The S&P 500 suffers its quickest correction since the Great Depression; Volatility index hits highest level since 2015

Feb 28, 2020

Observations & Insight

The OCC cleared 45.4 million contracts yesterday, setting yet another record for the U.S. derivatives clearing industry.~MR

Lead Stories

The S&P 500 suffers its quickest correction since the Great Depression
Ben Winck – Markets Insider
The S&P 500 slipped through the week to post its fastest correction since the Great Depression as fears of a coronavirus-driven recession tore into markets around the world.
The key index notched its biggest single-day drop since 2011 on Thursday after plunging 4.4%. The S&P 500 index wiped out its year-to-date gains after its Monday and Tuesday slumps and now sits 10.7% below where it closed December 31.

****JB: Also see the Financial Times’ story, S&P 500 stages quickest correction since the Great Depression

Volatility index hits highest level since 2015
Matthew Rocco – Financial Times
The Cboe volatility index — known as Wall Street’s “fear gauge” — jumped to its highest level since August 2015, reflecting the heightened volatility in US stocks at a time of growing concerns over the coronavirus outbreak.

Panic in Volatility Markets Is Getting Even Worse Than Stocks
Luke Kawa – Bloomberg
The worst week for stocks since 2008 looks even scarier in the volatility market.
This below chart shows the difference between the daily percent change in the S&P 500 and the net change in the VIX Index, a gauge of implied volatility often called Wall Street’s fear gauge. Readings above the red line indicate the VIX increase was larger than expected for a given retreat in stocks, or the fall is smaller than anticipated for an increase in equities.

Will Coronavirus Cause a Recession? US Stock Sell-Off Worsens
Vildana Hajric, Sarah Ponczek and Lu Wang – Bloomberg
With $3 trillion erased from American stocks and the angst starting to morph into panic, investors want to know where it will end. A lot of the answer, and the fate of the bull market, turns on whether the virus outbreak ends up causing a recession.
In America, economic contractions are what cause bear markets — not valuations, political drama or even human tragedy — and very rarely does one come without the other. Indeed, the absence of a recession over the past decade allowed the S&P 500 to rise 2,700 points, a run that defied all others in terms of duration.

The Coronavirus Selloff Might Be Exaggerated
Jon Sindreu – Wall Street Journal
Forget the 2007 collapse and the dot-com bubble bursting in 2000: The coronavirus has now officially engineered the fastest-ever correction in U.S. stocks from their peak. Investors may take solace in the fact that, if this seems a bit exaggerated, it is because it could be. On Thursday, the S&P 500 suddenly dropped 4.4%, as fears about the viral outbreak’s impact on the global economy turned into full-blown panic. Equities are now down more than 10% from their all-time high—analysts’ definition of a correction—which was only last week.

Derivatives Traders Turn Most Bearish on Europe Inc. in a Decade
Todd White – Bloomberg
Investors have turned the most bearish on euro-area blue chips in more than decade — and the change has been swift.
A gauge of three-month Euro Stoxx 50 index options prices on Thursday showed the relative cost of downside protection has spiked to the highest since 2008. By contrast, a similar measure for U.S. companies in the Dow Jones Industrial Average is not even testing its September 2019 high.

Dealers cast doubt on swaptions compensation plans
Lukas Becker –
Redress scheme for victims of post-Libor valuation change may fail due to “cherry-picking” fears
Rates traders are sceptical that swaptions users will agree to voluntarily compensate counterparties who lose out following a change of swap discount rate, casting doubt on a mechanism that dealers say is a crucial part of the industry’s broader Libor transition efforts.

Derivatives Traders Turn Most Bearish on Europe Inc. in a Decade
Todd White – Bloomberg
Investors have turned the most bearish on euro-area blue chips in more than decade — and the change has been swift.
A gauge of three-month Euro Stoxx 50 index options prices on Thursday showed the relative cost of downside protection has spiked to the highest since 2008. By contrast, a similar measure for U.S. companies in the Dow Jones Industrial Average is not even testing its September 2019 high.

Blowout fear for FX markets as coronavirus stirs dormant vol trades
Olga Cotaga – Reuters
With this week’s coronavirus-driven rout having shaken awake previously slumbering euro-dollar markets, the spotlight is back on the “short volatility” trades that some regulators fear could trigger a blowup on world markets.

Euro-dollar volatility jumps to one-year high amid big FX moves
Market gauges of euro-dollar one-month implied volatility jumped on Friday to their highest in over a year at 6.6% as the intensifying coronavirus outbreak fuelled big currency moves and recession fears.

That Quick Post-Volmageddon VIX Drop May Not Occur This Time
Joanna Ossinger – Bloomberg
The Cboe Volatility Index closed at nearly 40 on Thursday, and some market watchers are saying high levels might stick around a bit longer than in past VIX spikes. When Wall Street’s “fear gauge” spiked in the volatility-induced meltdown of early 2018, it closed at 37.32 on Feb. 5 but was back down to 15.80 by Feb. 26. By March 9, it closed below 15. But at that time, a number of volatility-linked products exacerbated the swings — and once they were out of the picture, markets were able to calm down relatively quickly.

