Huge Swings Send U.S. Futures to Volatility Limit for Second Day

(Bloomberg) -- Volatility continued to sweep through global stock markets, sending futures on U.S. equity indexes to exchange-enforced boundaries designed to limit extreme swings for a second consecutive day.

After spending most of the previous overnight session pinned to the lower band, the March S&P 500 contract surged Tuesday, at one point touching the so-called limit-up threshold established each day by the Chicago Mercantile Exchange to keep turbulence from spiraling.

If the rally held it would erase roughly half of Monday’s rout, a decline that swelled to 7.6% in the S&P 500 during regular trading and represented Wall Street’s worst day since the financial crisis. Gains today came after President Donald Trump, speaking at a White House news conference, said he plans to announce “very dramatic” actions to support the economy following discussions with lawmakers.

Futures on the index traded at 2,843.25 at 8:12 a.m. in New York, up 3.4%, after earlier hitting the daily maximum of 2,879. Contracts pared gains after CNBC reported the White House might not be as close to implementing stimulus as initially thought.

“Investors are less likely to panic if the Federal government is panicking,” Dennis Debusschere, head of portfolio strategy at Evercore ISI, wrote in a note to clients. “That is the play book for dealing with a pandemic.”

At the start of Tuesday’s overnight session, S&P 500 futures dropped as much as 1.9%, bringing the plunge since a February record to more than 20%. Dow Jones Industrial Average contracts also briefly fell more than 20% from the all-time high. Monday’s rout came as an oil price war broke out in markets already rattled by the spreading coronavirus.

Investors fled risk assets on Monday with virus cases surging. The U.S. announced more deaths, Italy struggled to lock down its financial hub and the World Health Organization warned the threat of a pandemic is “very real.” The velocity of the drawdown in American equities is threatening to end the bull market that just logged its 11th anniversary.

Added to the uncertain impact of the virus on the economy is the crashing oil price that threatens to upend politics and budgets around the world, exacerbate strains in high-yield credit and add pressure on central bankers trying to avert a recession. It typically would have proved a boon to consumers, but the coronavirus is increasingly keeping them at home.

The market meltdown is forcing equity investors to confront worst-case scenarios they normally delegate to colleagues in credit: which companies can survive a slowdown, and which are teetering toward extinction?

The urgency of the assessment is a sign stock managers have entered survival mode as credit spreads spike. Companies with strong balance sheets have generated “extraordinary returns” on a relative basis since the S&P 500 peaked on Feb. 19, according to Goldman Sachs Group Inc.’s chief U.S. equity strategist, David Kostin. Their weaker counterparts have gotten trounced.

“Markets will continue to see this extreme volatility with falls on worries about the economic outlook on the back of coronavirus and its flow on, but occasional sharp rallies on stimulus plans and signs of hope,” said Shane Oliver, head of investment strategy and chief economist at AMP Capital Investors.

--With assistance from Vildana Hajric and Lu Wang.

To contact the reporters on this story: Sarah Ponczek in New York at sponczek2@bloomberg.net;Heejin Kim in Seoul at hkim579@bloomberg.net

To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Naoto Hosoda, Paul Jarvis

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