Surveillance: Market Sell-Off With Matus

twenty three. To put that in perspective in the great markets of Vix's twelve thirteen. Maybe you expand out in the new regime of the VIX to seventeen or eighteen and we come out as well. We have the perfect guest to frame this this morning, Drewmatics, not only with the clarin An Award winning economic work for years, but it met life now driving forward their strategy as well. Drewmatics of till your equity strategy into your first class economics.

How do you fit those two together right now? Well, I you know, I think what you're seeing. Um, so there's there's two factors. One, it's just kind of the risk on, risk off, which we've talked about everyone decided they didn't want to be long over the weekend. That seemed to have been the right call this time. UM, and so people went risk off and they were rewarded for it. UM. I think if you look ahead, we were kind of drifting in this environment where where margin

compression was beginning to happen. It looked like, in our view at least corporations, we're begetting to pull back on hiring and we're going to drift into a recession sometime in kind of like the middle of next year. That seemed to be, you know, that was the scenario we

were working with. UH. In the current environment, you have to you have to maybe be pulling that forward a little bit and thinking to yourself, you know, if these trends continue in terms of disruptions to supply chains, that that you know, maybe, um, maybe those margins compressed a little faster, Maybe from back a little faster. Maybe they're disinclined to invest heading into something where they have as much uncer and t is the average consumer has drew.

Is the concept of a V shaped recovery dead? I no, I but I think you know it requires the right kind of construct. But I think what what you're pointing towards, though, is something that I think a lot of people have focused on, which is um for the vast majority of people, not the vast majority of people, but for a lot of people. And for I think the vast majority of people on Wall Street actually who actually are are charged with trading. Uh, two thousand eight is the recession. They know,

that's the only recession they know. They don't remember two thousand one, where if you blinked you could have missed it. Um. They don't remember kind of the slowdown. UM. So you know, the the actual life experience for a lot of people on Wall Street, it doesn't include recessions that don't look like two thousand eight. And and so I don't think a two thousand eight V shaped re car I don't think a V shaped recovery is dead. But you're not going to get one if you have a recession like

two thousand and eight. Fortunately we're not expecting one like two thousand and eight. So, Drew, I mean a lot of times we've been talking over the last week or two, is this coronavirus kind of evolved and we saw a lot of impacts, say in the commodity markets, in the bond market, we didn't necessarily see a concern consistent in the equity markets. Maybe we're seeing a little bit of

it today. Are you concerned that maybe the equity markets is not are not discounting the long term economic impacts of what a coronavirus could mean. Uh? You know, I I think that they're struggling with it, and I think that's that's the problem is this. Uh it's very hard to assign weighted probabilities to all the different outcomes because there's so many potential outcomes. Uh. And then if you take that sector by sector and company by company, you

just you could drive yourself nuts going through the permutations. Um. And so people then just go into do I want to be along the market? Do I want to be short the market? And people are now saying, hey, you know what, I don't want to be along it because I don't know what's going on and I think that kind of environment is going to continue. So I'm struggling though,

because I'm looking right now at the FED model. This has been one of the big humans for why to buy stocks that basically bond yields go lower, making the relative valuation case for stocks better. Today that valuation case got a whole lot better. Even still, as thirty year treasury yields go further into record low territory, why shouldn't people buy this dip? Well, it's not a so we don't really focus on equities in my life. But I'll just I'll just say this. This is why you can't

just blindly follow models. Right. The question is the relationship is a good and an interesting one to use as a factor. All right, so components your model. But if you just close your eyes and say it doesn't matter why the bond yield is going down, then you're going to put yourself into a situation where you're taking more

risk than you ever thought was possible. Uh, and you're and you're blind to it because you're following this model that just works off of why the yield is moving, or that the yield is moving, rather than why is the yield moving? And that's that's why I don't really

worry about artificial intelligence. You know, like I play my son and you know in FIFA, and it's like the A I never does what I wanted to do um and and I'm thinking to myself, can't even run the soccer probes explain why the Thoughts got crushed by Chelsea this weekend for the failure, but my son was happy to see the bluest triumph over over Tottenham. Oh really, thank you? I mean John emails in where John John emails in from Turks and Caicos No excuse me antigua

of course more. You know it's fancier Farrell, he wanted he brought this up. Chelsea like crushed the Thoughts this weekend. Farrell's not even Lisa's like, what I'm learning, I'm studying? Yeah, she's yes, so am I let met me tell you every day. This is really critical. You say that MetLife isn't focused on uh stocks, that's because it's an adult

house focused on our futures. Do you assume going to work every day that your actual assumption is going to come down and that that locked in boggie rate that we have is not going to be ex percent. It's going to come down down, down, you know. I. I think what we assume is, um, we have to plan

for every environment that we can imagine UM. And I think when you think about the current world we've been in for a long time, we've been in a very low rate environment for a very long period of time, and I think you know, the ongoing assumption you know has been you know, you can't expect just because you want you'ld to move higher, you can't expect that they are going to move higher. Do you sell jump ons here? Uh? You know, I leave that to our credit portfolio managers.

