- VIX soars to 14-month high as global stocks plunge on spreading coronavirus
- Markets now expect 2.2 Fed rate cuts by year-end
- Dec U.S. home prices expected to show another strong increase
- U.S. consumer confidence expected to rise
- 2-yr T-note auction
VIX soars to 14-month high as global stocks plunge on spreading coronavirus — The VIX S&P 500 volatility index on Monday soared to a new 14-month high as global stocks plunged on the spread of the coronavirus outside China. The VIX index spiked up to a 14-month high of 26.35 and closed the day up +7.95 points at 25.03.
However, the VIX on Monday was a long way from challenging the 2-year high of 36.20 posted in December 2018 when the S&P fell on a heavy downside correction, or the 4-1/2 year high of 50.30 posted in Feb 2018 when Volmageddon caused some VIX products to blow up.
The S&P 500 index on Monday plunged by -3.35%, adding to last Friday’s sharp -1.05% sell-off and resulting in an overall -5.3% downside correction from last week’s record high. While the 2-session sell-off has been steep, the S&P 500 index has so far retraced only 17% of the extraordinary 44.6% rally seen over the past 14 months from the 3-year low posted in Dec 2018.
Tech and momentum stocks took a beating on Monday. The Nasdaq 100 index closed sharply lower by -3.89%, and the NYSE Fang+ index plunged by -5.06%.
Energy stocks were hit particularly hard on Monday as April Brent crude oil prices plunged by -3.76% to a new 1-1/2 week low. The SPDR S&P Oil & Gas Exploration and Production ETF (XOP) plunged by an extraordinary -6.12% to a record low (going back to its initial listing in 2006).
Brent crude oil prices have plunged by -14.7% on a year-to-date basis due to the sharp drop in oil demand in China and elsewhere that has been caused by business shutdowns and reduced travel from the coronavirus. Crude oil prices are also sharply lower because Russia has so far refused to approve the recommendation of the OPEC+ Technical Committee to cut production by -600,000 bpd to address the plunge in oil demand and to extend the Q1 production cut of 1.7 million bpd through year-end.
Monday’s stock market meltdown did not begin until after the Asian markets had closed. The Shanghai Composite index on Monday closed only -0.28% lower but is sure to plunge in Tuesday’s trading after traders saw Monday’s carnage in the European and U.S. markets. The Euro Stoxx 50 index on Monday plunged by -4.01%.
Stocks have plunged in the past two sessions on alarm about the spread of the coronavirus outside China, which has increased the risk of regional business shutdowns outside China. Indeed, key areas in Northern Italy are now under quarantine after Italy was hit by an outbreak of the coronavirus with 229 cases and 6 deaths. Italy now has the third-largest outbreak after China and South Korea. China’s Hubei province, the epicenter of the coronavirus, will remain closed this week for the fifth straight week.
The business shutdowns in China are hurting corporate supply chains across the globe, including companies such as Apple. The markets are also alarmed by reports that millions of private Chinese businesses could go bankrupt if their banks don’t forgive loan defaults. Investors are also bracing for a new spate of Chinese corporate bond defaults, which were already running at record levels before the outbreak of the coronavirus.
The only good news is that the WHO has not yet declared the coronavirus a pandemic since the outbreaks outside China have largely been contained so far. The WTO on Monday called the new cases in Italy, Iran and South Korea “deeply concerning” but said that the spread of the virus has not yet reached a pandemic, which is defined as an uncontrollable geographical spread. The problem for the stock market is that the spread of the disease is being controlled in part by quarantines, business shutdowns, and cancelation of travel, all of which are highly detrimental to corporate profits.
Markets now expect 2.2 Fed rate cuts by year-end — The markets on Monday boosted expectations for Fed easing by year-end by another 8.5 bp to 56.0 bp, or 2.2 rate cuts. Specifically, the Dec 2020 federal funds futures contract on Monday closed at 1.065%, representing expectations for a 56 bp cut from the current target midpoint of 1.625%.
The markets now believe the Fed will need to implement its first rate cut by June. The probabilities for a rate cut at upcoming FOMC meetings are now 18% for the March 17-18 meeting, 74% for the April 28-29 meeting, and 100% for the June 9-10 meeting. The market is then fully expecting the second rate cut of the year by the Sep 15-16 meeting.
Dec U.S. home prices expected to show another strong increase — The market consensus is for today’s Dec home price reports to both show increases of +0.4% m/m. That would follow the Nov reports of +0.5% for the S&P Core Logic Composite-20 index and +0.2% for the FHFA home price index. The FHFA index was up sharply by +4.9% y/y in Nov and the Composite-20 index was up +2.5% y/y.
U.S. consumer confidence expected to rise — The consensus is for today’s Feb Conference Board U.S. consumer confidence index to show a +0.5 point increase to 132.1, adding to Jan’s +3.4 to 131.6. However, consumer confidence by late February is likely to sink as consumers take account of the sharp drop in the stock market, which suggests that stock investors are losing hope that the virus can be controlled.
2-yr T-note auction — The Treasury today will sell $40 bln of 2-yr T-notes to kick off this week’s $131 bln T-note package. The 2-year T-note yield on Monday fell to a new 2-3/4 year low of 1.239% and closed the day -10.7 bp at 1.248%.
