TOP 10 of Major Financial Events 2020

The past year has been called a “witness to history “: for example, the US presidential election set a new record for the largest number of votes in history, and for example, the United States suffered the worst unemployment rate ever. There are incredible highs in these “histories “, such as record growth in the number of new businesses, and collapsing lows, such as the worst surge in American history among the poor. But, in general, the financial sector may be the only sector that can best amplify these highs and lows.

The unstable financial situation has become an integral part of the ongoing new crown epidemic. As with 2020, the events in global financial markets in 2020 can be described as: from shock to destruction to disbelief. So many unlikely events have taken place together in a year. Although to some extent they can be explained by economic logic, this angle alone is not enough to see the whole picture. The recurrence of the epidemic and the widespread panic caused by the government’s forced blockade and suspension of enterprises to contain the epidemic are one of the “culprits” that triggered the great turmoil in the financial industry.

Next, this article will briefly review the top ten extremes in the financial sector in 2020 in a rough chronological order to explain why last year was a worthy year. It is important to note that the start date of some events is estimated, and many events are not a flash in the pan, but last for days or weeks after occurrence.

1. Treasury yield curve upside down —— February 14,2020

Although the significance of the upside-down Treasury yield curve is open to question, it is not common, however, that short-term interest rates on government bonds exceed long-term interest rates, which usually indicates a growing pessimism about the short- and medium-term economic prospects. Every time the yield curve of U.S. debt hangs upside down, the prices of various assets fluctuate sharply, and U.S. stocks fall panic because it is seen as a leading indicator of recession.

Before the last seven recessions, there had been a reversal of the yield curve between 10-year Treasuries and 2-year Treasuries. In fact, the Treasury yield curve hung upside down almost a year before the panic of the new crown outbreak, but reversed it for a large part of the autumn of 2019. In February 2020, January and March Treasury bonds were upside down.

Investors are worried not only about the severity of the epidemic, but also about the effectiveness of the anti-epidemic policy, so they will choose to abandon risk instruments (stocks, bonds, etc.) and buy short-term bonds guaranteed by the U.S. government. When increasing suspicion (or, indeed, outright panic) drives investors into short-term securities issued by the government, the prices of these securities are coaxed up, and yields (interest) naturally fall, creating an upside down phenomenon.

While the upside-down yield curve sometimes affects the prospects of bond issuers, the large-scale upside-down of U.S. Treasuries that began on February 14,2020 has little to do with the United States more importantly, the overall global economic outlook. The yield on January and February bonds rose to 1.60 percent, while the 10-year yield was only 1.59 percent. This should be seen as the first sign of the impending financial panic.

2.VIX futures spot premium —— February 27,2020

VIX is the Chicago Options Exchange’s volatility index, which the market is more accustomed to calling a panic index because it uses exchange-traded option prices to track the extent of the market’s “panic “(expectations of decline) about stock prices. This is a somewhat esoteric financial market instrument, and many people can not understand futures. Futures refer to market trading contracts that buy and sell financial instruments at specific prices in the future. Therefore, its trading price can well represent the expectation of future fluctuations.

In general, when many futures contracts specify a particular financial instrument to trade on a series of dates, their trading is in a state called a futures premium. In this state, the longer the duration of the transaction, the higher the transaction price. The term structure is tilted upward. The reasons for the upward tilt include: longer expiration times mean more risk, more uncertainty and higher capital time value (more opportunity cost).

Only in extremely rare cases will the term structure tilt downward over time, that is, today’s price probability is slightly lower than that after a month, and the price after a month is slightly lower than that after two months, which is the reversal. The opposite of the futures premium is called the spot premium, that is, the current price is higher than the contract maturity date.

Here are VIX futures contracts that occurred at the beginning of the year:

At the start of 2020, VIX level is 13.78, Term structure is also a typical futures premium… When the new crown broke out in China, VIX spot (current market) is driven by concerns about supply chain disruptions and a global economic slowdown, It rose slightly to 17.97 on 3 February, But the term structure hardly changes… Then the big sell-off began on February 20 th. From 21 to 28 February, VIX term structure quickly changed from futures premium to spot premium. But this conversion is relatively minor, And mostly in the early days, This indicates that, Investors thought the sell-off would be a short-term sell-off. However, After March, Major stock indexes all showed the fastest decline in history. VIX thus soared to 81% on march 16. Its term structure also shows a very obvious spot premium, All futures prices rise within maturity. The message is: the stock market may fluctuate in the short term, Even after six months (180 days), The annual volatility of the S & P 500 will be as high as /-32.

