The following from Bloomberg highlights the dynamic (forced liquidation) that we discussed herein that had, among other things, gold selling off last week — counterintuitively:
“Treasury 30-year yields unexpectedly rose after their swiftest declines on record, while gold tumbled, even as stocks suffered their sharpest one-day plunge since 1987. The cost to trade Treasuries spiked and order books thinned out to a degree last seen during the 2008 financial crisis.”
“Basically everything was sold: stocks, all forms of debt, Bitcoin, gold. It looked like a big margin call. You are seeing a large shift in investor preference away from anything besides cash.”
“This is a liquidity squeeze I haven’t seen since the Lehman crisis, not even during the European debt crisis,” said Shinji Kunibe, general manager of global strategies investment department at Sumitomo Mitsui DS Asset Management Co. in Tokyo. “Strategy is for flight-to-cash, flight-to-liquidity.”
Some of the stresses were alleviated Thursday and Friday after the Federal Reserve said it’s prepared to inject a total of more than $5 trillion in cash into funding markets over the next month to ease the cash crunch. It also started to purchase Treasuries across the yield curve.
While the Fed’s moves may not prove to be a panacea that cures all of the various markets’ ills, it should at the very least alleviate the need for banks, corporations and investors to hoard dollars.
“We don’t think this can turn around risk sentiment; it can’t prevent the upcoming slowdown in consumption and economic activity,” said Elsa Lignos, global head of FX strategy at RBC in London. “But it does mean that financial markets don’t need to hoard liquidity in the way consumers have been hoarding tissue paper and pasta. It shows the Fed has learned the lesson of 2008: pump in liquidity.”