Wall Street Breakfast

Author: bmotrader   |   Latest post: Fri, 3 Apr 2020, 8:59 AM


Wall Street Breakfast: Black Swans Circle Longest Bull

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If you could pick one word to define the market leading into this week it would be "chaos." An oil price war is in the making, treasuries are going haywire and coronavirus fears are everywhere. It's also starting to look a lot like one of those turning points that marks a generation of investors, like the dotcom bubble in 2000 and financial crisis in 2008-2009. Irony? March 9 is the eleventh anniversary of the longest bull market for U.S. stocks, but it's now taking a turn for the worse.

'Historic' oil price war

The failure of OPEC+ to agree on production cuts sent crude into freefall, plunging as much as 33% to $27 per barrel (it started the year in the mid-$60s). Besides a collapse in demand due to the coronavirus, Saudi Arabia launched an all-out oil price war by slashing pricing for its crude in an effort to push as many barrels into the market as possible. It was in response to a face slap from Russia, which refused to cut output further and insisted that U.S. shale producers should be made to share the pain.

Going global

A sea of red was seen around the world, with the Euro Stoxx 50 Index now down nearly 7%, Japan's Nikkei tumbling about 5% and Italy on the edge of a bear market. Amid an increase in the number of global coronavirus cases (110K) and deaths (3,840), Italy locked down nearly a quarter of its population (17M people) as the World Health Organization urged governments to take decisive action. Stateside, Oregon became the ninth U.S. state to declare a state of emergency, while an agreement was reached to dock the coronavirus-hit Grand Princess (NYSE:CCL) cruise ship at California's port of Oakland.

Ugly open

Stock index futures in the U.S. plunged the 5% limit overnight, triggering limit-down rules, meaning only transactions at or above that threshold are allowed. Once the market opens, NYSE circuit breakers will work like this: trading halts for 15 minutes if the S&P 500 falls 7% (to 2,764) at any time before 3:25 p.m. ET. Another 15-minute pause is triggered if losses reaches 13% (2,586). If the decline hits 20% (2,377.9), markets will close for the day.

Collapse in Treasury yields

The fears sent the benchmark 10-year Treasury yield below 0.4% for the first time ever, touching 0.3469% in overnight trade. In fact, yields on all maturities (including the 30-year and two-year) fell below 1% for the first time, with investors pricing a Fed rate cut to 0% in coming months. The flight to safety also saw gold futures blast past $1,700/oz overnight until the "sell everything" mindset kicked in, with the precious metal now falling back to $1,666/oz.

Are bond vigilantes out to get the Fed?

On Friday, Boston Fed President Eric Rosengren said if yields drop to zero, the Federal Reserve should consider buying a broader range of assets. "That would be a game-changer in my opinion, as no one in their right mind would want to be short an index when against a central bank with unlimited funds," said Chris Weston, head of research at Australian brokerage Pepperstone. "It seems the bond vigilantes are out to get the Fed to go hard here." The current bond rally is also notable because traders are preparing not only for zero-bound rates, but a raft of additional measures, including QE.

New coronavirus work policy

Immediate effects may be seen on the broader economy after Amazon (NASDAQ:AMZN) relaxed its attendance policy for employees who "work from an office, store, fulfillment center, delivery station or sort center" during the month of March. The company will not count any unpaid time off and won't assign attendance points to ensure there are no repercussions for needing to stay home due to illness. Last week, Amazon told employees in Seattle, Bellevue and the San Francisco Bay Area to work from home - if they can - through the end of the month.

State Department weighs in on cruises

In more bad news for cruise stocks, including Carnival (CCL), Royal Caribbean Cruises (NYSE:RCL) and Norwegian Cruise Line (NYSE:NCLH), the U.S. State Department updated its website with instructions that U.S. citizens should not travel by cruise ship. "CDC notes increased risk of infection of COVID-19 in a cruise ship environment... While the U.S. government has evacuated some cruise ship passengers in recent weeks, repatriation flights should not be relied upon as an option for U.S. citizens under the potential risk of quarantine by local authorities."

Authorities cancel SXSW

"After consultation with the city manager, I've gone ahead and declared a local disaster in the city," Austin Mayor Steve Adler declared, adding that the order effectively cancels South by Southwest for this year. A wave of companies already pulled out of the festival, including Facebook (NASDAQ:FB), Apple (NASDAQ:AAPL), Netflix (NASDAQ:NFLX), Twitter (NYSE:TWTR), Twilio (NYSE:TWLO) and WarnerMedia (NYSE:T). Since its inception in 1987, SXSW has grown to include film and technology, and brings hundreds of thousands of people from around the world to Austin each spring.

Just Walk Out technology

Boosted by the success of Amazon Go (AMZN), the company has launched a new website to sell its automated checkout technology to retailers. Amazon has already inked "several" deals with customers, reflecting a strategy of turning its internal capabilities into lucrative services (think warehousing operations and cloud technology). Dilip Kumar, Amazon's vice president of physical retail and technology, had no market forecast to share but said shoppers' preferences will determine how big the business becomes.

Today's Markets

In Asia, Japan -5.4%. Hong Kong -4.2%. China -3%. India -5.2%.
In Europe, at midday, London -6.4%. Paris -6.6%. Frankfurt -6.8%.
Futures at 6:20, Dow -4.9%. S&P -4.9%. Nasdaq -4.8%. Crude -21.2% to $32.54. Gold -0.4% to $1666. Bitcoin -9,4% to $7917.
Ten-year Treasury Yield -3 bps to 0.45%

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