Market comment 2020

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You might recall that on Monday evening, in a post for this platform, I noted that coming out of options expiration, the "gamma pin" lost quite a bit of its influence. In other words, option hedging was no longer likely to keep things "calm." When dealers' gamma profile flipped negative, it meant that, instead of mechanically insulating the market from large moves, dealer hedging would instead entail market makers selling into a falling market, potentially magnifying the swings. Well, guess what? According to Kolanovic's estimates, dealer hedging accounted for between $40 billion and $50 billion in selling pressure this week. And then there's CTAs, which likely de-leveraged to the tune of $40 billion to $60 billion on JPMorgan's estimates.

 Sword Of Damocles | Seeking Alpha

As large and positive aggregate gamma impacts the realized volatility directly (dealer need to buy when the spot falls and sell when the spot rises, thereby dampening the potential spot moves on either side), persistence of long gamma positioning can lead to low volatility over extended periods of time. As per our estimates, aggregate gamma on the S&P 500 was positive for more than three-fourths of 2019, and hence we believe this to be a significant cause of lower than expected volatility last year. Heavy gamma positioning was also among the main reasons why the S&P 500 escaped any drawdowns amidst all the US-Iran news flow in the first week of 2020.

Following the large expiries late last week (VIX last Wednesday, everything else last Friday), two macro shock catalysts created a profoundly negative price impulse which sent spot levels in equities index, equities vol. and rates deeply through prior ranges, which drove dealers into short gamma territory, meaning that instead of insulating market moves as they had been previously, dealer hedging flows would see them pressing into the directional moves [which in this case] meant shorting into the new lows in equities, buying VIX and buying USTs/STIRs the more they rallied.

 From Bubble To Bust - S&P 500 Index (:SP500) | Seeking Alpha

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The global stock market is, theoretically, the distillation of how investors think everything that happens in the world will play out in the economy. Right now, judging by these drops, investors are much less optimistic than they were a week ago. But what they’re predicting is not only how bad the outbreak could be in terms of workers staying home sick, drops in consumer spending, or supply-chain disruptions; it’s also how bad people think it could be. Those might turn out to be two very different things.

 The Coronavirus Put Stock Market in Uncharted Territory - The Atlantic

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The UK can expect to see widespread infection of the coronavirus “fairly soon”, one of England’s top health officials has warned. Following a significant rise in the number of UK cases over the weekend – with 12 more confirmed in England and another in Scotland – Public Health England’s medical director, Paul Cosford, said to prepare for more widespread infection in the UK.

 Coronavirus: expect widespread infection in UK 'fairly soon', warns health official | World news | The Guardian

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The Tom Tom Traffic Index, run by the same company you once used to get around before smartphones, uses the data from its 600m drivers to gauge the level of congestion in 416 major cities worldwide. Handily, the index covers some of the major Chinese cities, so let’s take a quick look at the data. As a quick note, a 23 per cent congestion level means a journey takes 23 per cent longer than it should with no traffic. You see that small spike this Monday morning? Traffic levels actually bounced to 66 per cent, encouragingly 3 percentage points higher than in 2019. Evening congestion, however, is less intense at just 29 per cent, versus a 56 per cent average. Not everyone is convinced by the traffic data, however. The Economist’s Simon Rabinovitch, who is based in Shanghai, thinks the main reason is because those returning to work are still worried about taking public transport

 Coronavirus: green shoots? | FT Alphaville

And some awkward dilemma's:

Although the economy will need some sort of stimulus if it falls into a recession, I am not sure this is the time for it. There are many reasons for taking this point of view. 
1. Providing incentives to boost economic activity from the natural rate dictated by the existential threat we face is bad health policy. One could easily see a strong correlation between economic activity and the spread of the coronavirus. Think of the marginal worker receiving extra pay to get on public transport to come to work, whereas he or she might otherwise stay at home. We should instead focus everyone's minds, including those obsessed by fortunes available on Wall Street, if they are able to distract themselves, to stopping the virus and let that dictate our economic activity, however dire the economic outcome. Reducing economic activity temporarily might help to reduce the spread of the virus. 
2. If we are then successful at facing off this threat and containing it, only then should the relatively bare cupboard which contains the central banker's remaining toolkit be opened to deal with a recession. Using the tools now means, if worse is to come, the central banks will have even less firepower when they need it most. 
3. We should be prepared to suffer a recession and declining living standards for a short period than have 1/2 the world infected. For an economic policy standpoint, the latter would in any case result in a far worse economic outcome.