How about so all right, we're more than eighty percent away through the earnings this quarter? Your key takeaways here? Do you feel a little bit better? You feel a little bit more concerned the last time I looked at earnings? What what you know? So one of our one of our thoughts is, you know, when you're trying to time the recession, how do you time it? And the way that I'm trying to work it is looking at the erosion of margins in the economy as a whole, So

not just SMP five hundreds. So but if we look at if we look at those earnings numbers, I'm seeing revenue go up and I'm seeing or you know, um earnings go up by less and so that tells me that the margins are compressing a little bit further. So it's consistent with our view that that erosion is continuing Um, and that's you know, you know, absent other factors. It still looks to me like one is when we have to really think about there being a recession in the US.

Drew manis thank you so much for that right now on politics and we'll be jumping back and forth on this end of the Tuesday UH debate in South Carolina, Todd Marianna joins us from eur Asia Group. Todd. Every weekend, I go, I have a panic, and I go, I gotta get smarter fast on something. And without question, off of Mr Saunders relative performance in Las Vegas and Nevada. UM, I had to read it on a Latino vote. Latino vote, help me here? How important will Latino vote be? Super Tuesday?

Good morning, Tom. Great to be with you as always, And I think we're all of that same camp these days, given uh all that's going on in politics, trying to get smart on things over the weekend. The Latino vote is, you know, it's it's something that's become of increasing importance to US politics generally, Um, but of critical importance to winning the Democratic nomination, and Nevada showed that very clearly.

But UM, you know we've known that for several cycles. Now, what I think is different here in Nevada is the fact that a candidate like Sanders could come out with entrance polls, you know, uh, indicating that he had above fifty Latino vote. He struggled with minority votes the last time around. And again, as we said, we've known for several cycles that Latino vote is growing. That's places like you know, South Carolina, Texas obviously, but across the South

and even the Midwest. So the fact that a candidate like Sanders could get that kind of draw, I think is a real important lesson of Nevada. The money question this morning, Greg Valier wrote it up. I know you've been looking at it as well, is if Sunder Sanders prevails, is a Democratic House at risk? I think it is at risk. You know what, what exactly that risk is,

um kind of remains to be determined. It's still it's still early to say, but I mean, I think the fact that it's at least at risk is what's motivating a lot of Democratic leaders and the elites as a party to have feared of Bernie Sanders candidacy, you know, from from the get go, from t and certainly continuing

through this cycle. UM, you know, you you don't look at the national level there, you look on a district by district basis, where you know, Republicans are going to hammer a message, an anti socialist message, and in places like, for example, the Virginia seventh district, which which was flipped very very famously in UM, that message will probably resonate. So it's it's at least at risk. But we don't know is how many new people and disaffected voters Bernie

could turn out at the polls. That's that's the real argument behind his candidacy. But the risk is clearly there. So Todd, what's ex what's at stake on the debate tomorrow in South Carolina? Number one? I think that Um, Michael Bloomberg certainly has has you know, some some work to do, I think to uh to get past the you know what what happened last week, and you know many indications that that certainly can happen. We we've seen

that before. Um. You know, Joe Biden another he's another I think strong debate performance to uh solidify his lead in South Carolina. Last year, bid Fleet in South Carolina was you know, double digits, getting into the twenties at points, and you know, on average, he's up about three points about over standers now, So that's good news for Biden if you can take home in South Carolina went heading

into Super Tuesday. But the fact that it's so close means that um certainly that I think there's more pressure on him in in this debate than before. The third thing I'd say is whether the candidates can really kind of circle the wagons and attack Burnie Sanders if they really don't want him to be the nominee. I think it behooves them to stop fighting among themselves for you to say the moderate vote and uh and and turn on him. But there's there's certainly a sense among campaign

strategies that it that it might be too late. Do you mentioned Michael Bloomberg, the founder a majority owner of Bloomberg LP, the owner of this radio station and Bloomberg News, And I am wondering if this is a make it or break it moment for him, given that he was widely panned and his performance at the last debate. I don't think it's naked or break it for him because he is he's self financed number one and all along

he's had a Super Tuesday strategy. So the real maker breaks with him, I think comes on Tuesday, where he's already made you very significant in rows across a whole host of states that you know that it's been a little bit surprising, and I think a reflection of the weakness of some other candidates in the race that just

be undecided of Democratic voters in general. But it's it's clearly a very important moment for him, I think, to keep that momentum going facing you know, the American public again, of which he had not you know, up until his debate last week. So Todd, you know, if I'm the Democratic National Committee, if I'm the establishment, the Democratic establishment, how am I thinking about Bernie Sanders here to the extent that he is the front runner and his potential

in November. I think I think you're very worried, you know, quite frankly, because, uh, the argument for Bernie is that he could be like Trump in and you know, the sort of anti establishment vote could confound expectations and you know, provide a lot of surprise, uh in this in this race. But the reason you're worried is that Bernie is so much more extreme, you know, across the board, uh than

than Trump as ever was. Trump has you know, many positions which are very orthodox Republican views on you know, economic policy judges, things like that. Bernie, there's not an issue out there on which he's not extreme. So they're they're very nervous because again, like I was saying, that argument for his candidacy was completely contested. I mean, this came up over cocktails last night and and uh, todmer

