The Wall Street Journal - 06.03.2020

B10|Friday,March6, 2020 **** THEWALLSTREETJOURNAL.

MARKETS

S&P5 00 CORRECTIONS

Sources:ParagThatteandSrineelJalagani,DeutscheBank(liquidity);FactSet(volatility)

*WeeklyaveragenumberofcontractsavailabletobuyorsellwithinonepointoftheS&P 500 'scurrentlevel.FiguresthroughFeb. 28.

CboeVolatilityIndex

NumberofE-miniS&P5 00 futures

contractsbeingquotednearthebestprice*

Volatilityrosethisweektoits

highestlevelinmorethanfouryears

Lowestsincelastcorrection

40

0

10

20

30

2016 ’17 ’18 ’19 ’20

In 2017 ,ayearof

mostlylowvolatility,

liquidityinE-minis

washigh.Sincethen

ithaserodedand

remainedlowfor

reasonsthatare

notfullyclear.

OnekeymeasureofliquidityinU.S.

stockfuturesisatitslowestlevel

since2 01 8,acharacteristicofpast

correctionsthatcanfuelvolatility.

6,000

0

2,000

4,000

Lowestsincelastcorrection

2016 ’17 ’18 ’19 ’20

Yieldson 10 -yeargovernmentbonds

Source:TullettPrebon

*AsofnoonETonMarch 5

–1.0% –0.5% 0 0.5% 1.0%

Germany

Netherlands

France

Spain

Italy

March5* Feb. 27

year,the cartelsaid.Saudi

ArabiaandotherPersianGulf

producersarealsoconsidering

additionalproductioncutsout-

sidethegroup,delegatessaid.

Thecoronavirus’simpacton

oildemandhasweighedheav-

ilyonrecenttalksamongmem-

bersoftheso-calledOPEC+al-

lianceledbySaudiArabiaand

Russia.Brentisdown23%this

year,asthe virusoutbreak

hammersglobaldemand.

Theepidemicisexpectedto

diminishglobalcrudedemand

byasmuchas2.1millionbar-

relsadayinthefirsthalfof

2020 ,accordingtoanestimate

fromGoldmanSachs.Mean-

while,IHSMarkitandStan-

dardCharteredforecastade-

cline indemandfor2020’s

firsttwoquartersbyaround 2

millionbarrelsadayfromthe

sameperiod ayearearlier.

Gulfnations’additionalcuts

wouldtakeOPEC+’scutsto2.1

millionbarrelsaday.

“It’snotjustaboutbleeding

demandgrowth,”saidMoham-

madDarwazah,directorfor

geopoliticsandenergyatMed-

ley GlobalAdvisors.“We’ve

had inventories building

throughthiswholeperiodand

it’saboutcleaningupthemar-

week.Itisscheduledtomeet

onThursday.ECBPresident

ChristineLagardesaidMon-

daythatthebankisreadyto

take “appropriateand tar-

getedmeasures’’inresponse

totheepidemicanditsimpact

ontheeconomy.

Thatcouldincludelowering

thealreadynegativeratethe

ECBchargesbanksondepos-

itsorincreasingthesizeofits

bond-purchaseprogram.

“We’reexpecting some-

thingmoretargeted,which

could mean expansion” of

quantitativeeasing,saidCa-

thalKennedy,Europeanecon-

omistatRBCCapitalMarkets.

Thatwouldlikelymeanthe

ECBbuyingmoregovernment

andcorporatedebt.

Germany’spenchant for

frugalitymeansitrunsabud-

getsurplusandissuesvery

littledebt.Berlinhadatotal

of€1. 58 trillion($1. 76 trillion)

ofoutstandingdebtsecurities

inJanuary.Thatiscompared

withmorethan$16trillion

fromtheU.S.and$10trillion

inJapan.

Theplungeinbundyields

seemstoreflectskepticism

thatGermanywillchangeits

tuneandincreasethatsupply

ofdebtdespiteyieldsonits

debtofallmaturitiestypi-

callybeinginnegativeterri-

tory.

“HowbaddoestheEuro-

peaneconomyhavetogetbe-

foreGermanywantstodo

that,that’sthebigquestion,’’

Mr.Stealeysaid.“That’sreally

whatwe’llbefocusingon.’’

Alsokeepingsupplytight:

TheECBcurrentlyowns30%

ofGermangovernmentdebt,

whichincludessovereign,re-

gionalandmunicipalbonds,

accordingtoSociétéGénérale.

As the economic fallout

fromthecoronavirusspreads

acrossEurope,thesafesthaven

available to investorsisin

chronicallyshortsupply.

