Cachet's Insight 16/03/2020
As of 12 March, JACI Total return index delivered -2.02% last week. Primary issuance remains slow last week amid heightened volatility in markets.
Bank of England delivered an emergency rate cut of 50bps last Wednesday to counter the economic impact from COVID-19. Several governments including Italy, Japan, and the EU have also announced supportive measures and additional fiscal packages to defend their virus-hit economies. Markets generally expect more supportive and easing measures to follow from governments globally.
Sentiments worsened during a highly volatile week as oil prices collapsed and the COVID-19 continues its rapid spread worldwide. The WHO has officially declared COVID-19 a global pandemic. More action from central banks and governments are expected. 10Y UST yields fell further last week to historic lows and was down 6bps at 0.85% as of 12 March close. Investors should keep a close watch on developments of the coronavirus spread and oil price collapse, and their impact on market liquidity and issuer fundamentals, and maintain defensive posture, focus on liquidity through UST and cash.
Oil prices plunged to multi year lows last Monday after the failure of the OPEC+ discussions and Saudi Arabia's subsequent decision to increase oil supply and cut prices. This has added even more pressure to oil prices which has already been suffering from a drop in demand from the outbreak of COVID-19.
Since limit IPO market activity in the time being, investor should monitor the geopolitical events closely especially Saudi-Russia oil price war, US-China trade progress and Middle east tensions as global geopolitics remain volatile.
US Treasury Secretary Steven Mnuchin said he doesn’t expect the coronavirus pandemic to tip the U.S. economy into recession, even though growth will slow. “Later in the year, obviously the economic activity will pick up as we confront this virus,” Mnuchin said last Sunday on ABC’s “This Week.” Mnuchin spoke as many businesses in the U.S. and around the world grind to a halt in response to the fast-spreading virus.
Stock futures dropped sharply last Sunday evening after the Federal Reserve surprised markets and cut short-term interest rates to zero and launched a fresh round of crisis-era bond purchases, an emergency move to combat the economic shocks from the coronavirus pandemic.
Dow futures tumbled more than 1,000 points and Standard & Poor's 500 futures dropped 5%, triggering an automatic shock absorber. The losses came after the central bank lowered the Fed’s benchmark federal funds rate by a full percentage point to a range of zero to 0.25%, a range it hovered at in the aftermath of the 2008 financial crisis.
Futures imply that the 10-year Treasury yield will fall by more than 25 basis points when cash trading gets under way in Asia on Monday, after it closed last Friday at 0.96%. The yield sank to a record low of 0.31% last week as stocks plunged. Fed funds futures signal traders expect the central bank’s target to hover around 0% until at least the fourth quarter of 2021.
For some analysts, the Fed’s emergency move over the U.S. weekend points to fresh all-time lows in Treasury rates ahead, with the potential for America’s oblibations to join the world’s almost $12 trillion pile of negative-yielding debt. “Treasury yields will go toward zero or lower now,” said Torsten Slok, Deutsche Bank AG’s chief international economist. “We have now opened the door with this move to long-end Treasury yields going negative.”
"The market is likely taking this as a panic since the Fed couldn't wait until their meeting on Wednesday to take action," says Stephen Guilfoyle, founder and president of Sarge986 LLC, a family-run trading operation. "Still, the Fed has been aggressive in handling this situation as global economies have been disrupted. The best thing they can do right now is keep money flowing throughout the economy."
“Financial stimulus at this point is having less of a positive impact on financial markets than health measures,” says Nick Giacoumakis, president and founder at New England Investment & Retirement Group. “What the public wants to see is more advances on the health side with more concrete action plans like additional testing measures that will help slow the growth of the virus."
To be sure, last Sunday’s dramatic action by the Fed could "significantly" reduce stress in the financial system, according to Mike Fratantoni, senior vice president and chief economist at the Mortgage Bankers Association.