Marianna with us your Aisier group right now. I mean, who of the candidates would you see dovetail with Senator Sanders if he tries to put together a ticket. I mean, I mean it's ridiculous to talk about a vice presidential prospect right now. I get that. But are all of these different candidates so removed from his democratic socialism that they would be uncomfortable even standing with him? I think

most of them would be. And so you know, again you could you could see something very similar to to Trump sixteen, where Bernie would be reaching beyond you know, the the usual back bench, the usual names that are that are floated here. Um. I mean, you know, people

talk about a potential Lawrence Sanders tickets. I I myself think, uh, you know, standers would probably look for, you know, a little bit more diversity in in the ticket, but you know, in terms of policy positions, the establishment will pressure him to moderate. I think Bernie could credibly argue that he hasn't gotten this far by moderating. Is there any is there any history of Senator Sanders quote unquote moderating If if there is, it's not significant, and I'm and I'm

not aware of it. You know, his his views are are very similar to you know, what they what they

were in the nineteen eighties. When you hear sometimes is that his support for certain groups, especially in foreign policy, has you know, has moderated versus some of the people he was supporting in the nineteen eighties, which will hear plenty about if he's the nominee against Trump, Latin dictatorships and all that kind of Well, there's a question here to about momentum and how much moment tim the Democrats have or don't have due to how big the field is.

Who are the next candidates that you expect to drop out? I think the spotlight is really on Elizabeth Warren and Amy Clobature. For me, I think Pete boota judge probably has enough money to stay in through Super Tuesday. Elizabeth Warren probably does as well. But you know, unlike boota judge who at least had good results in Ireland at Hampshire, you know, Warren has been you know, sort of relegated

in the ranking so far. I think that's why you saw her pivot back to sort of protecting the progressive agenda in the debate rather than necessarily you know, selling her own candidacy. There's not really a state on Super Tuesday in which she u is very likely to win. She's competitive in her homestead of Massachusetts. Clobature is also competitive in Minnesota, which both Super Tuesday. Um, but both of them. I think the odds are against their Their

candidacy is going a lot further. The trouble there is that, um, you know, that's not going to provide much of a tailwind for the other candidates and the Ray simply because they're not um you know, uh, grabbing a whole lot of boat share at the moment. Anyway, let's leave it there. Thank you so much, Todd, Marianna, thank you so much for the briefing. Here is all everybody tries to adjust digest Rather what we saw Saturday and onto that CBS

debate Tuesday in Charleston, South Carolina. Our focus this morning, as in the last twelve hours, has been on the spread of the virus and the let's be clear here, there's been no annwn statement of epidemic to pandemic, and yet that is a source of conversation this morning. We need a briefing now on China and get that in Beijing from our Selena waiting Selena, Selena very simply here, is there a better outlook on a Monday into your

Tuesday in China? Well, Tom, the only outlook that seems to be somewhat improving, it's at the rate of use. Who they taught in China do seem to be stabilizing that. As you said, the conversation is now growing around whether or not the World Health Organization escalates this from an international public health emergency to a global pandemic, which essentially means us a sustained during of cases outside of that

outbreak area. And because there's seeing an increased cases outside of China and Italy, new cases emerging in the Middle East, a very strong ramp up of stasies in South Korea, that does beg the question of just how much faster this is when to continue to accelerate outside of the center of the outbreak, Selena, can you put that into perspective when we hear about a reopening of some of the previously quarantined areas in China, is this because basically

Beijing is admitting conceding that containment has failed, so we aren't seeing the reopening of the lockdown area. There was a bit of confusion, so essentially, at first China had released a statement allowing some travel for non residents out side of the hunt, but then that was very shortly reversed. The top officials said that that was not authorized, that was a mistake. So this has brought a lot of continued confusion after Cuba Province has changed their county methodology

multiple times over the past month as well. But to put things into perspective, there are now more than seventy seven thousand cases in China. This is still the vast majority of total cases around the world. You do still have sweeping craft downs in terms of travel restrictions and quarantines across the country. You have seen some provinces sees that slightly, but overall people's travel and movement are still

respected across the country. So Selena, give us a sense of one of the areas that we've been seeing some reporting recently, is this concept getting back to work in China. What is the expectation of the government of trying to ramp up production, get people back into the factories back to work. Where are we in that regard, Yeah, exactly, that's a really the problem right now is trying to get those migrant workers that are stuck in their hometowns

to get back to their place of work. For instance, in Beijing, they had earlier instituted this looking day quarantine for people who were coming back for places outside of Beijing, so a lot of people have a trouble getting out of their city, but be also are buried that once when they get to where they need to be that

they're going to have to be self quarantined again. So that's been a really big problem because according to Boomberg Economics, China's econmuny is only running about half of its capacity over the past week, and a lot of these companies as well are having trouble paying their employees. Access. Survey of small and medium sized companies in China said that only a third of them had enough cash to cover expenses for a month. What do you see on the streets?