Germangovernmentbonds,

known as bunds,are the

benchmarksafeassetinthe

eurozone,playingasimilar

roletoTreasurysintheU.S.

Theyarewhatinvestorscom-

pareallotherreturnsagainst

andthethingeveryonewants

toownwhenmarketsarein

turmoil.

Because Germanyissues

verylittledebt,andbecausea

chunkofthebondsupplyis

lockedupbyEuropeanCen-

tralBankbuying,wheninves-

torsclamorforbunds,yields

fallquickly.

The10-yearbundtradedas

lowasminus0.69%onThurs-

day,downfromminus0.39%

onFeb. 18 whenthecoronavi-

russelloffintensifiedinEu-

rope,accordingtoTradeweb.

Thedownwardtrajectoryin

bundyieldshasbeenfaster

thanotherEuropeangovern-

mentbonds,slidingmorein

percentage-pointtermsthan

boththeFrenchand Dutch

equivalents.

“Whenthereisaproper

dislocation in themarket,

Germanbundscontinuetobe

the safehaven inEurope.

Evenwithnegativeyields,we

stillseetheflighttoquality,’’

saidIainStealey,international

chiefinvestment officerfor

fixedincomeatJ.P. Morgan

AssetManagement.

Drivingtheyieldslowerare

strongsignalsfromtheECB

thatitwillfollowtheFederal

Reserve’ssurpriseratecuts

withactionofitsownnext

BYANNAHIRTENSTEIN

Fearful Investors Pile

OPECreachedapreliminary Into Germany’s Bunds

agreementtocutcrudeoutput

byonemillionbarrelsadayto

supportoilpricesthroughthe

endoftheyear,asthecartel

seekstopersuadeRussiato

joinitsresponsetothecoro-

navirusoutbreak.

TheplanapprovedThursday

bytheOrganizationofthePe-

troleumExportingCountries

wouldinvolveproductioncuts

ofonemillionbarrelsaday

throughtheendofJunetobe

sharedamongits 13 member

nations.Italsocallsforanother

500 ,0 00 barrelsofdailycutsto

be divided

among the

cartel’s1 0

Russia-ledoil-producingallies.

OPECearlierinthedayhad

agreedtoonlyathree-month

cut.ButSaudiArabiadecided

itwantedtoforceRussiainto

amoreambitiouseffort.Other

OPECmembersworriedthat

theplanhadfailedtostimu-

lateflaggingprices,carteldel-

egatessaid.

“It’sagamble,”onesaid.

Brent crude,the global

benchmarkoilprice,endedthe

daydown2.2%.

Theproductioncutswould

comeontopof5 00 ,0 00 bar-

relsadayofexistingcurbs,

which OPEChas agreed to

carrythroughtheendofthe

ketand2.1[millionbarrelsin

cuts]wouldgoalongwayto

reversingthesebuilds.”

TheOPECplanneedsthe

approvalofRussiaandother

non-OPECallies,whichareset

toweightheproposalonFri-

day.Russiahasagreedinprin-

cipletoreduceitsoutputbut

hasn’tapprovedanyproduc-

tionfigure,OPECofficialssaid.

“Tomorrow,everythingde-

pendsonanon-OPECagree-

ment,”Iran’soilminister,Bijan

Zanganeh,toldreportersashe

exitedthemeeting.“If[Rus-

sia]doesn’tacceptit,wehave

nodeal...Wehavenoplan.”

OPEC Moves to Cut Crude Output

Trading conditions have

sharplydeterioratedinapop-

ular vehicle forbetting on

swingsintheS&P 500 ,exacer-

batingthe volatility in the

stockmarketinthepasttwo

weeks.

E-mini S&P 500 futures

playahuge,iflittleunder-

stood,roleinfinancialmar-

kets,withhundredsofbillions

ofdollarsoftradingactivity

eachday.TheytracktheS&P

500 and typically movein

lockstepwiththebroad-based

index.

Forreasonsthataren’tfully

clear,liquidityintheE-mini

markethasbeenunusuallyde-

pressedduringthepasttwo

years.Iterodedtonear-record

lowsduringthecoronavirus-

fueledselloffoflateFebruary,

anditisstillthin—asignof

potentialturbulencegoingfor-

ward.

Formostof 201 7,theaver-

agenumber ofE-minicon-

tractsavailabletobebought

orsoldwithinatightband

around their currentprice,

correspondingtoaone-point

moveintheS&P 500 ,hovered

between 3, 000 and 6, 000 ,

DeutscheBankdatashow.

