Quad-Witching Craze: Futures Blast Off, Nasdaq Limit Up... But Can It Stick

After a week of vomit-inducing limit up, limit down market moves, the week is set to end with another rollerocoaster bang, as the notorious gamma-slashing quadruple witching - the expiration of options and futures contacts - coincides with the ongoing market volatility.

Having started off the overnight session on the backfoot, Emini futures then surged on Friday along with stocks and bonds globally in a day of solace for risk parity funds, as investors relished the unprecedented government measures to shield jobs and economies from the accelerating coronavirus pandemic, while the dollar slumped after a record-breaking eight-day rally. U.S. stock index futures firmed over 4%, with Nasdaq futs briefly hitting limit up at the end of another torrid week for financial markets that have been battered by growing evidence of the economic damage from the coronavirus pandemic.

However, in this market past performance is certainly no guarantee of future returns, and never more so than on days like today when a surge in trading is expected: volume over the last four weeks has been higher than past quadruple witching days, according to Bloomberg. Adding the expiration of these contracts means there could be price swings throughout the day - and especially at the open and close - in a market that has recently been mainly a one-way street of sell orders.

Meanwhile, with equity futures surging in the pre-market, and open interest on S&P 500 options rising to the highest on record, that’s just a taste of what’s to come in the trading day ahead. Not to mention it’s Friday, and as Bloomberg notes the tendency has been to cut positions ahead of the weekend to hedge against headline risk.

Shares also jumped across Europe, where stocks were set for the best back-to-back gain since 2008 on the ECB's unprecedented easing. The Stoxx 600 Oil & Gas index jumped as much as 8.3% after crude oil saw its biggest single-day jump on record and are continuing to rise after U.S. President Donald Trump waded into the price war between Saudi Arabia and Russia. The Stoxx 600 Travel & Leisure Index also gained as much as 9.8%, the most intraday since Oct. 2008, and outpacing a broader market rally. The sector rises for a second day after closing at the lowest since June 2012 on Wednesday.

Earlier in the session Asia was sharply higher as well: markets added more than 7% in Seoul but were closed in Tokyo for a holiday.

Taking advantage of extremely thin liquidity, Treasuries rose, with the 10Y TSY yield dropping below 1%, as bonds across Europe also gained.

In FX, the dollar weakened against its major peers after vaulting more than 8% in the previous eight sessions. As it reversed, at one point the Bloomberg dollar index fell the most in more than four years.

The pound, Australian dollar, Norwegian krone and South Korean won all leaped more than 2% versus the greenback, as dollar-swap lines kicked in at more central banks.

After surging the most on record, oil extended its rebound from a day earlier, but it was still down double digits on the week.

Market Snapshot

  • S&P 500 futures up 3% to 2,474.75
  • STOXX Europe 600 up 3.8% to 298.82
  • MXAP up 3.2% to 126.70
  • MXAPJ up 4.9% to 411.64
  • Nikkei down 1% to 16,552.83
  • Topix up 1% to 1,283.22
  • Hang Seng Index up 5.1% to 22,805.07
  • Shanghai Composite up 1.6% to 2,745.62
  • Sensex up 4.5% to 29,560.24
  • Australia S&P/ASX 200 up 0.7% to 4,816.63
  • Kospi up 7.4% to 1,566.15
  • German 10Y yield fell 7.8 bps to -0.271%
  • Euro up 0.9% to $1.0788
  • Brent Futures up 5.8% to $30.13/bbl
  • Italian 10Y yield fell 68.6 bps to 1.568%
  • Spanish 10Y yield fell 11.8 bps to 0.761%
  • Brent Futures up 5.8% to $30.13/bbl
  • Gold spot up 2.6% to $1,509.79
  • U.S. Dollar Index down 1.3% to 101.38

Top Overnight News from Bloomberg

  • Treasury dealers’ holdings of long-dated paper jumped the most on record in March as leveraged funds rushed out of large trades held against futures, causing liquidity to quickly evaporate
  • German Finance Minister Olaf Scholz threw his weight behind the government potentially taking stakes in companies to boost their capital and help offset the impact of the coronavirus
  • U.K. Chancellor of the Exchequer Rishi Sunak and Prime Minister Boris Johnson will set out moves to support companies hit by the pandemic, after what officials described as very positive talks with business leaders and unions
  • Italy Prime Minister Giuseppe Conte is weighing extending the ban on non- essential activities until at least May 1, daily La Stampa reported
  • The World Health Organization said the coronavirus pandemic is now infecting people at a faster pace. It took three months for the first 100,000 cases, but only 12 days for the next 100,000
  • Hong Kong suffered its biggest daily increase in new coronavirus cases since the pandemic first reached the city in January, underscoring the mounting challenge to contain the spread after residents rushed back from abroad this week