 Complete Banker: How not to stimulate the spread of Covid 19

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That means discretionary activities — such as traveling, dining out or attending entertainment, sporting, religious and political events — would grind to a halt. Business travel and entertaining would dry up. Schools and day-care centers would close. Public transportation ridership would plunge. 

About 10% to 15% of U.S. gross domestic product consists of consumption of services that could be curtailed, Goldman economists wrote in a note to clients Sunday. Another 16% of GDP consists of non-food goods consumption that could be at risk if consumers don’t want to go out shopping. If no one goes out, then millions of people could lose their jobs. Thousands of businesses would be threatened with bankruptcy. More than 16 million people work in the leisure and hospitality industries. About 5 million work in education and child care. About 1.2 million work in transportation industries that could be affected.

The Congressional Budget Office has estimated that spending on food services, arts and accommodations would temporarily decline by about 80% during a major pandemic. Spending on public transportation would drop by 67%.

If layoffs followed the same arithmetic, nonfarm payrolls would drop by about 16 million — a mind-blowing number that’s about twice the number who lost work in the 2008-2009 Great Recession. It would be the largest percentage decline in jobs since the Great Depression of the 1930s. Layoffs of that magnitude sound absurd, but it shows you just how many people are vulnerable to a pullback in consumer spending.

 The coronavirus is taking aim at the heart of the American economy: Consumer spending - MarketWatch

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China took a whole bunch of steps when they realized they had to repurpose big chunks of their hospital systems to [respond to the outbreak]. The first thing is, they said testing is free, treatment is free. Right now, there are huge barriers [to testing and treatment] in the West. You can get tested, but then you might be negative and have to foot the bill. In China, they realized those were barriers to people seeking care, so, as a state, they took over the payments for people whose insurance plans didn’t cover them.

The other thing they did: Normally a prescription in China can’t last for more than a month. But they increased it to three months to make sure people didn’t run out [when they had to close a lot of their hospitals]. Another thing: Prescriptions could be done online and through WeChat [instead of requiring a doctor appointment]. And they set up a delivery system for medications for affected populations.

You look at the big, long lists of all the cases and identify those where you have clusterings in space and time and try to investigate what kind of clustering happened: Was it in a hospital, an old-age home, theaters, restaurants? We found it was predominantly in families. It’s not a big surprise; China had shut down a lot of the other ways people could gather. And family clusters are the closest, longest exposures [to the virus], and getting the virus is a function of whether someone’s got it, how long they’re exposed, and how much virus they are shedding. More of a surprise, and this is something we still don’t understand, is how little virus there was in the much broader community

That’s the mortality in China — and they find cases fast, get them isolated, in treatment, and supported early. Second thing they do is ventilate dozens in the average hospital; they use extracorporeal membrane oxygenation [removing blood from a person’s body and oxygenating their red blood cells] when ventilation doesn’t work. This is sophisticated health care. They have a survival rate for this disease I would not extrapolate to the rest of the world. What you’ve seen in Italy and Iran is that a lot of people are dying. This suggests the Chinese are really good at keeping people alive with this disease, and just because it’s 1 percent in the general population outside of Wuhan doesn’t mean it [will be the same in other countries].

 Coronavirus in China: The most important lessons from China’s Covid-19 response - Vox

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Sarah Kliff of the New York Times reported Saturday that Pennsylvania native Frank Wucinski "found a pile of medical bills" totaling $3,918 waiting for him and his three-year-old daughter after they were released from government-mandated quarantine at Marine Corps Air Station in Miramar, California. "My question is why are we being charged for these stays, if they were mandatory and we had no choice in the matter?"

The Centers for Disease Control and Prevention (CDC) is not billing patients for coronavirus testing, according to Business Insider. "But there are other charges you might have to pay, depending on your insurance plan, or lack thereof," Business Insider noted. "A hospital stay in itself could be costly and you would likely have to pay for tests for other viruses or conditions." Lawrence Gostin, a professor of global health law at Georgetown University, told the Times that "the most important rule of public health is to gain the cooperation of the population." "There are legal, moral, and public health reasons not to charge the patients," Gostin said.

