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Published: March 20, 2020 at 7:16 a.m. ET, By Steve Goldstein<\/p>\n
Albert Edwards, the strategist at Soci\u00e9t\u00e9 G\u00e9n\u00e9rale who has been right about bonds and wrong about stocks for the duration of the just-ended bull market, sees a coming thawing of what he has long dubbed the Ice Age, his label for a Japanese-style deflationary bout. The thawing, he says, is being brought about by central bank financing of fiscal spending. The recent spike in bond yields had him contemplating that a top in bonds has been reached, though that is not his expectation.<\/p>\n
\u201cI would be highly surprised when the market has sight of depression-like economic data over coming months and experiences the ongoing equity markets rout, if government bond yields did not make new lows, with the U.S. 10-year converging with bund yields deep into negative territory,\u201d says Edwards.<\/p>\n
The intensity of the moves in markets, though, haven’t simply reflected a pricing in of a recession brought about by a lockdown of the global economy. Market depth has disappeared and volatility has surged, leading to computer traders pulling their liquidity, which creates even more violent markets.<\/p>\n
\u201cMany aspects of this crisis have played out in-line with our prediction: severe liquidity disruptions, forced deleveraging of systematic strategies, record speed of equity declines, and failure of bonds to offset equity losses,\u201d says Marko Kolanovic, quantitative strategist at JPMorgan.<\/p>\n
The expiration of key options contracts on Friday may make for some less-turbulent markets ahead, he says. The month-end rebalancing of portfolios also will be a help.<\/p>\n
\u201cThe stark underperformance of equities vs. bonds [month to date] leaves fixed-weight asset allocation portfolios about 4% underweight equities, which suggests they are likely to do a large rotation out of bonds and into equities to rebalance back to target weights,\u201d he says.<\/p>\n
\u201cOur model suggests these flows could drive about 4% outperformance for equities during the last week of this month (all else equal), but given the record low liquidity and compounding effect of short gamma, the impact could be up to 4x times larger.\u201d<\/p>\n
The Buzz<\/strong><\/p>\n California Gov. Gavin Newsom on Thursday ordered the state\u2019s 40 million residents to stay at home<\/a>.<\/p>\n There were no new domestic cases in China<\/a> for the second day in row, as Italy\u2019s death toll of 3,405 now tops the world. Italy has the world\u2019s second-oldest population.<\/p>\n The Bank of England canceled stress tests on its banks.<\/p>\n
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