Butoverthepasttwoyears,

that number has rarely

climbed above2,0 00 con-

tracts.OnFriday,itfelltojust

163 contracts—down more

than80%fromaweekear-

lier—beforetickingbackupto

236 contractsonWednesday,

accordingtoDeutscheBank.

Theterm“liquidity”refers

totheabilitytoexecuteabig

tradewithout affectingthe

priceofanasset.Inlayman’s

terms,lowerliquiditymeans

thatwhenawaveofselling

hitsaparticularmarket,prices

dropmoresharplythanthey

wouldhaveotherwise.Inthe

caseoftheE-mini,heavysell-

inghasaknock-oneffecton

thestockmarketitself—and

oninvestors’portfolios.

Therearevariouswaysto

measureliquidity,anditisa

matterofdebatewhichisbest.

Asimpleapproachistolook

atthetradingvolumeofapar-

ticularmarket.Bythatstan-

dard,liquidityinE-minishas

neverbeenbetter,hittingare-

cordonFridaywithmorethan

$850billiontradedthatday.

But the liquidity metric

tracked byDeutsche Bank’s

analysts—thenumberofcon-

tractsavailabletobebought

orsold—offersameasureof

howfragileamarketis.When

therearelotsoftraderspost-

ingquotestobuyE-minicon-

tracts,theyeffectivelyactasa

bufferagainstsellersputting

downward pressureonthe

S&P 500.

Andbythatstandard,the

bufferisnowverythin.

“Marketshavebeenwalking

onthinice,onandoff,formore

than ayear,” said Shankar

Narayanan,headoftradingre-

searchatQuantitativeBrokers,

afinancial-technologycompany

thatprovidessoftwareforexe-

cutingfuturestradestobanks

andhedgefunds.

Futuresarecontractsthat

allowtraderstobetonfuture

pricemovesinmanymarkets,

includingoil,gold andU.S.

Treasurynotes.Currently,the

mostactiveE-minicontractis

tiedtothevalueoftheS&P

500 onMarch 20 .Butinprac-

tice,itmovesintandemwith

theindex’scurrentvalue.

Unlikestocksorexchange-

tradedfunds,E-minifutures

tradenearlyaroundtheclock,

fivedaysaweek.Tradersuse

themforavarietyofstrate-

gies,includinghedgestopro-

tectagainstmarketdeclines.

KevinDavey,anindepen-

dentfuturestraderinCleve-

land,wasamongthosewho

retreatedfromthemarketlast

weekbecauseofthevanishing

liquidity.Mr. Daveyrunsa

numberoftradingalgorithms

inE-minis,someofwhichshut

downordialedbacktheirac-

tivityasmeasuresofliquidity

orvolatilitygottooextreme.

“Thesheerdepthandex-

tremityofthemovecaughtme

andalotofpeopleoffguard,”

hesaid.“Whenthingsgettoo

squirrellyintermsofmove-

ment,sometimesitisbestto

stayonthesidelines.”

Exchangeoperator CME

GroupInc.,whichrunsthe

market,says$342billionofE-

miniS&P 500 futureschanged

handsonanaveragedaysofar

thisyear.Bycomparison,aver-

agedailytradingvolumeof

theentireU.S.stockmarket

hasbeenabout$433billion,

according to research firm

TabbGroup.

ACME spokeswoman

pointedtothefuturescon-

tract’sstrongvolumefigures

asevidenceofitshealth.Last

week,“arecordnumberof

marketparticipantsturnedto

theE-minifuturesmarketto

managetheirrisk,”shesaid.

ItisunclearwhyE-minili-

quidityhasbeeninretreat.It

appearstohaveneverrecov-

eredfromtheshockofFeb.5,

2018 ,whentheDowJonesIn-

dustrialAverageslid4.6%and

the Cboe Volatility Index

spiked 11 6%,blowing up a

numberofpopularvolatility-

linkedtradesinaneventthat

somedubbed“volmageddon.”

Somemarketveteranssay

E-miniliquidityhasdeterio-

ratedbecauseoffundamental

shiftsinthefuturesworld.In

recentyears,tradersatbanks

andhedgefundshavebecome

increasinglylikelytobuyand

sellfuturesusingautomated

algorithms,which tend to

chop up large trades into

manysmallerones.Thathas

resultedinsmallerordersbe-

ing placed on futures ex-

changes,forshorteramounts

oftime,accordingtoastudy

releasedlastyearbytheU.S.

Commodity FuturesTrading

Commission.

Meanwhile,thenumberof

marketmakersactiveinfu-

tureshasdwindledasthein-

dustryhasconsolidated,with

afewelectronictradinggiants

such as Citadel Securities,

DRWHoldingsandJumpTrad-

ingexpandingassmallerri-

valshaveshutdownorbeen

acquired.