In the case of the Wucinskis, Kliff reported that "the ambulance company that transported [them] charged the family $2,598 for taking them to the hospital." "An additional $90 in charges came from radiologists who read the patients' X-ray scans and do not work for the hospital," Kliff noted. The CDC declined to respond when Kliff asked whether the federal government would cover the costs for patients like the Wucinskis. The Intercept's Robert Mackey wrote last Friday that the Wucinskis' situation spotlights "how the American government's response to a public health emergency, like trying to contain a potential coronavirus epidemic, could be handicapped by relying on a system built around private hospitals and for-profit health insurance providers."

 'Why Are We Being Charged?' Surprise Bills From Coronavirus Testing Spark Calls for Government to Cover All Costs | Common Dreams News

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Rep. Mark Pocan (D-Wis.) is demanding information from the Centers for Disease Control and Prevention (CDC) about its decision to stop sharing data about the number of people tested for the novel coronavirus in the United States. In a letter sent to CDC director Robert R. Redfield on Monday, Pocan noted that up until Sunday, the agency had been publicly disclosing statistics related to the coronavirus and its spread in the U.S. The data included numbers on the total confirmed and presumptive cases of the coronavirus, as well as stats on how many tests had been administered and how many deaths had been attributed to the disease. By Monday, the CDC stopped disseminating figures on the number of people tested and the death toll.

 Democratic lawmaker calls out CDC for removing data on number of Americans tested for coronavirus | TheHill

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Millions of Americans are uninsured — 27.5 million at last count in 2018. For them, even going to the hospital to get tested can come at a steep cost. Business Insider estimated that the average visit to the doctor could cost anywhere between $149 to $1,151, not including the cost of any testing.   Even those who are insured face tough numbers. In Miami, a man who returned to the U.S. from a work trip in China went to the hospital fearing he may be infected with COVID-19. Osmel Martinez Azcue told the Miami Herald he would normally have gone to CVS for over-the-counter medicine to treat his symptoms, but felt he had a responsibility to get tested amid fears of a coronavirus outbreak in the U.S. Azcue tested positive for the flu and went home with a bill for $3,270, which cost him $1,400 after insurance.

How much will getting coronavirus cost you? | TheHill

As the new coronavirus continues to infect people around the world, the rush to test for the virus has taken on a new urgency. But the United States is lagging on that front, in part due to faulty test kits and strict regulations, experts told Live Science.  "We're not remotely prepared," Dr. Alex Greninger, an assistant professor in the Department of Laboratory Medicine and an assistant director of the Clinical Virology Laboratory at the University of Washington Medical Center, told Live Science.

US isn't 'remotely prepared' to test for coronavirus, experts say | Live Science

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We know, irrefutably, one thing about the coronavirus in the United States: The number of cases reported in every chart and table is far too low. The data are untrustworthy because the processes we used to get them were flawed. The Centers for Disease Control and Prevention’s testing procedures missed the bulk of the cases. They focused exclusively on travelers, rather than testing more broadly, because that seemed like the best way to catch cases entering the country.

Just days ago, it was not clear that the virus had spread solely from domestic contact at all. But then cases began popping up with no known international connection. What public-health experts call “community spread” had arrived in the United States. The virus would not be stopped by tight borders, because it was already propagating domestically. Trevor Bedford’s lab at the Fred Hutchinson Cancer Research Center in Seattle, which studies viral evolution, concluded there is “firm evidence” that, at least in Washington State, the coronavirus had been spreading undetected for weeks. Now different projections estimate that 20 to 1,500 people have already been infected in the greater Seattle area. In California, too, the disease appears to be spreading, although the limited testing means that no one is quite sure how far.

In total, fewer than 500 people have been tested across the country (although the CDC has stopped reporting that number in its summary of the outbreak). As a result, the current “official” case count inside the United States stood at 43 as of this morning (excluding cruise-ship cases). This number is wrong, yet it’s still constantly printed and quoted. In other contexts, we’d call this what it is: a subtle form of misinformation.This artificially low number means that for the past few weeks, we’ve seen massive state action abroad and only simmering unease domestically. 

While Chinese officials were enacting a world-historic containment effort—putting more than 700 million people under some kind of movement restriction, quarantining tens of millions of people, and placing others under new kinds of surveillance—and American public-health officials were staring at the writing on the wall that the disease was extremely likely to spread in the U.S., the public-health response was stuck in neutral. The case count in the U.S. was not increasing at all. Preparing for a sizable outbreak seemed absurd when there were fewer than 20 cases on American soil. Now we know that the disease was already spreading and that it was the U.S. response that was stalled.

 How Many Americans Really Have the Coronavirus? - The Atlantic