“These actions will lower mortgage rates, helping homeowners save money through refinancing, and thereby providing a boost to the broader economy,” Fratantoni said in a note.
Investors parsed fresh developments over the weekend from the fallout over the virus. More than 150,000 cases have been reported worldwide with almost 6,000 deaths. Almost 3,000 coronavirus cases have been confirmed in the U.S., with a death toll of more than 50. Spain ordered a state of emergency Saturday and prepared to close all schools, universities, restaurants, bars and hotels nationwide. France ordered cafes, restaurant and cinemas to close. Meanwhile, Detroit Pistons forward Christian Wood tested positive for coronavirus, bringing the number of NBA players who tested positive to three. Wall Street was still anxiously awaiting an aid package from Washington that investors hope can help cushion the economy from the slowdown in economic activity.
“No one really believes that the Fed’s policy will be the only thing to help counter the difficulties we’re facing from this global supply shock,” says Thomas Martin, senior portfolio manager at Atlanta-based GLOBALT Investments. “What will help right now is government action where they make money available through fiscal policy so hourly people can pay their bills and businesses won't go bankrupt.”
Chart of the week
Gold has a love/hate relationship with equity bear markets. Initially, it’s great as havens are bid. But as time goes on and the bear’s claws dig deeper, havens are sold to raise cash, especially if other markets are seizing up as no one trades. That was the case last week with gold as it appeared that some credit markets became difficult to trade and equity liquidity was not deep enough to accommodate all sellers.
There are some good historical examples of a sharp five-day plunge in gold coinciding with an end to the selling in stocks (highlighted in the chart above with the dotted yellow lines). The most recent examples are 2008 and 2011, though note the absence of a move when stocks cratered in December 2018.
The baby getting thrown out with the bath water is a classic sign of markets making a bottom. The trouble is it’ll only be clear in retrospect whether this week was the beginning of the end -- or merely the end of the beginning.
The big jaws gap, equity vs yields, many have been pointing out for a long time closed during the panic down. Yields have reversed higher since the panic lows we saw a few days ago, but equities have been in no care mode, as huge margin calls and classical equities panic have driven equities recently.
By now, any prudent risk manager must have ordered the margin call and executed those. Add short gamma to this and voila the moves have been magnified.
The question is, if yields is the big panic indicator, maybe equities will start realizing yields panic occurred several days ago. Last time US 10 year trades here, S&P was at 3,000. Time for upside panic, and yes there is short gamma on the way up.
1. Fixed Coupon Notes on Major Equity Indices
Structures below provide more than 40% buffer with a 59% strike OR a 50% buffer with a barrier and an 80% monthly KO.
SPX 5Year Charts
SX5E 5Year Charts
HSI 5Year Charts
2. FCN on defensive names
Defensive stocks like McDonalds, Unilever and Walmart tend to hold up well in terms of corrections and economic downturns. Please refer to below charts for comparisons against major stock indices (MCD vs SPX, UNA vs SX5E, WMT vs SPX) during the 2008 Global Financial Crisis.
We are able to get a 35% buffer with the current volatility in the market (VIX is at 75 – highest levels).
MCD-SPX Index Comparison
UNA-SXSE Index Comparison
WMT-SPX Index Comparison
Asia Bond Market
Despite the rebound in bonds after last Monday ’s surge in interest rate spreads, the issuance of Asian dollar bonds remained thin on last Tuesday, primary market sees solitary Chinese issuers. Asian investment-grade U.S. dollar bond spreads and credit default swap rates in the region declined since last Tuesday morning, reversed the strongest rise since at least 2014. Asia dollar bond sales recovered a bit and had the most active day last week after a couple of offerings from China. However, Asia dollar bond sales came back to a halt after the World Health Organization officially classified the coronavirus as a pandemic and U.S. President Donald Trump’s address failed to provide more details about his economic rescue plan. Dollar bond sales by Asian issuers fell to about $2.7b last week, the lowest since January, in an historic week when concerns about the coronavirus sent the S&P 500 tumbling into a bear market and Treasury yields to unprecedented lows. Asian credit indexes had some of their biggest moves in almost a decade.