Asian equity markets traded higher as the region took its cue from the mild rebound on Wall St amid continued policy efforts to contain the coronavirus fallout including the latest 15bps emergency cut by the BoE and with the US Senate working on a deal which would provide USD 1200 cash payment to individuals. ASX 200 (+0.7%) was underpinned by supportive measures including the RBA’s first ever QE operation and the Australian Banking Association announcement that banks will defer loan payments for 6 months on small businesses impacted by the outbreak, while real estate led the gains as the sector found restitution from its recent collapse after the big 4 banks lowered business and home loan rates. KOSPI (+7.4%) outperformed and triggered a side-car as it atoned for the prior day’s substantial losses and related stoppages, while Hang Seng (+5.1%) and Shanghai Comp. (+1.6%) conformed to the rebound after China’s coronavirus epicentre of Hubei reported no new cases for a 2nd consecutive day, but with gains in the mainland restricted by continued PBoC inaction in which it skipped liquidity operations again and disappointed calls for a cut to the Prime Loan Rate. As a reminder, Japanese markets remained closed for Vernal Equinox holiday.

Top Asian News

  • Cathay Pacific Scraps 96% of Flights as Virus Stops Travel
  • Brokerages Hit by Margin Calls Are Rushing for Dollars in Korea
  • AustraliaScrambles as Cruise Passengers Test Positive for Virus

European bourses opened with gains of around 5%, and subsequently extended on this given a grinding bid in futures as we entered early EU hours; albeit, indices are just off of highs at present. The region remains underpinned by remarks from EU Commission President von der Leyen which received a wider airing – noting the EU is to loosen debt rules, while specific details were not provided this does follow reports out of Germany yesterday that they wish to apply an exemption to the debt brake, while the debt comments from the European Commission are likely in reference to Growth & Stability Pact deficit limits. Following the EU cash open sentiment continued to improve, to the extent that the Nasdaq March’20 future briefly touched the 5% limit-up level at 7649; with the E-mini S&P and DJIA not far from their respective levels (circuit breakers/limit down levels are listed on the Newsquawk headline feed). Sector performance sees all sectors firmly in the green, with some notable outperformance seen in Energy (+7.0%) as the broader crude complex has rebounded significantly after yesterday's sell-off. In terms of individual movers, Osram Lich (+23%) is by some measure the stand-out after AMS confirmed they are to close on their acquisition in Q2. Other movers are largely moving in-line with sector/bourse performance, with a number of the Stoxx 600 laggards arising from the FTSE 100 which has been weighed on by Sterling's substantial resurgence this morning; ahead of measures from Chancellor Sunak.

Top European News

  • Europe Stocks Set for Best Back-to-Back Gain Since ‘08 on Easing
  • Italy Set to Tighten Its Lockdown as Fatalities Top China
  • Bank of England Cancels Annual Stress Test of Major Firms
  • Maersk Suspends Guidance as Virus Disrupts Supply Chains

In FX, consolidation and corrective trade in the currency markets after the DXY surged to new peaks a fraction shy of 103.000, with the index back below 102.000 amidst a broad recovery in G10 counterparts and EM rivals that are also getting a reprieve from a relief rally in related commodities. However, the Greenback remains bid in volatile conditions ahead of the weekend as the coronavirus vigil continues and global Central Banks join forces with Governments in emergency and/or unprecedented policy action to combat the adverse effects of the pandemic.

