U.S. extends social distancing to April 30, braces for another volatile week ahead

Feds and Social Distancing: U.S. braces for another volatile week ahead

U.S. President Donald Trump has extended social distancing guidelines from March 29 to April 30 after reports that coronavirus cases in the country have soared to over 100,000.

Despite the large number of coronavirus cases in the US, the Dow Futures spiked up to start the week and the Feds stimulus measures on the housing market backfired.

Early Monday, Dow Jones futures dropped as low as 300 points. At around 1:00 AM ET, futures were up 132 points, rising about 59 points at the Monday open. S&P 500 futures and Nasdaq 100 futures also pointed to a slightly higher opening for Monday. The move was influenced by a sharp drop in crude oil prices.

Aside from the oil price drop, the move was also influenced by Trump signing the US$2 trillion fiscal stimulus package last week.

Analysis battle between bulls and bears continues

Financial experts and strategists are now determining if this week could be the start of another highly volatile season. Ken Berman, a strategist at Gorilla Trades, had some mixed sentiments about the Dow’s rally as he reported:

“Bulls staged an epic comeback […] Despite the rally … the uncertainty regarding the length of the necessary, but economically damaging global lockdowns continues to weigh on risk assets […] The technical picture continues to be bearish across the board, despite the mid-week surge in stocks, with all of the key trend indicators still pointing lower.”

MRB Partners mentioned in a note that the equity markets are overextended and they are expecting a period of more virus-related news and poor economic statistics in the next 1-2 months. They also added in their note:

“The world is now entering a third phase, the first being the shock of an out-of-control virus spreading around the globe, then the massive policy response, and now the economic fallout phase has arrived and will test investors’ very fragile confidence.”

Other traders are also speculated that a bounce this week could be highly possible.

Feds’ interference could spark trouble in U.S. housing market

Earlier this month, the Fed bought US$68 billion worth of mortgages in order to maintain its financial liquidity. Last week, it purchased an unprecedented amount of over US$183 billion worth of purchases of mortgage-backed securities. This move led to the driving down of rates.

However, the Mortgage Bankers Association (MBA) in an urgent letter to regulators on Sunday anticipated the move by the Fed as a “large-scale disruption” despite their intention to help rescue the mortgage market.

The massive volatility in mortgage bonds introduced huge margin calls from the broker-dealers as they wrote in the letter:

“Margin calls on mortgage lenders reached staggering and unprecedented levels by the end of the week. For a significant number of lenders, many of which are well-capitalized, these margin calls are eroding their working capital and threatening their ability to continue to operate.”

Instead of trying to help provide liquidity in the mortgage market, the Fed clearly crippled it. MBA chief economist Micheal Frantantoni told CNBC:

“We understand that when the Fed came into the market, they couldn’t come in surgically. They didn’t have a scalpel. They only have a sledgehammer.”

It is only a matter of time before the US markets try to make a comeback despite the rising coronavirus cases and try to implement fiscal measures.

Featured image courtesy of Flickr/Tuncay

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