2020/3/15 ~ 2020/3/21 Judgement Day

2020年3月24日

No one could have anticipated that the longest 12-year bull market in the U.S. history would come to an end in a form of virus outbreak, forced human economic activity to freeze and then followed by a total crash at a speed rarely seen in history. After the outbreak of the virus in Wuhan, China at the end of January 2020, the European and American stock markets only reacted with a small drop, and the market then quickly used the experience of SARS virus, which miraculously disappeared in the summer of that year (quoted form Trump), to anticipate that the potential impact of COVID-19 virus impacted on the world economy might only be a short-term impact which woluld not cause much damage to the stock market. Although it was expected that the profit growth of many firms would be significantly reduced, and there were threats of supply chain disconnection in many industries, the market still set the tone that of the virus brokeout in China and the government’s fierce reaction of almost nation-wide lockdown was only a supply challenge. The strength of European and American stock markets remained strong. Stock prices continued to hit new highs, squeezed those bears who did not agree with the strong stock price strength. However, as the desease began gradually outbreaked outside of China in late Faburary and evolved into a total out of control in Europe and the Unitd States, the financial market until then became to aware the severeness of the situation. As more and more countries joined China’s policy to lockdown cities and close their boarders, the economy situation turned from shortage of supply capacity into a forced freeze on demand. The original extreme optimism soon turned into extreme pessimism and the stock prices began to decline rapidly, but still sought support and rebound around the 600-day moving average.
However, in addition to the economic impact of the pandemic, the collapse of oil prices also played a part to hit the market. The impact of the disease on the economy has already caused heavy pressure on oil prices and the market was expecting that OPEC and Russia would reach a consensus to reduce production to support oil prices. However, after the negotiation on the weekend before 3/9 broke, Saudi Arabia surpricingly announced that it would fully open its production capacity and cut prices for its customers in order to take revenge on Russia. Oil prices collapsed by more than 20% at the opening of Asian trading session on 3/9 and the prices were close to the low level of 2008 financial crisis and 2016 and barely show sighs of rebound. This has added market panic and started the most turbulent two weeks since the financial crisis. Not only traders entered into the market after 2009 have never seen the situation, but even market veterans who have experienced the financial crisis also praised the speed of the market crash.
If the decline in the stock market from the end of February to 3/8 was a pessimistism about the economic slowing down, then the crash from 3/9 to 3/20 was a despair of drying up liquidity. If we only focus our eyes on the decline of the stock market, it may be difficult to aware that the market collapse in the two weeks from 3/9 to 3/20 was essentially different from the sharp decline at the end of February to earky March. We need to expend our eyes to the foreign exchange and interest rate (bond) market and to put attention on the U.S. dollar cash, or liquidity of the U.S. dollar. After the opening of the Asian market on 3/9, in addition to the stock market and oil price collapse, the bond market began to soar. U.S. Treasury yields also fall at a rare rate. I still remember that after the Asian opening that day, the 30-year U.S. Treasury yields plummeted by 20 basis points (the price range of more than 10 basis points a day over the past two years would be tought to be very dramatic). Based on past experience, when this kind of excessively extreme price jump occurs, the market would usually soon to make corrections, and the price would quickly move closer toward the moving average. After sideway for a while, then it will move toward the direction of the main trend. Also, prices usually do not fluctuate very much during Asian session, it would mostly wait until the European opening for the main trend of the day to start. Based on such experience and judgment, I thought that the 30-year U.S. bond yield might rebound up by 5 to 10 basis points before continue going down, and immediately sold 30-year U.S. Treasury bond futures with a small position. In hindsight, it was not known at the time that the tiny transaction was not trying to conquer an ordinary big wave, but a tsunami that happened once in 10 years. Soon after the transaction, the interest rate did rise as expected. Just as I was complacent about my wise and savvy trading vision, the tragedy began to occur. After the opening of Greater China at 9 o'clock, bond yields began to fall again in an avalanche style at a rate felt like light speed. And 5-year, 10-year, 30-year rates all faced the same crash. Noticing that the situation was abnormal, I turned my eyes away from the falling candle chart and looked at the limit book interface. At this time I realized that the situation was an extreme: the U.S. bond liquidity has dried up, and the longer the date, the more serious it becomes. Then I looked at the interest rate curve window, seeing that the spread between the long and short term rates narrowed at an extremely fast speed. I thought this was not an ordinary short squeeze, but something is going to be really bad in the market! Till then I had no intention to do other daily chores, but could only focus on watching U.S. Treasury bonds and the U.S. dollar interest rate swap quotes jumping up and down at a rate of 5 to 10 basis points per second, combined with cry out and mourn from my FX trading colleague. (The same turbulence also happened in the foreign exchange market, with the exchange rate of the US dollar against the Japanese yen depreciated from about one dollar to 104 yen to one dollar to 101.5 yen within one hour after 9 o'clock, Taiwan time).