  • AUD/NZD/NOK/GBP/CAD - All leading the comeback from multi-year lows, with the Aussie reclaiming 0.5900+ status and Kiwi more stable above 0.5800, while the Norwegian Crown is outperforming its Swedish peer on the firmer rebound in oil rather than another impromptu Norges Bank rate cut (-75 bp) and more liquidity measures. Similarly, Sterling has not suffered a severe hangover following yesterday’s BoE salvo, as Cable holds well above worst levels within a massive 1.1414-1.1877 range awaiting UK Chancellor Sunak’s supplementary fiscal support package that may be unveiled around noon, while the Loonie is nursing more losses between 1.4151-1.4536 parameters ahead of Canadian retail sales data.
  • JPY/CHF/EUR - Also attempting to regroup, but hampered somewhat by the latest upturn in risk appetite plus holiday impacted Japanese participation due to Vernal Equinox Day. Nevertheless, Usd/Jpy has retreated from 111.00+ to sub-110.00, Usd/Chf towards 0.9800 vs almost 0.9900 at one stage and even Eur/Usd has managed to clamber back over 1.0700 from almost 1.0650.
  • EM - Regional currencies are all benefiting from the aforementioned improvement in sentiment or less COVID-19 angst for the time being, but the Rouble is underperforming after the CBR held rates as expected to leave the focus on the tug-of-war over crude prices and market share with Saudi Arabia that Russia has attempted to play down.

In commodities, WTI and Brent front-month futures extend on yesterday’s rally, which saw prices climb over 20% as the complex was buoyed by signals that US President Trump could intervene in the Saudi/Russia price war at “an appropriate time”, with reports of potential sanctions on Russia in a bid to stabilise markets. The benchmarks also experience an underlying bid from reports that the US DoE is planning on stockpiling crude for the SPR. Overall risk appetite also aids the complex in grinding higher after the European Commission President stated that the Union is to loosen debt brakes. WTI May’20 has reclaimed USD 28/bbl to the upside whilst its Brent counterpart gain ground above USD 30.50/bbl, with technicals futile at this stage, meanwhile the spread also widens vs. earlier in the week. Elsewhere, gold prices stage a rebound as DXY loses impetus from its recent rally, and as liquidity concerns somewhat fades for the time being amid a string of Fed liquidity announcements. The yellow metal reclaims a USD +1500/oz status having printed a recent trough just above USD 1450/oz. Finally, the overall sentiment bolsters the red metal back north of USD 2/lb, having briefly lost the handle during the prior session.

CME raised crude oil NYMEX futures margins by 20.4% to USD 5600/contract from USD 4650/contract and is reportedly changing its dynamic circuit breakers for oil to 15% from 7%. Furthermore, CME raised COMEX 5000 silver futures maintenance margins by 14.3% to USD 8000/contract, raised Palladium futures NYMEX initial margins by 9.3% to USD 38500/contract and raised Platinum futures NYMEX margins for specs by 11.1% to USD 4400/contract.Goldman Sachs sees restraint by core-OPEC could raise Brent to USD 30/bbl from its forecast of USD 20/bbl in Q2, while it added that production quotas could result in USD 5-10/bbl upside to its 2021 price forecast of USD 40-50/bbl.

US Event Calendar

  • 10am: Existing Home Sales, est. 5.51m, prior 5.46m
  • 10am: Existing Home Sales MoM, est. 0.92%, prior -1.3%

DB's Jim Reid concludes the overnight wrap

Working from home has ruined my exercise regime. As regular readers will know I walk to the station, walk from station to office, walk to meetings and walk just for the sake of walking. A slow financial market Forest Gump. At the moment walking is limited to between my kitchen and my study. So my calorie and step count on my iPhone has taken a severe hit. However in-spite of being as busy as I can remember (apologies if I haven’t responded to an email. I can’t keep up) I’m now trying to get into a routine of answering emails twice a day from my exercise bike. So if you get an email from me I’ll more than likely on my bike. In fact I’m writing this paragraph on it too.

Thankfully it was a relatively boring day. Ok, as you’ll see below that wasn’t the case everywhere but the S&P 500 (+0.47%) did at least finally see its first move of less than 1% in either direction for the first time in 13 days. That was the longest streak since September 25th 2002 when we saw a run of 15 +1% absolute move days. In fact, it’s the first time in over a week that the index has seen a move of less than 5%. For comparison, in all of 2019 we never saw the S&P move more than 3.5% either way in a single day. In Europe, equities saw larger gains, with the STOXX 600 up by +2.91%, with energy companies leading the advance on both sides of the Atlantic as oil came off multi-year lows.