I mean, Selena, through the weekend and into your all day Monday. Now it's there. Let's call it seven pm almost eight p m Monday evening. What did you actually observe in the streets this weekend. Well, it's really interesting because across Beijing, different communities, how different levels of activities. So around where I live at a pretty commercial disference, and it's still very quiet. A lot of shops and

restaurants are still closed. Everybody is required to wear masks out side, a lot of big public gatherings are are not allowed to occur. And if you lost when I just went over the weekend, when East do a mall and there are some more residential areas, you actually started to see more movement on the streets. And actually some of the public parks not quite crowded. I went to

Reton Park. The elderly folk still exercising and walking out and about with the government does not encourage that, but people are really getting stick inside of being stuck inside all day. Selena, thank you so much. Loved that anecdotal work from Beijing as well. Selena Wayne reporting from Beijing. Let's dive into a global Wall Street conversation, and this really works to Lesa's theme this morning, which is Catharsis. Stewart Kaiser writes exceptionally detailed notes for Ubs on the

moments of the mark. This is the mathematics. You know, the bell curve in high school folks. And then there's a squishiness to the bell curve, which is variants and a thing called skewness or skewness if you're British. And then this thing called crotosis, which is not the mold in your feet. Right now, do you have any idea, Mr Kaiser, where the cross moments are right now? Well,

I mean obviously this uh the move this morning. You're gonna change things a little bit um on the pricing if you look at it coming into this week, you know, the vix curved flattened out, which is sort of what happens when the market is a little bit confused about

what's going on. Um, what we're gonna see today, which we are seeing, is the curve getting very steeply inverted and effectively, if you think of what the VIX is, the vix is the twenty five delta put implied volatility loosely, which is telling you it's the price for protection to head your portfolio, and that's back above twenty. So what you're seeing is a very big bid for skew and that's happening in the US, that tends to happen in

the SMP. This is great. I mean, this suppis will be jargonted a hockey games alta new Jerseys out in the Garden State Parkway and drove off the road three times on let's unpass what you said in English. The bottom line is, guys like you look at the dynamics of the volatility of the SMP five hundred as a guestimate of confidence in the market. Did I get that right? Yeah? So the victure is gonna tell you two things. Just gonna tell you how concerned people are, I how much

they're willing to pay for insurance. And then because there's a term structure, they'll tell you when they want that insurance. And what you see when the market is really really stressed like it is today, is they want insurance really badly, and they wanted a meetia. I'm like, come on, this is an August of two thousand seven or August. I mean, how stressed is stressed today? Sweeney's you know, got you get your brokers on the phone here, you're not ready

to do a toime keen you go all to cash? Right? How stressed are we? Look? I think there's there's three aspects to this. The first is the psychology part, which which Amy touched on, which is when we got the initial sell off on China, it was relative. It's at least Amy Amy's in last week It's ok, you can call me Amy, it's two sell of it worked, I apologize, ke So what happened in late January was the market

didn't sell off very much, and that's suggested by the mentality. Um. We think that also might have been impacted by the fact that people would already hedge their portfolios against election risk because you had all that coming in early February. The second thing is what's going on with growth? And last week what we saw in Europe was the p m I S printed strong, but within the p M I S was a very long increase in delivery times.

Typically that's right, is positive for growth. We actually read that as negative for growth because what that means today is that the supply change, you're getting massively disrupted. The third part is you know what's going on from a global perspective, and you know this is now affected the West and it's in Europe, so that's gonna you know, hit a third aspect of us. You're seeing three sort

of impacts I think on the market. So from a technical perspective, there's a question do you sell your holdings if this is going to be temporary. How much do you look at the VIX curve? How much do you look at what people are doing there as a way of hedging without selling, sort of the knee jerk response that could give some sense of just how much fear could end up bleeding in to the market and causing forced sales. Yeah, look, I mean I think the mentality

market is probably still too by the dip um. But when you see these types of moves in the market, I mean, the SMP is down almost two and a half percent overnight. I think the worst selloff we had in January was probably one to one and a half percent, So this is a different degree of it. So I think generally speaking, what you're probably going to see is people keep their core portfolio intact and hedge it unless

and until and so then. In other words, how much do you have to see the vics spike up from here right now? At one point it was the most since two thousand and eighteen. How much more do we have to see before we really are starting to feel

the capitulation? The catharsis at least expressed in derivatives. I think from my perspective, you know, come and talk to me when it's on a handle um and I think that that type of level suggests, like in the scrim and in discriminate hedge, what's the bet in the market right now? I mean, Paul helped me here. The the idea that we've seen is institutional money has been comfortable in bonds, in cash and has been reticent to pile into equities. Is at a generally correct statement? I think?

So I'm looking at the tenure on one thirty night time. What do you do? I mean, what's the what's the bet on the street right now? Around the derivative strategies you live in every day? I mean, what are people putting on? Look at? I think what you've actually seen? You think more Grave Simmons is taking over products that I would say what I think you've seen more generally

is two things. One some hedging, usually or mostly around election risks, and the second is people frankly buying upside in more cyclical parts of the market on the assumption that US growth is going to bottom at the end of the first quarter of the early second quarter, and this China thing is gonna be temporary. And I want to explosure. Let's go a Greek letter right now. How are you managing Gamma right now? The second derivative the

accelerations in the market. Are you thrilled to buy Gamma and believe we're going to accelerate or you selling it bringing in premium because you think the acceleration call is wrong. I think it's a very hard thing to estimate what the neck Gamma position, but we do that Gama. I would say that generally the street has probably been caught short Gamma for the most excuse me, um, excuse me. The market is generally been caught long Gamma. The street has.