Precisenumbersonfutures

market-makingaren’tpublicly

available.ButRickLane,chief

executiveoffinancial-software

firmTradingTechnologies,es-

timates that about half a

dozenmarket makersnow

dominatethebusiness.Ade-

cadeago,hesaid,therewere

atleast10timesasmanymar-

ketmakers.

BYALEXANDEROSIPOVICH

Thin Futures Trading

Exacerbates Vo latility

COMMODITIES SaudiEnergyMinisterPrinceAbdulazizbinSalmanAlSaud,left,andRussianEnergyMinisterAlexander

NovakattendedThursday’smeetingoftheOrganizationofthePetroleumExportingCountriesinVienna.

FR

OM

LEFT

:ALEX

HALAD

A/

AFP

/G

ETTY

IMA

GES;

RO

NALD

ZA

K/

AS

SO

CIA

TED

PRES

S

E­miniS&P 500

contractplayshuge,

iflittleunderstood,

roleinthemarkets.

ByBenoitFaucon,

SummerSaid

andDavidHodari

AUCTIONRESULTS

HerearetheresultsofThursday'sTreasuryauctions.

Allbidsareawardedatasinglepriceatthemarket-

clearingyield.Ratesaredeterminedbythedifference

betweenthatpriceandthefacevalue.

FOUR-WEEKBILLS

Applications $136,342,999,400

Acceptedbids $53,165,636,900

"noncompetitively $1,568,624,300

"foreignnoncompetitively $995,000,000

Auctionprice(rate) 99.928056

(0.925%)

Couponequivalent 0.939%

Bidsatclearingyieldaccepted 99.79%

Cusipnumber 9127962A6

Thebills,datedMarch10,2020,matureonApril7,

2020.

EIGHT-WEEKBILLS

Applications $125,565,311,200

Acceptedbids $47,849,316,200

"noncompetitively $231,245,300

"foreignnoncompetitively $0

Auctionprice(rate) 99.872444

(0.820%)

Couponequivalent 0.832%

Bidsatclearingyieldaccepted 17.37%

Cusipnumber 9127962K4

Thebills,datedMarch10,2020,matureonMay5,

2020.

on10-yearTreasurysforthe

firsttimeeveronTuesday,a

milestone foramarketthat

helpssetborrowingcostsfor

theU.S.governmentaswellas

millionsofconsumersandbusi-

nesses.

Thursday’sdeclinecameas

U.S.stockslurchedlower,ex-

tending aspell of volatility

drivenbysignsthattheepi-

demicwilldisruptsupplychains

andcashflowforcompanies

world-wide.

Investorshaveflockedtoas-

setsthatareseenasreliable

storesofvalue,suchasU.S.gov-

ernmentdebtandgold,amid

swingsinthepriceofstocks

andcorporatebonds.

Investorsworld-wide are

lookingtobuyU.S.government

bondsastheyseektobuysafe

assetsthatpayapositiveyield,

saidRichardMcGuire,headof

ratesstrategyatRabobank.

“Whowouldn’twanttoowna

U.S.Treasurythatoffersa1%

returnover 10 yearsifyouhave

topay0.7%fortheprivilegeof

owningabund?”hesaid,refer-

ring to German government

bonds.

Manymoneymanagersex-

pecttheFedtocutinterest

ratesagainasitseekstoshield

theU.S.fromapotentialslow-

downinglobalgrowth.

Inonesignthatinvestorsare

awaitingratecuts,theyieldon

two-yearnotes,whicharesensi-

tivetomonetarypolicysetby

theFed,fellto0.568%onThurs-

day,from0. 61 4%adaybefore.

Treasuryyieldsfelltonew

lowsThursday,pulleddownby

investors’appetiteforsafeas-

setsandwagersthattheFed-

eralReservewilltakefurther

actiontocounter

theeconomicim-

pactofthenovel

coronavirus.

Theyieldonthebenchmark

10-yearU.S.Treasurynoteset-

tledat 0. 92 4%,accordingto

Tradeweb,establishinganew

closinglowafteritsettledat

0. 99 4%Wednesday.Earlierin
   Thursday’ssession,theyield
   alsoreachedanewintradayre-
   cordlowof0.901%.
   Yields,whichfallwhenbond
   pricesrise,droppedbelow1%

BYJOEWALLACE

Yields Hit Lows as Haven Assets Rally

CREDIT

MARKETS

P2JW06 (^6) F (^00) or0- p (^4) e-rBso (^0) n (^1) a (^0) l,