That’s where the boringness ends though as there were spectacular moves elsewhere and note that some of them were very positive. WTI oil (+23.81%) saw its biggest daily move since we have daily data going back to March 1983. Brent crude (+14.43%) had its biggest daily advance since the drone strike on Saudi oil facilities back in September. President Trump gave an extra push to oil at the end of his Covid-19 press conference, saying that he would get involved with the oil price war between Saudi Arabia and Russia when it was appropriate. The administration also pledged to aid shale-drillers who are struggling in the geopolitical crossfire, by buying as much as $3bln of oil from smaller domestic producers – smaller than 5,000 workers. Mr. Trump’s comments came after his administration announced earlier that they would be purchasing as much as 77mln barrels of crude to fill the Strategic Petroleum Reserve, with 30mln being delivered over the next 2 months. Though it is yet to be confirmed whether the additional buying will be enough, given the degree of oversupply coming from Russia and Saudi Arabia, however Trump does have some leverage through security deals in place with the Kingdom. Prior to Trump’s comments, Brent was already up +7.5% and WTI +17.8%.

During that press conference, the President also said an old malaria drug – chloroquine – as being approved for use against Covid-19. However the FDA later clarified that the drug has not yet been approved for use against the disease, but that it would be tested in a clinical trial. Chloroquine has already been cleared in general as safe by the FDA though, and so US doctors are allowed to prescribe it if they feel that it is medically appropriate. Much like we saw with Gilead’s possible treatment yesterday, the market is eager for a medical solution. Equities initially popped on Trump’s comments.

The relative calm has continued into markets this morning where futures on the S&P 500 are up +0.28% as we type those on the Nasdaq are up a bit more at +0.67%. Asian markets are also broadly up with the Hang Seng (+2.81%), and Kospi (+4.80%) seeing the biggest advances in the region while the Shanghai Comp is up a more modest +0.47%. Japanese markets are closed for a holiday. After three days of big gains the USD index is -0.78% this morning with all the G-10 currencies advancing against the greenback. Oil has risen further with Brent crude up +2.74% and WTI +4.40% this morning after yesterday’s record gains. In other news, California has announced a statewide stay-in-place order overnight.

Back to yesterday where in sovereign bond markets, there was a significant tightening of European spreads following the ECB’s announcement of their €750bn Pandemic Emergency Purchase Programme the night before. The spread of Italian 10yr yields over bunds fell by -73.5bps, their largest daily move lower since December 2011, while for Greece, where the ECB granted a waiver that will allow them to buy Greek sovereign bonds, the spread fell by a massive -152.5bps. Other countries also saw dramatic reductions in their spreads, with Spanish spreads down by -38.4bps (biggest tightening since October 2012) and French spreads by -16.0bps. Credit finally saw some 2-way tension as the CSPP got an implicit uplift. Euro IG massively outperformed on an adjusted basis with iTraxx Main (IG) -21bps and Crossover ‘only’ -33bps. A 1:4 ratio is broadly normal. Over the last few days it feels like the market liquidity issues for corporates are being helped by the massive programs from the Fed and the ECB. However what the authorities can’t do is tell us how long economies will be shut down for and how bad the earnings/economic hit will be. Our base case is that as the bias moves away a bit from immediate company liquidity it will move to the economic impact and as such HY has more relative stress to come than IG. For completeness in cash, EUR IG and HY were +2bps and +20bps wider at index level yesterday while USD IG and HY widened +48bps and +78bps. So we’re still seeing a significant underperformance of USD IG where spreads are now at 351bps.

Unsurprisingly, credit fund outflows have become worse in the last few days as investors scramble for liquidity. Funds’ cash buffers have been shrinking rapidly and forced selling is taking hold. The anecdotes have been confirmed by most recent weekly fund flows data released overnight, showing record-breaking withdrawals. For more details, see our report called ECB and BoE vs. Accelerating Corporate Bond Fund Outflows published earlier this morning, which puts the recently announced additional central bank purchases of corporate bonds in the context of recent outflows and the overall market size. You can see the full report here.

Talking of liquidity issues, we’re certainly not out of the woods in dollar funding terms as hoarding continues. With the Bloomberg dollar index climbing to yet another record high yesterday (+1.58%), our head of FX research, George Saravelos put out a report yesterday on the dollar crunch (link here). He writes that he’s worried that in spite of the Fed’s new commercial paper funding facility, as well as the USD liquidity being provided from other central banks via FX swap auctions, that it wasn’t working to solve the ongoing dollar “hoarding” crisis. According to George, the current lack of dollar liquidity is potentially more structural in nature. And while he says governments are moving in the right direction, it’ll take time for the various measures to come into place.