And the reason what happens when that happened is when the market moves. You have selling. When market was up, you have selling. Me the market moves down to your buying, and that's one of the reasons that market has been so well behaved recently because the street just kind of been in that position and will that change today? It could?

You know, we're busting chops here, folks, but Stewart kais just killing it here on how adults on Wall st long gamma they did flock of seagulls like, alright, alphabeta gamma delta. What am I buying here? To say? What do you think? What are you seeing on your desk? You know, you know, maybe over the last several days, are people kind of going out on the risk curve or they saying I'm pulling in my horns. I'm kind

of going conservatives. From from an equity perspective, I think people were moving up the risk curve until the middle of last week, and the the Apple News last week caught people, I think a little bit wrong footed. And the reason I say that is because most people expected this to be a very sharp V shaped recovery and the Apple you know, the speed with which they were willing to cut or you know, say we're gonna miss

our guidance basically in less than two weeks. I think people say, wait a second, is this going to be a deeper pullback or perhaps some more pronounced pullback than I expected. If a company of that size is willing to move their guidance that quickly, so I think that was kind of shot across the bow. And now what you see in the last couple of days is obviously a different but an acceleration or an expansion of that. This has been a wonderful Stewart Kaiser, thank you so much.

With UBS really adult RelA, we again we protect the copyright of all of our guests. If you want this exquisite mathematics from UBS, get it from UBS. Mr Kaiser, how to derivatives there with right now we start strong with Christina Hooper. She is with strategy at Investco. Christine and Arianna Cuta Dakota published in Bloomer Opinion in the

last hour. Very important statement. This from the former head of the Minneapolis Fed and now at Rochester, one of our great mathematicians, great students of the dynamics of the economy. He says, the Fed can't wait, they should cut rates now. He even says, or fifty basis points, what's the urgency of the Fed to accommodate this virus? I'm not sure

there should be an urgency of the FED. I think a lot of it has to do with business confidence, and if we do see an erosion there, that's when the FED does need to step in, at least to make more statements that suggests that it stands ready to provide an insurance cut for the purposes of fending off

the negative impact of the coronavirus. I don't. I don't think there's a sense of urgency yet, although there does seem to be a feeling of I know, earlier today you talked about how it felt like a controlled sell off. I think that changed a bit out of control. I think that's not a bit out of control sincent exactly. And so I think that the said has to be

measured and thoughtful. It can't be completely reactionary, but is clearly um suggested that it's willing to provide insurance cuts just by its behavior last year and the way we triangulate that. Folks on the Bloomberg and I've got the Bloomberg launch pad in front of me. It's got probably a hundred and fifty data points. As you triangulate, Paul, certain trends away from the blunt instrument of the vix at twenty three point two one to tape a little

better in the last fifteen minutes. I triangulate by looking at stronger yet and critically Paul to Christina's perfect point, how we've given away to a little bit of sweat Nimex crew. The West Texas Intermediate was a solid fifty one. It's now fifty point nine five, down two dollars three cents, So that's oil giving way as well. Yeah, that's down four and a half percent, so clearly reflecting potentially our global growth. Christina. So when you look at the price

performance this morning, is this healthy? Is this a reasonable reaction to what is a dynamic story as it relates to the coronavirus. Well, I think it may not be reasonable, but it is perfectly understandable given that markets in the short term are voting machines and only in the longer term are weighing machines. So I think it's it's perfectly

understandable and not surprising. What I'm a bit more surprised about is what we've seen with the plummet in UH yields on treasuries UH to see where the tenure is, where the thirty year is is a bit surprising, especially since I've always believed that the Tenure U S Treasury yield is a better fear gage than the vix Um. But I will tell you, I'll give you the caveat that the Tenure does not have medical training, and I

think that's an important point to make. We'll believe their Christine over way too short today, but very very valuable on of course, so she is with invest what we're gonna do as we drive forward through this half, however, special coverage with do we get the negative one thousand? I don't think. We don't think first we bounced up a hundred points negative eight fifty nine now on the Dow that we're gonna bring in a select number of guests,

all of them with different views. Cameron christ joins us now with Bloomberg, and of course he has a wonderful ability to synthesize correlation into all this. Cameron, what do you see within the correlations of the market. Well, I mean right now, everything is uh uh, it is pricing fair right um for the equi market. That's a relatively recent phenomenon. Obviously we had last month's episode, but it

was only a few days ago. This time last week, we were pretty much the dingy um treasury or government bonds. I've been fairly consistent since the whole virus thing um broke UH pricing risk aversion. I think it's the previous gustum guest mentioned. And the interesting nexus in between the two is credit um, where I think you can are you that high yield at the moment is trading like a government bond um, and that is pretty unsustainable if there is a legitimate economic hit um that spreads from

the from from the virus. That looks like a particular point of vulnerability to name, How does factor investing play into this? Paul just mentioned. You know, it can be the virus, or it can be other things as well.