The stock market crashed, the Jaoanese yen ’s skyrocketing, the collapse of bond yield accompanied by the rapid narrowing of interest rate spreads, and even once inverted along the curve, all signs indicated that the market is not only pessimistic about the economic slowdown, but panic that the economy is about to fall into recession! Then I remember I could do nothing but only to watch the loss of that tiny trade continue to expand with the 30-year interest rate that fell without limits. The decline in interest rates gradually increased to a range of 30 basis points, 40 basis points to close to 50 basis points. Looking back over the past 20 years, only in the desperate moment of the financial crisis, the single-day decline in interest rates has reached close to 50 basis points (but at that time the U.S. Treasury interest rate was still more than 3%. The US dollar interest rate fell below 1% this time, and the ratio of falling was completely incomparable). Only then did I know that it was not a usual big wave but a tsunami that I was encountered, I wanted to take advantage at a little kitty, but got bitten by a big tiger. However, I did not try to close the position on that day. After all, since the position was small, the loss can still be tolerant. I just lamented how did the profit and loss of that tragic tiny trade as if the trade size were 10 times? In addition, I also carried a weird joy of witnessing history, and wondered at such a speed as if there were no limit to falling, what would happen to the world with zero or negative interest rates on U.S. Treasury bonds. The stock market has fallen, the yen has risen, and the bond market has risen. Well, everything is still in the rational logic of safe-haven model of the financial market, but only a little bit more exaggerated. I did not noticed that the day was just the beginning of a financial thriller.
The morning news on 3/10 flooded with the stock and oil prices crash. At most, News on bond market only covered with U.S Treasury yield hit record low, nothing more. In addition, I also heard an interesting news which I did not pay much attention to that gold price did not rise but fell. The market interpreted it as the stock and oil prices tumbled. It was necessary to liquidate profit assets like gold in order to get cash to pay for margin. I did not pay attention to this humble news that it was actually the starting point of the market's desperate liquidity crisis in the next two weeks and also the key to mastering the market direction. After arriving at the company and turned on the computer, I was pleasantly surprised to find that the trade that had almost killed me yesterday was miraculously resurrected. Based on the fear of post-traumatic syndrome and the awe of uncontrollable market volatility, I quickly squared this miraculously resurrected tiny trade, then watched the market redefining crazy and madness with a feeling of watching. I didn't know that although I had eliminated a tiny risk, I had also missed perhaps one of the most correct position this year. What was not noticed that day was that although interest rate fluctuations were no less than the previous day, the direction had quietly changed.

During the rest of the week, I was distracted by the drying up of liquidity in the bond market, chaotic stock market conditions, and the worsening European and American epidemic and the shocking news that Trump announced that the United States baned European tourists from entering the United States. During discussions with colleagues, we noticed that U.S. Treasury interest rates have rebounded rapidly since hitting a record low on 3/9. The prices might turn in the middle, but none of them had tested the 3/9 low anymore. Meanwhile, the dollar ’s exchange rate against the Japanese yen bounced back at 3/10, completely erased the previous day ’s decline and began to soar. In addition, though the stock market may have rebounded sharply due to policies stimulus to rescue the market by Eutopean and U.S. government during the period, the stock market would back to crash on the next day in the form of futures hit low limit and stock price hit circuit break. At this moment we knew that the market is not only panic but despair. The stock market crashed, the bond market plummeted, and the dollar rose sharply against the yen. The traditional safe heaven mode of stocks fall, bond rise has ended, but switched to a escaping mode that ran for dollar cash. In addition, the liquidity index of the short-term interest rate of 3 month U.S. dollar LIBOR began to rebound. All signs indicated that the worst situation may occur at any second. Once the dollar liquidity dried up, the hope for financial stability would be doomed, and might evolve into a disaster like 2008 financial crisis, not just a recession, in any time.
