S&P500 closed flat Monday, after slowly unwinding losses early in the session. European and Asian equities were mixed. US10Y treasury yields lifted 3bps to 0.71%, and 2Y yields rose a bit as well. Oil fell by 1.4%.
News flows have been primarily focused on the reopening themes, more specifically to the negative side of the equation as indications abound that increased mobility will lead to re-occurrences of the virus which will change the slope of the recovery.
While markets may eventually desensitize to mini-cluster outbreaks, provided death statistics remain static, at this stage, it does not lessen fears of a significant secondary spreader, which will undoubtedly weigh on consumer sentiment and hurt the rebound.
Unfortunately for global risk markets in general, this will be a reoccurring theme until – or if – effective vaccines are made available to the masses.
Earnings are mainly behind us, but a lot of uncertainty remains. After a majority felt we ran "too far, too fast," the conversation has started to shift a tad more favorably. It’s hard to say anyone’s pounding the table positively, but there’s less negativity out there now and investors continue to buy the dips.
The market is on the recovery roller coaster, making frequent stops at the West Wing to cover Main Street’s back, 33 Liberty Street (NY FED) to make sure the wheels of the market are greased, and the daily check-in at Johns Hopkins to make sure the curves are flattening.
Asian stocks are poised for a mixed start as traders assess the challenges economies face removing restrictions amid the coronavirus pandemic while, at the same time, busily searching for their highest conviction beta catch up trade.
Negative Fed Funds
Everyone on the Street seems to be expressing a view on negative rates in the US front end. The universal opinion is that it’s irrational, reflective of market technicalities, reduced liquidity and quirks of the financial system. No one expects the Fed to go negative: it would kill money market funds, which are a fundamental pillar of the US financing system.
There’s a saying that the Fed decides when to hike rates, and the market tells the Fed when to cut.
So even though the Fed currently claims negative rates are not appropriate, it’s another question of how they’ll feel if 20 basis points of cuts get priced into the September 2020 meeting.
I’d guess Chairman Powell will stick to that script for now (he speaks Wednesday at 9 a.m. NY) because market pricing of negative rates remains minimal. But given the Fed’s never-ending desire to corroborate market expectations, I would guess negative rate market pricing could eventually test the credibility of the current "we don't want negative rates" mantra. For this reason, no matter what the Fed says, I would never rule it out.
The reflation trade (repost from my view on April 6)
In 12-48 months, I expect the world will face the most significant wave of asset price inflation/fiat currency debasement in recorded history. Once the economy returns to pre-pandemic liftoff, the incomprehensibly-large global stimulus will find its way into every nook and cranny of all assets known to humankind.
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Soaring US yields trigger the wrecking ball effect as yields become a source of volatility for risk, rather than a source of support