When you look at the vogue of momentum or value or style investment and all the other almost marketing ideas wrapped around a legitimate finance theory called factors, how do factors play in when you see a four or five drop from the top and intiquities, Well, I think what's happening is that you've got an increasing number investors piling into an increasingly narrow range of night um, whether it's hedge funds or retail kind of everybody has decided that

they cap tech um is where to be. And it takes a lot of the boxes that you see in terms of these factors, certainly in terms of momentum UH, in terms of growth, which as we know, has trounced value, and insofar as the human animal is ultimately a momentum based animal, deducing that that which happened yesterday and that which happens today is likely to happen tomorrow. UM, that we've got everyone kind of long these these relatively narrow

basket of names. The risk, obviously is if it goes wrong, UM, that the exit door might not be sufficiently large to accommodate everyone who wants to get out at the same time. And Um. The upshot, I think is that liquidity is going to be is going to is going to be at a premium, and the volatility of volatility UH is going to remain elevant. It's very important, folks, that phrase of volatility of volatility is Mr christ gets a little Matthew Paul, let me frame uh here where we are

on the opening. We're down five point four percent from the recent highs of middle February. I think that will be called the Valentine Day high and after that the massacre. Uh, and a correction on the Dow is if I can get the fame cursorout, twenty six thousand, six hundred would be a traditional correction, right, we're points above that down

known eight d one point. Lukawa just darkened the door, as you like to say, Tom Lukawa, Bloomberg News cross asset reporter joining us with the camera crisis as well. So Luke kind of a rocky opening to the market, a little bit of a new view, it seems like from financial markets on the potential risk of this Corona crisis. What are your early thoughts here as we're you know, about eight minutes into the opening of the cash equities markets. Oh, many,

many assorted thoughts. So let's start with Mark Dow of Dow Global Advisors is frequent market commentator, former I M F A. Anymous. He's pointed out a lot of the times that markets have this tendency to have belated overreaction. So we all know what the event is. Not many facts about the event of change. There's a lot of the knowns, but then we just freak out later anyways, rather than when we first hear about it. This strikes me as quite memorable compared to the Chinese evaluation that

did not happen at the end of August. That happened with August twelve, and yet it took, you know, a couple of weeks later before we open limit down. Second of which which ties into this the strictures of the options market and how that leads to realize volatility. Last Friday was options expiry. When you have all of that open interest in strikes hanging around and then it completely falls off the table. This is freedom to move, and what you're seeing this morning is definitely freedom to move

to the downside. Look and camera Christ with us with down negative seven seven two the vix twenty two points three for a better tape in the last five minutes here often ugly almost down one thousand, opening to the both of you and Luke, let me start with you right now. What do institutions do when they see this drop? I mean they're in cash? Are they deploying now? Or how do they measure the mood the catharsis? Do they revert to technical analysis? What do they do where they

say here's the entry point? Well, are they really in cash is the first question. And if you've looked at you know, like SMP five under, if you look at the asset managers UH in the CFTC and their allocation to stocks, that's those numbers in terms of what we get are actually quite high. So the real question would be is, I think, is how much is institutional dumping

on this and joining the party? And by the fact that what you're seeing from this phase of the coronavirus correction that's different from the late January one is all of your beloved stocks are joining in and not only

joining in, their leading to the downside. So you know, if you were all up in Microsoft, will be all up in Apple, all up in those expensive text stocks, especially in software, those are the ones that are get hit more now, which does suggest that you know, there is a bit more of an active selling component and cutting even exposure to the stocks you love that is

taking place this time around. So Camra christ I'm looking at the three months to the ten year treasury UH minus seventeen here down eight and a half points today, is that what is that telling you? Should we really pay close attention to that because we've seen that go negative in the past with no real implications. Yeah, I

mean that curve. I don't think it's particularly useful on a sort of very very high frequency basis, because really it's just telling what the tenure does because um, three month bills don't really you know, three month bill yields don't really um don't really move so much. Twos tens perhaps offers a little more forward looking um uh color and uh, it's interesting that curve hasn't really moved at all today. It's been a parallel shift, UM to the

to the downside. What is the camera that's well said. What is a parallel shift where all yields go down? What is that signal to a fete? I mean, is is that signaling to them? Signals signals cut rates and keep them down. Um. Now, I think you could make a pretty good argument that rape cuts UM, while they might cheer up UM equity investors temporarily, would have a vanishingly small impact on on the real economy. Um. You know, not only in the United States, but sort of in

the rest of the world. UM. You know, uh, you know. In terms of the previous discussion of what's actually changed, well, I think something has changed, which is that you've started to see an economic impact extend beyond China's borders. UM for Venice to to cancel the carnival is I mean, they're not doing that because interest rates are too high. They're doing it as a public health scare. UM schools

are closing. That's something that that I think has impacted or infected, if you will, um uh investor in best investor consciousness, because it was kind of easy to write off UM as an ephemeral thing or a contained thing, and it was contained within China. But when you're starting to see business UM and the economy being impacted outside of China, then it's kind of like who let the dogs out? And how do we get them back in the cage? And that's a that's a more difficult proposition.

