8-sigma market crash! - [MONEY]

Zenaan Harkness zen at freedbms.net
Thu Mar 19 19:50:39 PDT 2020

On Sun, Mar 15, 2020 at 10:22:57AM +1100, Zenaan Harkness wrote:
> Ominous signs, biggest swings in history, and scary headines all continue:
>   The Last Time This Happened Was October 1929...
>   https://www.zerohedge.com/markets/last-time-happened-was-october-1929
>     .. Top 20 biggest daily gains and losses back to 1926.
>     3 of 5 days this week made the list!
>     29, 32, 33, 87, 08, 20 had weeks with multiples.
>     .. But even more unusual this week was the fact that the market had back to back 9% swing days...
>     The last time this occurred was the three days ending October 30, 1929...
>     .. But it could never happen again right?

Just blink for a few days, and we've gone from 7.7 sigma, to 8 sigma!

In statistics, this is literally once in a lifetime stuff.  Enjoy the view while it lasts, folks :D

  "We're Not Sure What's Going On": Markets Hit "Sell Everything" Moment After "Largest On Record" 8-Sigma Crash

    Last week, following a series of unprecedented, shocking market moves, we explained that a big reason behind the decorrelated cross-asset rollercoaster was due to an unprecedented, the biggest ever VaR shock, that forced risk parity funds, which until 2 months ago were the most levered ever, to engage in an unprecedented liquidation and delever to levels that were more suitable for the current, well, market crash.

    We thought there was no way this market-dislocating move could ever be repeated. We were wrong, because as we showed yesterday, on Wednesday markets just suffered the biggest balanced portfolio drop in history, surpassing both the insanity of last week and the global financial crisis.

    This morning, in a detail postmortem of just this move, Nomura's Charlie McElligott writes that the move shown above in the model "60/40" balanced portfolio may have marked the peak "sell everything" moment, with a record 15.5% drawdown in 18 days, which represents an 8-sigma move, and is the largest on record.

    Drilling into this historic move  which saw the conventional "bonds as your hedge" trade going completely wrong-way, especially for risk parity funds in-light of what McElligott notes is the "liquidate financial assets/cash at all costs" environment—and a potential “paradigm shift” of unprecedented and experimental fiscal stimulus in-the-pipe, "we now see the past 18d period of returns for our model “World 60/40” fund -15.5%, greater than a -8 SD move and truly unprecedented dating-back to our model’s 1999 start-date"

    Why does this matter? Because "the feedback loop of forced deleveraging/stop-outs in light of the extreme realized volatility mechanically “triggering” and de-risking is best seen by the "remarkable slashing" of gross-exposure within Nomura's Risk Parity model, where there has been a reduction from the 100th percentile, a reading of 555% on Feb 10th, to this morning’s 240%/0th percentile estimated gross-exposure reading.

    Digging through the market plumbing, McElligott points out the "kitchen sink" of central bank emergency announcements overnight...

      - Fed announced a new emergency program (MMLF) to aid money markets
      - ECB “no limits” bazooka (“Pandemic Purchase Program w/ $820B of QE)
      - RBA 25bps cut to ELB, introduces QE and targeted YCC
      - Japan discussing $276B packed including “cash payouts” to households
      - S Korea new $40B package
      - Brazilian 50bps rate cut
      - US Senate passes 2nd stimulus bill and negotiating the 3rd ($1.3T)
      - BOE emergency rate cut to 0.1% and GBP200BN QE expansion

    ... and notes that all these extraordinary policy measures roll-in alongside the abovementioned liquidation into cash and "stop-out" behavior, flows from UST/Rates business which have been “…decisively bearish for the last week, with heavy selling from foreign and domestic RM, deleveraging in basis/off the runs/tips from hedge funds (RV/Macro/RP strats etc)”

    Worse, the Nomura quant believes that it is nowhere close to done...

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