Germany Announces “Limitless” Aid Program For Small Business: SBA Are You Listening?
To anyone who fell asleep some time in early February and woke up today, it will come as a shock that Germany – which until very recently was perceived as the fiscally stingiest nation in Europe, if not the world – is fast emerging as the most generous provider of government stimulus, and this morning we got confirmation of that when Angela Merkel’s government announced a new “limitless” aid program for small- and medium-sized companies (note: not a bailout of Germany’s mega corporations) as part of an effort to support Europe’s largest economy in the coronavirus pandemic.
Merkel’s government will provide guarantees of as much as 100%, German Finance Minister Olaf Scholz announced at a joint press conference with Economy Minister Peter Altmaier Monday, Bloomberg reports, adding that loans of up to 800,000 euros ($862,000) that will pay out very quickly will be available.
The existing program only provides for an 80% to 90% loan guarantee and banks have been reluctant to take on new risk as the economy falters. Private lenders have thus pressed the government to expand the existing program by guaranteeing 100% of the loans, which it now appears to be doing.
So… SBA are you listening? In light of the very strict limits on a similar program in the US where funding is limited to 2.5x the average monthly payroll of small and medium businesses, assuming it is disbursed which as we just reported it isn’t with BofA reporting just 100 loans have been actually funded, it is certainly time for the Trump administration, which unlike Germany has the benefit of the world’s reserve currency, to consider a similar “unlimited” program especially with the US economy rapidly sliding into depression.
The program for loan guarantees is the latest in a range of measures introduced by the German government, which said the economy might contract even more this year than the 5% drop caused by the global financial crisis in 2008 and 2009.
Of course, the question is whether companies will use the money to actually pay down debt/fund employment, or simply use it for stock buybacks. Indeed, so habituated is the market to stock repurchases that the news sent the DAX to session highs, some 5% higher.
“Nobody’s Traveling For Next Two Months” – Airlines Dumping Chemicals In Fuel Tanks To Prevent Algae
The unprecedented collapse of airline traffic across the world has left many carriers on the brink of bankruptcy. Parking lots of commercial jets are scattered across the globe as carriers reduce flights amid travel restrictions due to the COVID-19 pandemic.
Carriers are under severe financial pain, learning how to survive with much of their fleets grounded, reported The Wall Street Journal. In the US, airlines have applied for $25 billion in government funds. The problem is that the bailout might not be able to float the industry for the next several months as consumers will stay away from flying for the time being.
“Nobody’s traveling in the next 30 or 60 days,” said Vasu Raja, American Airlines Group Inc.’s senior vice president for network strategy. “But nobody is really making any plans to go travel in the next 90 to 150 days, either.”
President Trump recently said that his administration is looking into grounding some domestic air travel between cities that are COVID-19 hotspots. Internationally, airlines have been reducing flights for the summer season.
In Frankfurt, Deutsche Lufthansa AG Chief Executive Carsten Spohr said there is a “pause” in the airline industry, and any restart could be gradual.
“I think it’s a stop, reverse the tape, and then restart at a slower speed,” Spohr said. “There will be no reset to normal.”
Spohr has spoken with government officials where his carriers are based, indicating that his airlines, which also includes Austrian Airlines, Brussels Airlines, and Swiss International Air Lines, have reduced its capacity by 94%. He said 700 of its 763 aircraft are grounded.
Spohr said with 700 planes parked for an extended period, there’s a risk that algae will grow in the fuel tanks. He’s been searching for supplies of a chemical that can be put into the fuel tanks that would prevent algae from developing.
As for smaller airlines, one European carrier has kept its planes flying to avoid creditors from seizing the aircraft, a source told The Journal.
“We’re getting many inquiries from airlines about protecting their assets, including protecting from repossession,” said Regina Lee, a managing director at consulting firm Alix Partners.
József Váradi, CEO of Budapest-based Wizz Air Holdings PLC, said operations are being wound down, and salaries have been cut in half.
Váradi has found a new business in these challenging times, one where flying “repatriation missions for governments” has been in high demand for the last several months. He also said his business has transformed into a cargo carrier, shuttling medical supplies from country to country.
“Over the last 10 days we became a cargo airline and an intercontinental airline flying between Los Angeles and Beijing, China,” Váradi said. “I don’t think I would have ever thought that.”
It has become evident that many large carriers have grounded a majority of their fleets as travel restrictions persist across the world. Airlines in the US have applied for government bailouts that will bridge them for several months. Other carriers are trying to adapt to survive.
But as Raja said, consumer demand for flights could be two months out, and even then, people have not made plans to travel for the next five months, which could lead to a bankruptcy wave in the airline industry or at least further consolidation.
Mark Cuban told Fox News over the weekend that the pandemic will usher in a massive transformative period called “America 2.0,” where “everything” will fundamentally change about this country. One significant change will be consumer choices, and no American is going to step into an airplane anytime soon.
What could save the airline industry is the ushering of “immunity certificates” to people who have developed resistance to COVID-19. This would allow people who have developed antibodies to the virus to travel freely.
“This Is The End Of Western Capitalism As We Knew It…”
Authored by Garfield Reynolds via Bloomberg,
The sheer speed of the coronavirus crisis means investors are way behind the curve in assessing its long-term impact on economies, companies and stock market valuations.