Kevin Christ, thank you so much for joining us in a short notice today with Bloomberg of course, looking particularly at the cross at space, Paul Sweni and Tim King worldwide with our special coverage, we are without commercial interruption in this special half hour getting the markets open. We opened near negative one thousand, and the down down negative

eight three seven down. We went captured, the bid, bounced back up, and we went back a little bit with a vix was a twenty four handle now twenty two point seven eight. The yield is in ten basis points were in eleven earlier one point three six seven two on the tenure, Luke, is it general? You know? I I make jokes about your three Bloombergs, but it's true. It isn't What is? What is? That's a hell of a monthly bill that we say, thank you? What What

do you see right now off your Bloomberg screen? Like what's the the delineating feature of panic or critically non panic? To me, it'll still be kind of the the starting point where we were for this and how quickly things change. So like equity put call ratios in terms of the volumes traded on the put side versus the call side, they've been below one pretty much every day this year,

a k more calls changing hands, then puts. I. I want to see how dramatically something like that changes, just like I want to see not only does the greed disappear, but also does the demand for protection orally skyrocket, because really you haven't had both things happen consistently. Even in late January. He's so seventies. He's like Wall Street he's wearing a shirt today that could have been worn with leud Wolfson, Gordon g Michael Holland would have warned twenty

years ago. It's got the blue stripe, that's got the Glary Caudlow statement blue stripe shirt with the white cord. And this this is my Kevin really special pull off something like this. It's very it's very fashion forward. Daward Ay time joining us with Lucawa. We have Gina Martin Adams. Uh. She's our strategist for Bloomberg Intelligence giving us I think so yes, she that's kind of where she was. So Gina,

thanks so much for joining us. Give us your perspective on this opening here and what may be different here for the US equity markets. Well, I think the equity market has been riding on the hotels of the better than expected fourth quarter earning season and able to therefore dismiss underlying weaknesses in the earning stream related to coronavirus um dampened outlook which has emerged in revision. It's pretty persistently.

But now the earning season is fading, and you've had really strong spikes in a sort of risk off tone across other asset classes. The equity market is following suit. So if you actually look at the technicals of the equity market, the two week rally that we had in early February was really running on steals anyway. It was largely supported by just a few names and tech and some defensive rotation into utilities. So it was signaling that the equity market was on fairly weak footing as it was.

But I do think that the end of earning season was inevitably going to be difficult for stocks, and we're going to go through a period of churning here, probably a modest correction related to the fact that the economic outlook is not going to improve in the short run and estimates are a little too high for the next couple of quarters of growth. The rule of thumbs as a correction, is that still true or the markets so adjusted or boloxed up right now that we're on the

cusp of a correction? Now, which is it? You know, I think it's some the arbitrary, honestly, Tom, it's a ten percent is known as the correction, is known as a bear market. Some people would say we haven't had any bear markets over the course of the last ten years. I would say, we've actually had three, maybe even four, just based on the fact that we had very severe

contraction in the equity market nearing. So, you know, I think that any correction always feels somewhat difficult, whether it be five percent, ten percent, or fifteen percent, particularly when in the company's of really strong spike and volatility and a strong risk off tone. That's likely what we're in for um at least for the next couple of days.

Just the massive rally that we saw in gold, the big rally we saw in the thirty year on Friday, would have indicated that we were in for weakness at least in the short run here in the equity market. And I think unless you get some really really strong earnest results from the retailers, which is highly unlikely, it's just going to continue for the near terms, kind of blowing off some of the excess that we had to

see left earlier this year. Well, I look for a forward your team and they're writing this afternoon from Bloomberg Intelligence, Gina Martin Adams out of all of our equity coverage today, Paul, Yeah, look at you know, I'm looking at my commodity screen that g l C O screen, which is just for us,

you know, equity people just the savior. And I'm seeing so much red across the commodities uh space here And is this just you know, the US equity markets just kind of catching up with what commodity has been telling us, which is global growth is you know, tepid at best

and may even be at risk with this coronavirus. Is that kind of we're just seeing maybe a little bit of catchup, as maybe Gina suggested, Yeah, I totally think there's you know, that's that's the way to frame it when you look at how commodities have been on a sustained basis coppercruede week for quite a while. Commodities have been showing the demand implications of the coronavirus for quite some time. Equity markets have been focused on the temporary

supply implications of the coronavirus for quite a while. So the kind of scaring that circle here is is a law of what we see. And one one thing that's really jumping out to me right now is I'm looking at implied correlations for the SMP five hundred, So the extent to which things are expected to move together, you know, generally in a crisis. Does one do that? Uh, the SPX one month, I see bee ball index on your terminal.

And so one thing that's really struck me is this was one of the rare occasions where you had correlations spike, implied correlations spike in late January and then immediately immediately fade to where they were before. Generally, when you have a spike and implied correlations, it means, hey, there's some kind of macro thing going on that we're going to worry about for a while. It's gonna be some kind of episode that we have to work our way through.

