Dow Tumbles Into 10% Correction As Futures Crash, 10Y Yields Plunge To Record Lows On Pandemic Panic

Against the backdrop of all this, the US has updated its travel advisory for Italy to “Exercise Increased Caution”. Later in the day Delta cut the number of flights to South Korea and Nestle SA, the world’s largest food company, has told employees to avoid traveling for business reasons until mid-March to keep from contracting or spreading the coronavirus. These actions are only likely to increase over the next few days. Meanwhile, Microsoft reduced its quarterly outlook yesterday due to the virus impact.

Elsewhere, Iran has imposed travel restrictions and suspended Friday prayers in areas hit by the virus after the country announced 19 Iranians have died due to the disease compared to 139 case, which is now the most deaths recorded outside of China though there are worries about the transparency and thereby accuracy of the reporting there. Overnight, Saudi Arabia has decided to temporarily halt religious visits that include stops in Mecca and Medina, which draw millions of people a year to Islam’s holiest cities, to prevent spread of virus in the country. The move comes amidst spread of virus in neighbouring countries including Kuwait, Bahrain, Iraq and the UAE. Saudi Arabia has not reported any cases so far. Meanwhile, Pakistan also reported its first two cases yesterday.

There initially looked like there would be some respite for risk markets yesterday, with the S&P 500 trading higher through the NY morning (+1.73% at the peak). Then markets headed lower later in the session as the reports of new cases built and after an unsubstantiated report that there may be an outbreak of the virus just outside of New York City. The MSCI All-Country World Index sank -0.6%, reaching 16 week lows on its fifth straight decline, and the S&P 500 index joined it ending down -0.38% lower, also the fifth day lower in a row, which is the longest such streak since August. The large intraday swings continue to support a high VIX index level, which was relatively steady above 27 points. The US 10yr Treasury continues to its slide into fresh record lows down -1.8bps, finishing at 1.333%. Oil joined equities in a move higher while Europe was open and then reverting lower in the US afternoon session as risk assets were hit across the board, Brent finished down -2.80%.

The 3M/10Y yield curve threatened to invert further throughout the day, before finishing unchanged near 5 month lows. Yesterday we highlighted that the WIRP Bloomberg page showed the chance that the Fed would cut rates again ahead of their April meeting was 66.5%, up from 24.5% a week earlier, but now the market is pricing in an 84.5% chance. In a report (link here) out yesterday, our US economists estimated that a cumulative equity decline of around 16% would exert a drag on US growth equivalent to nearly a 25bp rate hike. As such, they note that a continuation of the deterioration in risk sentiment could materially raise the risk of Fed rate cuts in the coming months. That is 16% from highs, which means we are nearly half way there already, with the S&P -7.96% off highs!

Before that European equities stabilised yesterday, with the Stoxx 600 paring back losses earlier in the session to close unchanged, just before headlines really started to turn around. European stocks did end their run of four successive moves lower for the index though. Italian assets outperformed, in spite of the country being at the centre of the coronavirus cases in Europe, with the FTSE MIB advancing 1.40%. 10 year yields were higher in Germany (+0.7 bps), France (+1.3bps), and Italy (+0.6bps). iTraxx Crossover index of credit-default swaps climbed by +4.45bps to 258bps, its highest level since 8th October. The Dollar strengthened through the day with the DXY dollar index now up for 14 of the last 18 sessions. With investors in search of havens in the second half of the day, gold resumed its march higher after the ‘big‘ -1.46% drop yesterday and is now up over +4.5% over the last 2 weeks

Elsewhere in the US, former Vice President Biden received a crucial endorsement from Jim Clyburn, South Carolina state representative and highest ranking African American in congress. Biden who was already leading with Black voters across the country, had not performed well in the first two primaries and finished a fairly distant second in Nevada. He needs to do well in South Carolina on Saturday in order to build momentum into Super Tuesday and have a path to the nomination. Clyburn said on Sunday political talkshows that he was worried about having a candidate with the title ‘socialist’ on the ticket and many party leaders have commented on what it could do to House and Senate races. Clyburn might be the first signal that party leaders are going to more forcefully back a moderate alternative.

In terms of data, US new home sales gave a rush of good news, even if slightly backward looking at this point. New home sales surged to its highest level since 2007 in January, reaching an annualized rate of 764k, significantly above consensus expectations of 718k. It was the best month-on-month change since last summer. This reflects on the record low levels of long term rates in the US coupled with strong consumer sentiment.

To the day ahead now, and economic data releases out include the Euro Area’s M3 money supply for January, along with consumer and economic confidence readings for February. Meanwhile there’s an array of data in the US, including the second reading of Q4’s GDP, the preliminary January readings for durable goods orders and non-defence capital goods orders ex-air, weekly initial jobless claims, the Kansas City Fed’s manufacturing activity index for February, and January’s pending home sales. From central banks, we’ll hear from ECB President Lagarde, as well as the ECB’s Panetta, Schnabel, Lane, de Guindos and Lane. In addition, the Fed’s Evans and the BoE’s Cunliffe will also be speaking.

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