Rates Pushing Higher, Volatility Sky-High, And Central Banks Stepping Up

Yesterday was the worst day for equity markets since Black Monday 1987, -2352 for the DJIA yesterday, The 1987 crash led to a number of Wall Street firms ending their existence. This morning the volatility continues with the DJIA at 8:30 am ET up 1,000 points. The S&P hit limit up (+5.0%) at 8:20 am ET this morning after dropping 9.5% yesterday. MBS prices yesterday ended down 80 bps from Wednesday, lenders re-pricing multiple times. Early this morning, MBS prices started +38 bps from yesterday.

The US is closed! No sports, many schools closed, conventions canceled, gatherings restricted to small groups, and a coronavirus conference canceled. On Monday, the trading floor at the CME will be closed.

More central banks are stepping up. The Peoples Bank of China banks has to set aside as reserves. The Bank of Japan offered to buy 200 billion yen ($1.9B) of bonds, adding to an injection of short-term funds. The Reserve Bank of Australia pumped the most extra cash into the country’s funding markets in at least seven years. And the European Central Bank signaled it’s ready to rein in widening bond spreads and stressed it could cut rates further. Next Wednesday, the FOMC will likely cut the Federal Funds rate again by 0.25%. Nancy Pelosi said she’s near an agreement with the Trump administration on a bill to mitigate the impact from the virus, and Germany pledged to spend “billions” to cushion the economy. The ECB is being criticized for its weak response yesterday; The French and Italian leaders both outwardly said the stimulus package announced was insufficient. Austria urged its traveling citizens to come back home and stay there, declaring the rest of the world unsafe in an unprecedented travel warning. The global death toll from the outbreak topped 5,000; total cases 135,118.

Sec. of Treasury Mnuchin on CNBC made a powerful statement that there will be liquidly in markets no matter what it takes to keep money flowing. He made a point that banks should use the Fed’s discount window Historically, when a bank went to the discount window, it was seen as the bank was in trouble. In the MBS world, it won’t be easy with pre-payments mounting, causing a major duration problem and declining values of servicing rights that support private lenders and roil bank portfolios.

At 9:30 am ET the DJIA opened +1250, NASDAQ +427, S&P +143. 10 yr at 9:30 am ET 0.93% +13 bps. MBS prices at 9:30 am ET+31 bps from yesterday’s close, and -43 bps from 9:30 am ET yesterday. BUT, by 9:45 am ET MBS prices were down 19 bps from yesterday and -93 bps from 9:30 am ET yesterday.

At 10:00 am ET, the preliminary March U. of Michigan consumer sentiment index was estimated at 95.0 from 101.0 in February; the index hit at 95.9.

Today will be another volatile session; after what the markets have gone through the last three weeks, speculation is growing that the worst is over. We hope it is, but presently it is more cheerleading than reality. There are very good stock values out there for those that know where they are. The point is that we expect a lot more cheerleading after the DJIA 7710 point decline. How much and when? The economy will suffer through the rest of the year; consumers won’t spend as they did, and many businesses will not meet those optimistic forecasts that were prevalent at the end of January.

Source: TBWS