“Asian credit market liquidity deteriorated rapidly over course of this week. At current credit risk premiums, global recession is being priced into some extent already,” Ek Pon Tay, senior EM debt fund manager at BNP Paribas Asset Management. “Market may see a temporary rebound if and when further coordinated central bank and/or government stimulus measures materialize”. Credit markets are headed for their worst week since the global financial crisis, raising the risk of a chain reaction of defaults.
Average spreads on Asian IG dollar bonds widened 30bps to Thursday last week, heading for the biggest such blowout since at least 2013; junk bond spreads spiked 131 bps to Thursday, Bloomberg Barclays Indexes show. Traders cited further widening last Friday.
SSE Composite Index was down 4.85% last week.
Hang Seng Index was down 8.08% last week.
Dow Jones Industrial Average index was down 10.36% last week.
NASDAQ Composite Index was down 8.17% last week.
S&P 500 Index was down 8.79% last week.
9969.HK InnoCare Pharma Limited (2020/03/11 - 2020/03/16)
1957.HK MBV International Limited (2020/03/16 - 2020/03/19)
1472.HK Sang Hing Holdings (International) Limited (2020/03/17)
1961.HK Jiu Zun Digital Interactive Entertainment Group Holdings Limited (2020/03/17)
2381.HK SMC Electric Limited (2020/03/17)
0589.HK Jianzhong Construction Development Limited (2020/03/18)
6918.HK Kidztech Holdings Limited (2020/03/18)
FLRZ.US F5 Finishes Inc (2020/03/19)
CGROU.US Collective Growth Corp (2020/03/19)
Core Pacific gave its price target on Tencent Holdings Ltd (0700.HK) to HK$443.00 a share and gave the buy rating.
ABC International gave its price target on A-Living Services Co Ltd (3319.HK) to HK$50.60 a share and gave the buy rating.
Kingsway SW Securities gave its price target on Sunny Optical Technology Group Co Ltd (2382.HK) to HK$146.90 a share and gave the buy rating.
Goldman Sachs gave its price target on FedEx Corp (FDX.US) to US$175.00 a share and gave the buy rating.
China Renaissance gave its price target on Baozun Inc (BZUN.US) to US$45.00 a share and gave the buy rating.
Annual: 2382.HK Sunny Optical Technology Group Co Ltd
Annual: 0880.HK SJM Holdings Ltd
Annual: 0968.HK Xinyi Solar Holdings Ltd
Annual: 1769.HK Scholar Education Group
Annual: 1858.HK Beijing Chunlizhengda Medical Instruments Co Ltd
Annual: 1717.HK Ausnutria Dairy Corp Ltd
Annual: 2202.HK China Vanke Co Ltd
Annual: 3319.HK A-Living Services Co Ltd
Quarter: FDX.US FedEx Corp
Quarter: BITA.US Bitauto Holdings Ltd
Annual: 0700.HK Tencent Holdings Ltd
Annual: 6098.HK Country Garden Services Holdings Co Ltd
Quarter: BZUN.US Baozun Inc
Quarter: NIO.US NIO Inc
Quarter: TCOM.US Trip.com Group Ltd
Annual: 2342.HK Comba Telecom Systems Holdings Ltd
Annual: 0941.HK China Mobile Ltd
Annual: 0003.HK Hong Kong & China Gas Co Ltd
Quarter: MOMO.US Momo Inc
Quarter: DOYU.US DouYu International Holdings Ltd
Annual: 0081.HK China Overseas Grand Oceans Group Ltd
Annual: 0291.HK China Resources Beer Holdings Co Ltd
Annual: 0914.HK Anhui Conch Cement Co Ltd
Annual: 3900.HK Greentown China Holdings Ltd
Annual: 2669.HK China Overseas Property Holdings Ltd