Before going to work on 3/16 morning, I read on news that the Fed emergently cut interest rate by 1% before the market open, lowered the federal funds rate down to 0%. Noticing that the Fed cut rate so quickly and couldn’t even wait only few more days for FOMC meeting, I was really terrified, not because of the fear of a stock market crash. , But felt that there really was a liquidity crisis in the market so that the Fed could not wait until 3/18 to announce the interest rate decision. On that day, the US stock futures hit low limit rihgt after opened, the European stock futures plummeted, and the US stock market melt down immediately after opened and set a new record. The media and the stock market have scoffed that the Fed had raisen its hands and surrender to cut rate under the pressure from Trump, but the rescue failed to save the market unfortunately. However, I thought that the emergent rate cut from the Fed was trying to save the interest market rather than the stock market. During the week, in addition to lowering interest rates, the Fed also continued to inject funds into the market. In addition to buying bonds, it also restarted Commercial Paper Facility to maintain dollar liquidity. However, interest rates continue to soar and the dollar appreciates wildly. The whole world not only run for toilet paper, but also frantically dumping bond, non-dollar currency, and crying for the US dollar, which is really a global dollar run. The entire run came to a climax on 3/19 Asian trading session. On the morning of Taiwan time, Australian government bond and Taiwan government bond collapsed one after another. In particular, Australia's 10-year bond yield has soared by 128 basis points, and the interest rate swap spread between 2 and 10 years has risen above 80 basis points. Meanwhile, the Australian dollar exchange rate fell to 1 Australian dollar to 0.55 US dollars. The chaos continued until the RBA emergently cut interest rates again at noon, announced interest rate curve control, and the European Central Bank announced a 750 billion euro bond purchase program. The European market opened in the afternoon, and the yields of German, French, and Italian bond yield began to plummet, while the Australian dollar rebounded, erasing the decline in the Asian session and left a long low tail of more than 240 points. Besides, the US stocks no longer plunged on the same day, and the panic in the market finally eased.
After two thrilling weeks, I felt really nothing but exhausted, and it was really exhausting even standing by the side watching the market. At first glance, the emergency of financial crisis has been alleviated after the central banks cut interest rates, injected funds, and the Fed reached currency swap agreements with other central banks to ensure dollar liquidity in the international market. Although U.S. stocks continued to fall by Friday's close, the bond yield returned to decline, the market might switch back to safe heaven mode from the escape mode. Looking forward, the market may be concerned more about the impact of the epidemic on the economy rather than dollar squeeze. Many people are concerned about the government's successive efforts to rescue the stock market. My personal view is relatively pessimistic, and believes that the bear market still has a long way to go. The reason is that based on the impact of the epidemic, countries are rushing to control the spread of the virus, and the world ’s economic activities have frozed instantly. This may have only been recorded in during Black Death in the past history. Because the current epidemic is still spreading beyond of control, the government's most extreme measures have not yet appeared, at least not in London and major cities in the United States. Before those measure it is expected that the peak of infection will yet to come, and it would be difficult for the governments to relax the restrictions on economic activity before the speed of new confirmed cases slowing down. In other words, that the economic recession this year is for sure. Looking back on the recent economic cycle, as long as it encounters a recession, the degree of decline of U.S stocks market would be at least 40% to 50%, but it is only a little more than 30% now, meaning that the bear market may still persist for a long while. However, the stock market may be less likely to reproduce the plunge of the past two weeks, because as the governments has successively came out policies to rescued the market and some people have started to buying low, the battle between bulls and bears would continue to be more intense. At this point, the market might gradually focus more on fundamental data, and continue to revise expectations. The speed of stock prices to decline might slow down. In short, it may need some patience before take the shot to buy low.
In the end, some people may compare the current crisis with the distor in 1987 based on the speed of decline, or compare with the 2008 stock market crash. I think that each cycle might be similar but there are still some unique feature. The seeds of 2008 crisis has actually been buried since 2007. Economic activity and the stock market have begun to slow down in 2007. It was only the Lehman Brothers’ collaps in the fall of 2008 to trigger a more serious recession; and there were basically no serious economic slow down in 1987, the death spiral of the stock crash is more likely to be caused by news events and program trading. As for the crash in early 2020, though the virus outbreak may act as an external factor that forced the economic activity to stop, but it is essentially because during the past few years, regardless of any negative news, stock prices could always grow at the end and let the market believe that as long as the central bank prints money, it can solve all problems in the stock market. After a significant deviate from economic value, the bubble was forcibly punctured by the virus, which may be more like the disillusionment after the hurricane of 1929 (of course, it was also the worst great depression in modern economic history). As for the speed of decline faster than in the past, it may be because the development of transaction speed in the past 10 years is not comparable to that it was in 2008. In short, it is somewhat comforting that ancient economic wisdom has proved still useful through this outbreak. This time is not different!