U.S. Futures Rally to Limit Up Level With Volatility Persisting

(Bloomberg) -- U.S. stock index futures rebounded from the worst sell-off in 30 years, surging to exchange-mandated levels that prevent further gains as hopes for a more robust policy response increase.

Contracts on the S&P 500 that expire in June rose to 2,582 as of 8:19 a.m. in New York, hitting the 5% cap on gains from a reference price calculated by in the final 30 seconds of trading. The underlying index sank 9.5% Thursday, leaving it 27% from a record set just three weeks ago and ending the longest bull run in history.

Following the 10 worst days in S&P 500 history, the average return is a gain of 2.94%, according to Bespoke Investment Group. Thursday was the fifth biggest drop on record.

“The nature of the beast that we have been living with over past two weeks is the inevitable relief bounce, which in turn gets sold,” said Michael Purves, Tallbacken Capital Advisors LLC chief executive officer. “But one of the positive seems to be simply returning to some sort of central-bank policy sort of working.”

Investors are looking to the Federal Reserve to fill the stimulus vacuum by supporting the economy and keeping markets functioning. It unleashed a trillion dollars on Thursday, but failed to halt the stock market rout. The Trump administration hasn’t offered a fiscal stimulus package that was able to calm investor nerves.

U.S. Futures Rally to Limit Up Level With Volatility Persisting

Bulls with ever fewer tidings to point at for hope can derive a modicum of faith from valuations. After the rout, the index trades at 15 times last year’s profits, Bloomberg data show. Reduce those by the average rate in seven decades of economic downturns, and it’s still in the vicinity of average.

The European Central Bank on Thursday took a series of steps which still managed to disappoint investors and irritate politicians. Then on Friday Asian central banks including those of Korea, India and Japan moved to soothe markets. Norway slashed its key rate in an unscheduled meeting.

That’s a shift from Thursday, when measures proposed by President Donald Trump finally fell flat and the European Central Bank’s easing of capital constraints did little. Not even an unprecedented plan for $5 trillion in bond-buying from the Federal Reserve could mollify investors rattled by the growing likelihood that the coronavirus will plunge the global economy into recession.

That was enough to send stocks into free fall Thursday.

“There’s no good news and it’s weighing on the market’s psyche,” said Tom Essaye, a former Merrill Lynch trader who founded “The Sevens Report” newsletter. “Everybody is waiting for good news, for the government to act, to come out with a big impressive plan -- and we just keep waiting. And the longer we wait, the more people are doubting it so it’s adding to the volatility.”

The spreading coronavirus and oil-price shock have ushered in the most volatile period in markets since the financial crisis, with investors reacting to increasingly negative news. A number of economists are now warning a downturn could be at hand -- a Bloomberg Economics model places the odds of a recession happening over the next year at 52%, the highest since 2009.

The wild swings have triggered trading halts during the cash session twice times this week. On multiple occasions, futures also reached the 5% bound on gains or losses stipulated by the Chicago Mercantile Exchange.

Those levels exist only because investors disappointed by Trump’s response to the outbreak dealt a fresh blow on Thursday after the president said he doesn’t support House Democrats’ package of measures to respond to the virus. At the same time, the director of the National Institute for Allergy and Infectious Diseases conceded that the lack of widespread testing for the virus is “a failing” of the U.S. public health system, adding to investor gloom.

Volatility has been rampant, with the S&P 500 seeing average daily swings of 5.7% over the past five sessions. The index hasn’t seen two back-to-back up days in a month. Measures of share turbulence have also spiked this week, with the Cboe Volatility Index closing above 40 for the fifth straight session.

U.S. Futures Rally to Limit Up Level With Volatility Persisting

March contracts that expire in eight days are also subject to the price limits. For them, they’ll be barred from dropping further if they fall to 2,347 -- or 5% from the reference price, or from rising further if they rise to 2,595.

The Federal Reserve took steps Thursday to ease what it called “temporary disruptions” in Treasuries. Under the Fed’s existing program to buy $60 billion a month in securities, the purchases will be widened to include coupon-bearing notes across a range of maturities to match the maturity composition of the Treasury market

“The Fed announced a large program that was likely an attempt to over-awe the market,” said Dennis Debusschere, head of portfolio strategy at Evercore ISI. “Will it succeed? Who knows. Will it significantly reduce plumbing concerns in credit markets? Yes.”

The Fed has been under heightened pressure to act as investors lost faith in the U.S. government’s ability to produce a coherent policy response. Trump addressed the nation Wednesday with few details on fiscal stimulus plans but announced restrictions on travel from Europe to the U.S. that deepened the sense of alarm.

“We’re in for a bumpy ride,” Kim Forrest, chief investment officer at Bokeh Capital Partners, said in a phone interview. “Volatility will continue until investors understand what’s happening.”

©2020 Bloomberg L.P.

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