The policy moves did keep coming though. The Bank of England’s MPC unanimously voting to cut rates by a further 15bps down to 0.1%. This is their lowest level ever, which is quite something considering that unlike the Federal Reserve (which was founded in 1913), the Bank of England has been around since 1694!. Furthermore, while Governor Bailey said afterwards that he wasn’t in favour of negative rates, he ruled nothing out. The BoE also announced that they were increasing asset purchases by a further £200bn, which includes UK government bonds and sterling non-financial investment-grade corporate bonds, though the majority will be in government bonds. In response to the decision, UK gilts, which had been underperforming before the announcement, erased losses with 10yr yields ending the session -7.2bps at 0.72%. In the US, 10yr Treasury yields traded in a 25bp range overnight and through the day before finishing -3.5bps lower at 1.16%. We also saw the 2Yr/10Yr curve continue to steepen (+4.2bps to 69.4bps), now at levels last seen in February 2018.

On the monetary moves elsewhere, the Federal Reserve announced that they were establishing US dollar swap lines with 9 further central banks, adding to their existing swap lines with the ECB, BoE, BoJ, SNB and BoC. Other rate cuts included Indonesia lowering by 25bps to 4.50%, South Africa by 100bps to 5.25%, and Taiwan by 25bps to 1.125%. That said, it wasn’t just easing yesterday, with the Swiss National Bank keeping their policy rate at -0.75%, while the Danish central bank actually raised its key rate by 15bps to -0.6% in order to defend the Danish Krone’s peg against the euro.

On the fiscal side, Bloomberg reported that the White House was considering the idea of issuing both 25-year and 50-year bonds to finance the stimulus package that US Senate leaders unveiled after the US markets closed. As has been discussed for the last few days, the deal centers on $1,200 checks sent to individuals ($2,400 for married couples) that would be in the form of a tax rebate. The bill includes $58bln for the airline industry and over $350bln for small business loans and distressed areas of the economy, however there is a cap being put on executive salaries and severance pay. Republicans are going to try and get Democrats on board as quickly as possible, and as mentioned yesterday that some senators want to vote on it as soon as this weekend. There were also reports from Germany that the country’s government wanted to suspend the debt brake, which would mean the government would no longer be constrained by constitutional limits on borrowing. The cabinet is thought to be signing off on the request in the coming days and a decision on this could come as early as next week. With the debt brake gone, Bloomberg suggested that the government would use its resources to build a EU40bln fund supporting the self-employed, small businesses, and other ventures aimed to stimulate the economy.

On the virus front, we continue to look for a plateauing in Western cases. Italy’s daily case growth seems to have shifted to the low teens this week after being in the high teens last week and the 20% range two weeks back, though the total number of deceased in Italy surpassed those in China as the number of infected in Italy continue to strain the healthcare system. The US, France, and Germany continue to grow at sharper rates than Italy, but the social measures enacted in those countries to bend the curve came later and so expect to see cases continue to grow there at a fast pace for a few more days at least. This is especially true in the US, where testing is beginning in earnest and so there will be a coinciding spike in cases – e.g. NY state has started the drive thru testing centers seen in South Korea and expect more to come online. See the daily table and charts in the “View Report” link at the top.

With initial data coming in on the economic impact of the coronavirus, it’s no wonder that we’re seeing such a sustained policy response. In terms of the releases out yesterday, the weekly initial jobless claims reading from the US spiked up to 281k (vs. 220k expected), a level unseen since September 2017. And this was for the week ended March 14, so doesn’t account for any deteriorations since then. There was also the Philadelphia Fed business outlook, which fell to -12.7 in March, the lowest since July 2012 and the largest monthly deterioration on record. Finally, the Ifo business climate reading from Germany fell to 87.7, its lowest level since August 2009, and the expectations reading also fell to 82.0, its lowest since January 2009.

Turning to the day ahead now, and data releases scheduled include the Euro Area current account for January, the UK public finances for February, Canadian retail sales for January and from the US there’s existing home sales for February. There’ll also be a rate decision from the Russian central bank.