NAV discounts in credit ETFs underscores the ‘dash for cash’ environment

Yesterday’s events will go down in the history books as one of the most violent trading days with clear liquidity disappearing from markets and a historic policy mistake in Europe. The S&P 500 cash index closed down 9.5% and the Europe STOXX 600 cash index closed down 11.5%. It all started with Trump’s horrible speech and travel ban Wednesday night which was followed up by probably one of the worst ECB meetings ever on par with Trichet’s massive rate hike blunder in 2011.

Yesterday was supposed to have been the big rescue day but ended up with Europe failing to deliver in terms of speed and size as we have gotten used to over the years. All eyes are now on Germany to open up the purse and allow deficits to increase dramatically to offset the economic pain from COVID-19 and credit market stress which will hit economic growth. The world needs a global coordinated action but the chance is little so policymakers and markets will be in a tug-of-war for some time, but eventually the policy response will equate the economic impact and markets will find its low.

The Fed did on the other hand deliver yesterday to save the money market and indirectly the hedge funds doing relative arbitrage with high leverage in the US Treasury market which uses the repo market for these strategies. The Fed’s liquidity provisions will hopefully stabilize credit markets and convince financial firms to commit risk capital to close obvious gaps across Treasuries and credit bonds. In addition several countries such as the UK, Spain, Italy and South Korea have all issued short selling bans which seems to be working today to increase confidence. Euro STOXX 50 futures are up 7% from the recent lows. But be aware that its Friday and many active funds don’t want too much risk into the weekend as these have proven bad for risk with Monday gaps as the market is digesting incoming COVID-19 numbers.