However, this still does not give a clear answer to how likely this will be. One way to define an important spot premium period is to calculate the extended yield, that is, the positive or negative return from short-term futures contracts to long-term futures contracts. This yield is rarely positive, even if positive, will not exceed 1.

Since 2005, The rollover rate of return is only four times :1,2008 financial crisis; 2. Lehman Brothers and other companies have collapsed; 3. In 2011, American government loses AAA credit rating; 4. February 2018. Add the fifth —— March-April 2020.

3. snapped up Treasuries —— March 11,2020

From February to early March 2020, a series of extremely complex interactions took place, resulting in unprecedented pressure on Treasury bonds in the spot market. To put it simply, many companies have started to hold large holdings of u.s. treasuries and hedge u.s. treasury futures contracts in order to secure financing —— commonly known as seeking better balance sheets. Some companies do it deliberately to earn a small difference in so-called base trades. All that remains is to make money work in a low-risk manner so that it can be borrowed more easily when opportunities arise.

Of course, the supply of government bonds is limited, and new bonds (new bonds) are more liquid than similar bonds (old bonds) issued before. As some companies begin to use less liquid Treasury bonds for base trading, the effectiveness of futures hedging decreases, resulting in book losses. As some market participants tried to pull out of the deal, their approach was to buy back bond futures and sell bonds heavily, leading to a sharp drop in the price of Treasury bonds —— in some cases, illiquid bonds.

Treasury traders, who are ready to buy and sell a variety of U.S. government and institutional bonds, are starting to spit: normally, they try to keep their books balanced, so price adjustments are needed to regulate capital flows, but at a peak in bond selling (mainly on some popular maturing bonds, such as 10-year Treasury bonds), they have to start lowering their bids and even exit the market in some cases. Bond sales prices gradually lower, unwilling to reduce prices or unable to close the company, can only watch their book losses continue to increase.

The following is a microcosm of the situation:

Banks and investors have said the trading situation in the world’s largest and deepest debt markets —— U.S. Treasuries has deteriorated significantly this week as the outbreak of the new crown has triggered intense turmoil. Analysts at Bank of America said markets had been “overwhelmed by liquidity concerns 」…… after Wednesday’s chaotic day The bond portfolio manager at a large asset manager said the situation had not improved on Thursday, and the market continued to be affected by volatility. He said ,” we can’t trade “.

To be honest, a market as wide and deep as treasurys, driven by panic selling, is rare, not to mention a few maturing bonds. Around this time, the Fed launched a bond-buying program that tried to reassure sellers that their bonds would be a good price at maturity, encouraging them not to sell.

There is a good example of this: a burning cinema to symbolize a collapse in bond prices, and moviegoers, bondholders, scramble to squeeze escape routes. When they were all crowded there, the increased fire killed and wounded those who did not. The Fed’s Treasury liquidity tool, like six to eight more escape routes in cinemas, not only prepares all movie audiences for exits, but also makes them feel free to run.

4.First stock market crash in 33 years —— March 16,2020

“Crash” is a term that is often misused to report a digital but statistically normal decline. So, strictly speaking, the stock market has plummeted many times in the past few decades, but it has never collapsed since 1987. The broadest definition of a stock market crash is a 10% or more decline in a day.

And March 16 is the perfect day to fit that definition: that day, The Dow plummeted by nearly 13 per cent (2997 points); The S & P 500 and the Nasdaq also fell 12 percent. This completely ended the record of the longest and worst stock market decline since October 1929, Because the cumulative decline in four days is more than 26%(about 6400 Dow).

The day’s decline comes amid growing public pessimism about the economic impact of the anti-epidemic policies the government is considering. But the trigger for the day’s accelerated sell-off and the suspension of the deal was Trump’s statement at a news conference that the worsening U.S. epidemic could last until August. At the same time, companies’ earnings prospects have plummeted, and their stock market value and price have only fallen.

5. corporate bond ETF below NAV—— March 17,2020

Exchange-traded funds (ETF) refer to tradable financial portfolios. They can provide investors with diversified exposure to specific tools, market sectors, capital, etc. There is also something called net asset value (NAV) related to ETF in addition to market prices, NAV refers to the ratio of the underlying instrument per share. ETF prices should be very close to NAV in most cases, but there are sometimes price differences due to factors such as outdated prices (some securities are not traded frequently), jet lag (for example ,11 a.m. EST, a Japanese stock in a US fund happens to be inactive) and so on.

The price of some corporate bond ETF (and, of course, fell) and the NAV spread sharply in March 2020. Taking the two ETF——LQD and HYD of trading investment-grade and high-yield (” junk “) bonds, for example, the large spread shows that, if not the vast majority, many of the two ETF bonds are in high trouble and are likely to default.