Been the case for, you know, for the trade war, was the case in late was the case during the the Chinese hard landing fears. Right now those are still probably subdued. So if you're looking for a way for volatility to move up, it's through this conduit where we start pricing in everything moving together to the downside. And I just put that up on the screen, and we're now out the four standard deviations is a general of four standard deviation. Move is where the sweat clicks in

and we're getting there. We're getting we're getting there, but we're not quite there yet. So looking at the you know, we we talk a little bit about crude oil and it's down about four percent or four point two barrel. I mean, is that kind of a is that a place where people should look for, you know, where is global growth going to be? And if I see weakness

in that commodity, that's really a flag for me. I mean probably copper would be the even bigger one, or the or the complementary, or you know, at least both of them telling the same story. Yeah, it's I would say definitely commodities are pricing in the lower demand global growth outlook much more than any asset class has been

for a while. But hey, commodities have been financialized for quite some time, more than they are necessarily indicative of supply demand conditions for real end users for quite some time. So probably more of a tendency to overshoot in both cases. Very good. I don't knowough jargon from Calah, but I learned a new function today, so you know that was there was as good as Stewart Kaiser from ubs time.

It was pretty good. Do we get through this without mentioning a backup goaltender, because that's that's that's how bad things must be right now, Michael Reagan with us here as we look at that, He's trying to log onto the hurt when I'm like the backup goaltender around here driving the surveillance. When when the market goes down a thousand points, Michael, can you log on? I'd rather not. I should have said I should have work at home.

But what is the color of the market you? Michael Reagan was, folks, leading just all of our intellectual coverage in Bloomberg News on the equity markets. You go into a morning call, what's the theme that you want to attack here? Negative seven sixties seven on the dough? Well, I guess you know. Obviously the question on everyone's mind is gonna be how bad will this get? God bless anyone who can even attempt to try to answer that. I mean, I think obviously the Italian outbreak is really

the focus of everyone uh ire right now. And just looking at sort of the leadership in the stock market, what do you see that? Well, a lot of that sort of the high flyers are leading your Apple, Microsoft, Amazon, the ones that we're really sort of leading this this uh rally on the way up. What I find interesting he's looking at the healthcare stocks. They're pretty much down across the board. I mean, Gillyad is up because they might have the vaccine. What are you seeing in Johnson

and Johnson might have a well that's the thing. Everything's down pretty steeply. And I find it interesting because less we forget Bernie Sanders did win a pretty a pretty big better than my mind had was thirty nine percent, folks, And he's clocking here with yeah, so I would be curious. It's hard to isolate what is happening to say, the managed care stocks. United Healthcare is down like seven, so obviously that you know, could could be a lot of

the coronavirus fear. But you also gotta wonder if Bernie is in the market a little bit too. I don't know, but um it's hard to separate the two because obviously a coronavirus is not gonna be good for your your healthcare stocks, but neither is so um uh, you know, I would love to see what this market was would look like this morning if it had just been the Bernie news over the weekend and not the not the virus. And Michael Reagan with us and he'll continue on Bloemark

Radio with reports through the day. Right now, we have to digress for a global audience for something that was absolutely extraordinary this weekend. There's been a lot of coverage in it in America and certainly within Canada as well. This is where two goalies get hurt and you don't have another goalie, and every team has an agreement that there's always an emergency goalie who if they play, gets

five hundred dollars and they get to keep their jersey. Yeah, it's it's in the contract and the agreement, and this occurs, but it doesn't occur like it did this weekend in Toronto. Is Carolina had two people injured and Luke it was absolutely extraordinary, without question, I've never seen it before. Tavarus took the giant John Tavirus took that first shot and he looked like a goalie completely out of his well that's because he was a goalie completely out of his

league too. So for backstory here, the Carolina Hurricanes two goalies injured, they had to turn to the leaf's appointed back up, who is the Zamboni drivers, and the teams have an in Toronto, but so in front of a home team, we embarrass ourselves like this so Carolina has to turn to the Merley's Zamboni driver. The Toronto Marley Zamboni driver ted into net before he had even faced a shot. He hadn't even bigger lead than he started with.

He himself got a shot on net, banking it off the boards, and he made I believe, seven saves in the third period. But Tom, if you remember the old Scott Stevens era in New Jersey Devils, I have not seen a team play suffocating defense like that there was. You couldn't get a puck through to the net. Not that the Leafs are really trying. This will go down is perhaps more embarrassing than the four one collapse in Game seven to the Brewers look very quickly. And we'll

expand on this later. Ex going to our audience, his junior banus, I was at a junior B level when I was you know, Colorado, million years ago. But what does junior B now mean versus the minors or the NHL. I would say Junior B in a lot of cases means you care about the sport, you stuck around to play it for a while, but you were not one of the top tier talented guys. You're nobody had a chance at this level to play an the NHL. Essentially, oh yeah, that's you. You're not going to go to junior.

Being Austin Matthews had the puck off the left side in his stomach. He shot it. Even I could have stopped that. He he dotted the eye in canes. As we say, see the suffering there. It's like if he was long Apple calls here yesterday, Luke Kawa, Thank you so much for that perspective on the markets, and of course I'm truly an historic moment. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on

Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keene before the podcast. You can always catch us worldwide. I'm Bloomberg Radio.