for a rate cut ahead of the next scheduled meeting.
So with two former Fed officials (and potentially one future Fed chair), opining that the Fed may announce an emergency rate cut as soon as this weekend, sinking traders - desperate to grab hold to any stick - have been scrambling all morning to create a rumor, or at least a rumor, that on Sunday night the Fed will step in.
Picking up on this theme, Nomura's CHarlie McElligott summarizes today's market action, writing that we are now going through "dangerous times, as recently overwhelming Dealer short gamma hedging into the down trade, mechanical systematic deleveraging and dynamic shorting of Futures now are at risk of a “turn,” as Equities downside / VIX upsides hedges are increasingly likely to be monetized, creating violently “squeezy” flows in the Equities market which has recently been purged." And while none of this is news to regular readers, as we have covered all the technical and flow aspect of the ongoing historic crash in great detail, what is notable is that Charlie adds that all this is happening "with the background "upside catalyst" of the growing-likelihood of “imminent” Central Bank coordinated policy response statement as soon as this wknd, ahead of the Sunday Asian reopen."
The problem is that whereas just one week ago, the mere rumor of coordinated central bank action would have been sufficient to send stocks soaring, any attempts at a bounce for Equities (such as the 70-handle move in Spooz off the earlier overnight lows—similar to yesterday morning) will come down to likely - and imminent - monetization of large options hedges in the market, with McElligott noting that tactical traders looking to sell their Puts in S&P products / take-off VIX Calls (even see retail redeem their “long vol” VIX ETNs) to book the positive PNL against whatever hits they’ve taken in their “long” books—and probably thereafter switch into a more “dynamic hedging” stance, just trading futures thereafter to manage exposures whether “long” or "short."
In other words, the ongoing phase transition from negative dealer gamma to positive (should those who hold hedges monetize them), is now keeping stocks lower, and preventing any bullish rumors from taking hold!
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Which, once again brings us to the key topic: while it may be impossible to front run it, is the Fed about to activate a global coordinated bailout, and if so, how should one trade it? This is where it gets complicated. According to Nomura's cross-asset strategist, the fear of this potentially imminent - and coordinated- central bank “interventionary” response (most likely time is this upcoming Sunday night, before the Asian open) will keep markets in a dangerous space, because strategies and traders which are potentially "pressing" shorts:
- either directionally (CTA model now “in play” of outright “short SPX” as noted above) or
- pressing-shorts to managed “net exposures” or hedge long books, will be exposed to a surge squeeze higher, while investors who have been “grossed-down” by their risk management VaR models won’t be exposed to an “up-trade” in risk and likely feel obligated to “grab into” a short squeeze
The danger after a coordinated central bank response (assuming one comes), is that investors will be forced into chasing that potential move higher in Equities out of fear that they “missed the lows,” but again into that inevitable “cluster” report of confirmed cases in a global mega-city outside of China (see what’s happening in California now as prime target), "as the pandemic is now certainly “real”—which could drive another shock-down, but this time, without the hedges which, on the way down, can also act as “insulation” when monetized."
In other words, if or rather when the corona pandemic gets even worse after central banks have launched its bazooka, it will be orders of magnitude worse as central banks will have staked their credibility on being able to offset the economic consequences of the pandemic (they can't, unless they can print viral antibodies), while investors will now be looking into the abyss without any hedges left.
And that could be catastrophic.
Which may explain why, in case the Fed does nothing on Sunday night, the NYSE announced that it would conduct "disaster recovery testing in the Cermak Data Center between 8:30 - 11:00 am ET" on March 7 amid Coronavirus fears.
As Charlie Gasparino adds...
BREAKING: @NYSE announces "disaster recovery testing in the Cermak Data Center between 8:30 - 11:00 am ET" on March 7 amid Coronavirus fears.."During this test, NYSE will facilitate electronic Core Open and Closing Auctions as if the 11 Wall Street trading floor were unavailable"— Charles Gasparino (@CGasparino) February 28, 2020
... "During this test, NYSE will facilitate electronic Core Open and Closing Auctions as if the 11 Wall Street trading floor were unavailable." In other words, testing as if a viral pandemic had swept across Wall Street...