Why is that? A number of factors are at work: first, it is certain that the redemption of ETF and the selling of underlying corporate bonds by investors will not only lead to a sharp fall in prices, but also lead to increased illiquidity, which makes fixed-income traders more cautious about buying. On the other hand, illiquidity also leads to greater spreads and more unstable prices. In addition, as political discussions about the epidemic continue to heat up, the likelihood that some bonds will suffer, that is, the companies issuing bonds will have difficulty repaying interest on bondholders and other creditors.

It should be noted that unlike stock markets, bond investors are generally less likely to “buy at a low price “. Estimates show that normally only 20% of corporate bonds are traded every day, so the economic uncertainty surrounding the anti-epidemic policy froze the market after a sharp discount. This chill represents tens of thousands of traders, traders and other market participants waiting for more information to price for short-term risks. As Bloomberg said:

The seemingly perfect bond is being traded at a “big sale” price. Although over time, current prices may prove to be the right valuation, no securities are safe in an unprecedented sell-off, especially with few buyers. If more retail investors decide to exit the storm as they have in the past, the vicious circle is just beginning.

Beyond this historic mispricing, the Fed’s start to buy high-yield bonds in early April 2020 is a more unprecedented development than the chaotic spread between ETF and NAV, triggering intervention to some extent.

The good news is that most ETF and ETF bonds have rebounded in the coming months, but this is the worst corporate bond slump in modern history: far more serious than any since the 2008 financial crisis and 9/11.

Bundled with the failure of the treasury market and the collapse of corporate bond prices, other credit markets, such as commercial paper and revolving credit instruments, also began to have market participants withdraw when these markets became illiquid, spreads widened and bids disappeared. Yields on municipal bonds —— instruments critical to state and county government financing —— started to soar. As in many previous financial crises, various asset, securities, and derivatives markets turned overnight into cash flows.

6. historic gold-silver ratio was broken —— March 18,2020

The gold-silver ratio is simple, that is, at current market prices, how many ounces of silver an ounce of gold corresponds to. There is reason to believe that the gold-silver ratio is the oldest financial time series on record. Although the ratio of silver to gold reserves in the crust is about 18:1, in modern financial markets, the ratio of silver to gold transactions is traditionally about 60:1. This ratio fluctuates due to supply and demand (decoration and industry) and market sentiment, but tends to return to 60:1 after volatility.

But in the first week of April 2020, the rate reached an all-time high (and some say it was the highest in 5,000 years):

The gold and silver series goes back a long time in our records, For example, in the era of the Pharaonic era (around 3100 BC), The gold – silver ratio is 2.5, And in the days of king Hammurabi (about 1750 BC), This ratio is 6. In legend, The Greek king Croce invented gold and silver coins, More like a golden shell, he set a 13.33 ratio. Constantine I (280-337 AD) was 10.5. Since 1687, We have more and more frequently changed data, All these figures confirm that the gold-silver ratio hit a record high ——123.78 yesterday. Although in today’s Asian cities, It fell to about 116-117, But after the London market started trading, Back to 120-121. For reference, The average rate was 101.74 on Friday, And the average ratio for 2019 is 86.04. With reference to current prices, This is really an amazing rapid change. (The highest record before this month was born in 1940, At that time, the annual average was 99.76 per cent. )

The reasons for the large disconnect in the gold-silver ratio include the sudden shortage of spot silver (which is cheaper for hedgers than gold) and the difficulty of trading / hedging silver in the futures market. Because of low liquidity, large spread, and unusual 5000-ounce contracts, silver futures contract volatility is legendary, nicknamed “white lightning “.

7. gold spot-futures historic spread —— March 24,2020

The price of gold spot refers to the current (today or immediate delivery) market price, and the price of gold futures refers to the price after the next few months (delivery on a future day). The price of gold futures is the price of gold. Traditionally, spot and futures prices are traded at fairly close prices. For example, the current trading price of an ounce of gold in the spot market is $1877, while the trading price of the recently maturing gold futures contract is $1882, so the difference between the two is only $5. But between the end of March and mid-April 2020, the spread between spot gold prices and gold futures prices expanded to unprecedented levels.

At the end of March, gold futures were more than $80 higher than spot prices. This incredible spread tells us that in order to hedge economic uncertainty, the public suddenly began to rush to buy gold. furthermore, due to the nature of the transmission of the new crown virus and travel/cargo restrictions, it has become less easy to purchase physical gold from several major gold trading centres —— new york, london, switzerland and xiang-gang and transport it to other locations.