History’s Fastest Crash Is the High Price for Unbridled Optimism
Lu Wang – Bloomberg
It’s a stat so shocking that it’s difficult to believe: In a century spanning the Great Depression and Financial Crisis, the current correction is the fastest ever. To understand how it happened, you need to recall how euphoric markets very recently were. Hard as it is to remember now, as recently as two Wednesdays ago, with coronavirus headlines everywhere, Apple Inc. was capping off a rally that had added $600 billion to its value in eight months. Lookalike runups in all manner of tech megacaps pushed valuations in the Nasdaq 100 to a two-decade high. In just three months, Tesla’s market cap shot from $40 billion to $170 billion, while a pack of dodgy microcaps, hawking space vacations and fuels cells, were trading hundreds of millions of shares a day.

China Stock Option’s 2,800% Surge Shows Rush for Hedges
Bloomberg News
In China’s $7.8 trillion ocean of equities, there are only four options contracts. It’s perhaps no wonder then that one of them, introduced just in December, saw extraordinary demand when Chinese markets were roiled by coronavirus fears on Feb. 3. As trading came back online after an extended holiday, traders rushed into put contracts on the Huatai-Pinebridge CSI 300 exchange-traded fund, which itself is linked to one of the nation’s benchmark equity indexes. There was so much demand the contracts soared 2,849% that day. The put contracts jumped again Friday, with several of them rising more than 200%. The CSI 300 Index closed 3.6% lower.

Exchanges and Clearing

NYSE Arca resolves delay in trades reported to OCC options clearinghouse
The NYSE Arca options exchange said on Thursday that it had resolved a delay in trades being reported to the Options Clearing Corporation (OCC) for options on the SPDR S&P 500 ETF Trust (SPY.P).

CME Group Chief Financial Officer to Present at Raymond James Conference
CME Group
CME Group announced today that John Pietrowicz, Chief Financial Officer, will present at the Raymond James 41st Annual Institutional Investors Conference on Tuesday, March 3, 2020, at 2:15 p.m. (Eastern Time). The presentation will be available for livestreaming via CME Group’s investor website at Please allow extra time prior to the presentation to visit the site and download the streaming media software required to listen to the Internet broadcast. An audio webcast will be available for replay at the same address approximately 24 hours following the conclusion of the conference.


Contemporary Trends in Model Risk Management
Saqib Jamshed – OCC
“Model risk still is an extremely important component of a firm’s operational risk profile. It deserves the utmost attention at the C-suite level, the Board of Directors, and regulators.” This is the logical next step in the evolution of model risk management practices as the frameworks underpinning them become more mature. What follows are some of the contemporary trends in model risk management gleaned from my interactions with peers at several financial services firms.

The Future of Electronic Equities Trading
Larry Tabb – TABB Group
The advance of automated algorithmic trading has changed the business largely from a process revolving around intuition predicated on data, to a data-, speed- and machine-driven process. Marinela Tudoran, managing director of global equities technology at Credit Suisse, shared her insights with Larry Tabb and attendees at a recent breakfast event on running a modern, technology-enabled equities business.


6 Ways to Know It’s Safe to Go Back in the Market After the Coronavirus Selloff
Ben Levisohn – Barron’s
Just last week, the stock market was at an all-time high. Fast forward, and the Dow Jones Industrial Average briefly entered correction territory, defined as a 10% decline. The sheer speed of the drop, the near-indiscriminate selling is frightening, and while some measures point to a near-term bounce, others suggest that it’s not time to start buying stocks.
When will it be safe? In a note released today, Wolfe Research’s Chris Senyek released a list of six metrics to watch:

Stocks’ plunge through a key support level could set up a quick market rebound
Mark Hulbert – MarketWatch
Both the S&P 500 and the Dow Jones Industrial Average, along with other leading U.S. stock market benchmarks, broke below their 200-day moving averages on Thursday. Many technicians consider that to be confirmation that the market’s major trend has changed direction from up to down.
I’m not so sure. My research has shown that the 200-day moving average tell us little about the major trend. More often than not over the past several decades, in fact, the breaking of this moving average marked the end of the stock market’s decline rather than the beginning.


Five Hundred Points in 45 Minutes: Dow Close Runs Street Ragged
Claire Ballentine and Sarah Ponczek – Bloomberg
A week that has served up more harrowing moments for traders than sometimes happen in a whole year turned terrifying into Thursday’s close. Stock indexes lurched to the biggest one-day loss in almost nine years as coronavirus anxiety started feeling like panic. Forget the complacency of January: the Dow Jones Industrial Average plunged 500 points in 45 minutes and the Cboe Volatility Index closed at its highest point since 2015. Here’s what traders said it was like at their firms.

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