After weeks of trading with relative calm, the Dow Jones Industrial Average (DJIA) got a nasty shock yesterday. The stock market plunged almost 2% in the last hour of trading as volatility roared back to the market. Traders remain nervous this morning, with futures pointing to a flat open.
It was a wake-up call for investors, many of whom were beginning to get complacent about a quick recovery. Black Rock’s Neeraj Seth said the short-term picture now looks uncertain .
In the medium horizon, I would still be positive on equities, but in the near-term we are somewhat cautious.
Investing legend Stan Druckenmiller also urged caution as the market plummeted. He said the outlook is the bleakest he’s ever seen with stocks at these levels .
The risk-reward for equity is maybe as bad as I’ve seen it in my career.
Investors have been lulled back into a false sense of security in recent weeks. Stocks made a gravity-defying recovery from the March lows with the Nasdaq even turning positive for the year.
A sense of calm returned to the markets with the Dow trading in a narrower range. Volatility eased off. But it came back with a vengeance in yesterday’s session. Just look at the CBOE Volatility Index (VIX) spike in the last two hours of trading.
It was the biggest one-day points rise for the so-called ‘Fear Index’ in three weeks.
The selloff was triggered by a one-two punch. First, a dose of reality from Dr. Anthony Fauci. And second, an extension of LA County’s stay-at-home order.
Fauci delivered a somber testimony to Congress yesterday warning that America has not got control of the coronavirus . He said easing lockdowns won’t just exacerbate the health problem, but may trigger a fresh economic crisis.
[It] could even set you back on the road to trying to get economic recovery.
He also squashed the optimism for a Covid-19 vaccine, saying there’s no guarantee it will be effective .
The sell-off accelerated as LA County added three months to its stay-at-home order. A move that crushed any hopes of swift economic activity in America’s second-largest city.
Speaking to CNBC, Black Rock’s Neeraj Seth said that uncertainty around America’s re-opening is likely to cap any upside in the short-term. After rallying hard on the declining Covid-19 hospitalizations in New York, the market is now shifting its focus to re-opening.
Equities are going to look for the cues from fundamentals, which is more driven by how the economies open up, what’s the risk of the spread or the second wave of Covid-19 and to some extent get guidance from there in terms of how that impacts the earnings treasure tree.
It suggests that U.S. stocks have sucked up all the optimism they can. And the long road to recovery may now dampen the relief rally.
Today’s session will be fixated on Federal Reserve chairman Jerome Powell. Powell will speak virtually to the Peterson Institute for International Economics at 9am ET. He’s expected to reiterate the central bank’s unprecedented support for the economy through the crisis.
But most importantly, he’s like to address the issue of negative interest rates. A once-unthinkable phenomenon in the United States is now firmly on the table. President Trump has urged Powell to go negative, calling it a “gift.” The Federal Reserve is expected to push back against the idea.
But the market isn’t convinced. The Fed funds futures market is currently pricing in negative U.S. interest rates as early as April next year . If it happens, banks will pay the Federal Reserve to park their money overnight.