One factor that makes the treasury market difficult also works here: traders and brokers are forced to work from home because of the epidemic’s closure and homeownership without their usual telephone bombing and other technology. Reports say:

Ole Hansen, the head of Saxo Bank commodities trading, points out that the world’s two largest gold hubs (new york and london) are closed, so many traders work from home. This is the “culprit” of the market collapse, he said, because “we don’t have enough power to handle all needs. There is a lot of gold in the market, but it is not put in the right place. No one has the ability to deliver gold, we are all forced to stay at home. 」

8. U.S. Treasury bond interest rates have fallen —— March 25,2020

Do you think the yield curve is over? Yields on short-term, or nominally risk-free, government bonds have turned negative after investors bought heavily. In other words, given that short-term bond issuance takes the form of zero interest (meaning that it does not pay interest to buyers but is issued at a discount, but matures at its par value), investors are willing to “pay” the government $1.00, even knowing that they can only recover $0.99 after one to three months, but they are still willing to get the government’s $0.99 guarantee.

A week and a half after the Fed lowered its benchmark interest rate to near zero, U.S. Treasury yields fell below zero on Wednesday, January and March, as investors flocked to the safe zone of fixed income amid widespread market turmoil… Both short-term Treasurys are short-term red, with yields falling to -0.002. On Wednesday, yields fell again. As of around 2:35 p.m. EDT, January bonds traded at -0.053%, compared with -0.033% in March.

Negative interest rates on U.S. Treasuries are also a sign of complete market surrender, which is hard to see unless it is the toughest market environment, such as the days before and after Lehman Brothers collapsed in 2008.

9.May WTI Futures ——20 April 2020

Although much has been said before, one of the strangest moments in financial markets took place on april 20,2020, when the price of the west texas intermediate base oil (WIT) may futures contract fell well below zero at $-37.63 a barrel. The sudden sharp drop in oil demand (due to the closure of the city, the historic drop in tourist numbers, the cancellation of flights, etc.), as well as the production differences between Russia-Ros and Saudi Arabia, led to the influx of oil from some OPEC members into the market.

As demand for oil in the global economy plummeted (and demand for other petroleum products fell), oil supplies were released unprecedentedly and oil storage facilities were soon filled. So much oil is hoarding there —— which is the implication of negative futures prices —— traders are paying for rival oil, a dramatic phenomenon now called “peak storage “.

10.Bitcoin’s historic Tamaki —— November 30,2020(still climbing)

From $7000 to $10000 at the beginning of the year to a low of just above $4900 in March 2020—— this strongly suggests that at least some market participants have sold their Bitcoin holdings during the most panic and chaotic period, wondering how they are now feeling, as Bitcoin has jumped to an all-time high.

At the time of writing, Bitcoin’s historical record was a new record of Bitcoin at $34366.15 at 15:44 on January 3, according to Coindesk data. It is hard to say whether this is related to the halving of last May, or to the growing acceptance of its resilience, or to other factors.

Summary

The uncertainty of anti-epidemic policy triggered a series of extreme situations in financial markets, and with the implementation of the epidemic, expansionary monetary policy became a huge catalyst. The U.S. government spent about $7 trillion in 2020, including $3-4 trillion pledged by the Federal Reserve, mainly for plans to keep the market going.

The Fed also lowered the federal funds rate to zero and gave forward guidance that it would maintain low rates until inflation substantially exceeded 2 percent. Furthermore, it has opened up international swap lines, revived plans during the 2008 financial crisis, and launched a main street project reminiscent of economic policy during the Great Depression (MSLP). On the fiscal side, in June 2020 alone, the U.S. budget deficit was about $865 billion, surpassing the combined debt of the U.S. government between 1776 and 1980.

In addition to telling us the uncertainty of the market and the awesome power of the central bank to reverse it, the ten extremes summarized in this paper show that no matter how well a particular market is designed and how well the regulatory framework of the market is set, human behavior can be unpredictable or unexpected. And, in rare cases, when chaos and fear peak, not only do unforeseen “black swans” occur, but they also gather together.

Many options traders post a latin proverb on their laptops, computer screens or other devices abyssus abyssum invocat, meaning “the abyss has no bottom “—— which I do to better remind myself not to be” wrong again “. One misstep or accidental event makes another misstep or accidental event more likely to occur, sometimes even causing a full chain reaction before calm comes.

There is a trend that financial markets are either redundant casinos with no real economic significance or, in turn, valuable social means of refining different views. and many abnormal events in 2020 are clearly mapping the first view, although the second view is closer to the fact than the first.

An unusual year like 2020 will help train a new generation of traders and company executives, design more robust markets and exchanges, and attract innovators and adventurers seeking to take advantage of the next crisis opportunity. But whatever happens in 2021, it is unlikely to replicate the state of financial markets in 2020.

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