The global business environment is being transformed – we are all socialists now.
This is about more than just the failure of earnings estimates to keep up with the virus impact – investors need to disregard projections that an end to the crisis will restore the pre-outbreak status quo.
Decades of pushing government out of business are being reversed in mere weeks, with policy makers telling companies where, how and if they should operate – whether they can pay dividends, buy back stock or fire employees.
In other words, governments are almost fully taking over free markets, with the profit principle dethroned as the key business driver.
This changes the rules of the game for investors.
Look at crude oil for example, where U.S. companies that were on the way to going bust amid last year’s supply and demand shocks could end up surviving as Washington intervenes to prop up all businesses.
Once governments start deciding wholesale which firms live or die, how do you roll that back?
The same goes for the massive ramp up in what has been derided at times as the “nanny state.” Welfare and increased spending on health care will likely become a larger part of most economies.
The massive public borrowing to fund this – and the surge in stimulus programs – will take years to go away. The world is going to be awash with debt that will limit governments’ room for maneuver on things like infrastructure spending and tax cuts.
Companies are also busy taking on more debt, and that will constrain them going forward – funneling profits to paying it back or rebuilding cash reserves rather than dividends, buybacks or, heaven forbid, expansion.
The recognition of the role lower-paid workers are playing in keeping supply chains, supermarkets, delivery systems etc. running will likely fuel a renewed call for increases to minimum wages, further pressuring margins.
And calls to keep production closer to “home” will lead to an overhaul of supply chains that won’t come without cost.
Companies will likely emerge from this downturn with a permanent hit to their long-term potential margins – one that is not yet reflected in analyst valuations.
Any investor who assumes that the business models of December 2019 will work just fine in December 2020 faces a very rude awakening.
Millions Of Applicants But “Only 100 Loans Disbursed” In Latest Small Business Bailout Shock
On Friday, we reported that millions of small business owners around the country were stunned to learn that they weren’t eligible for loans via the government’s “Paycheck Protection Program”, or would at least face more roadblocks, and more critical delays, as landlords demand rent and vendors demand payment.
Last week, Treasury Secretary Steven Mnuchin and SBA Secretary Jovita Carranza scrambled to publicly assure investors that rumors of a “power struggle” between the Treasury and SBA were false, and that the big banks were finally beginning to process loan applications. He even enthusiastically tweeted out aggregate totals for approved loans. But amazingly, as more businesses owners went about applying for loans only to learn they weren’t eligible or would need to try again at a different bank, finally, BofA’s BriMo had to appear on CNBC to explain that businesses should apply for their stimulus loans via lenders with which they have “preexisting relationships”.
But as the administration and the big banks scramble to save the American economy from a far more brutal collapse (which is what would happen if half of the small businesses in the country close), even more roadblocks are popping up on Monday.
In a phoned-in interview on CNBC, Wilfred Frost urgently reported that Bank of America has received 177,000 applications for some $32.6 billion in emergency liquidity, but so far, only 100 of these loans have been disbursed.
The bank hopes to get most of the stack processed by mid-week, but it’s unclear what they’re basing these hopes on. Also, in case you dear reader still harbored any doubts about just how devastating this has been for small businesses, which typically don’t have the ‘fortress’ balance sheets that corporations do, nor the access to cheap capital, that $32.6BN figure represents 10% of the total Congressional allocation from the $2.2 trillion stimulus package for all the banks.
BofA described the demand as “fierce” – something that shouldn’t be a surprise to anyone, but is apparently a surprise for the bankers down in Charlotte.
About a week ago, we explained the infrastructure-related difficulties that government agencies and the big banks would face in doling out the money, one reason why it might take longer than Americans would ideally like, posing an existential threat to potentially hundreds of thousands of businesses.
Importantly, BofA was the first major lender to set up and launch its portal for the program.
And BofA isn’t the only big bank having trouble: CNBC reported last night that Wells Fargo will only be able to do $10 billion of the PPP loans due to the Fed asset cap that the central bank imposed on WFC back in January 2018. Because of this, Wells will focus on companies with fewer than 50 employees, as well as nonprofits. The bank also said it would donate “all fees related to program to nonprofits focused on small businesses,” Frost reported.
$WFC announces will only be able to do $10bn of PPP loans due to Fed asset cap. So will focus on companies less than 50 employees, and nonprofits. ALSO – will donate all fees related to program to nonprofits focused on small businesses.
How did regulators and Congress not anticipate this, and ask the Fed to suspend the asset cap that has prevented the bank from growing its assets, essentially stopping it from growing? Imagine being a small business or other business whose ‘regular bank’ is Wells Fargo, only to learn that they can’t give you a loan because the Fed won’t allow it?
Howard Schultz said on CNBC Monday morning that small businesses are facing a period of “carnage and fear.” We doubt this will help offer any peace of mind.
That certainly doesn’t inspire confidence in banks’ ability to ‘execute’ here. They’ve already demanded their extra 50bp in ‘tribute’. Does the administration need to dangle another ‘incentive’ in their faces?
Here Comes Round Two: China Just Report The Most New Covid Cases In A Month
Last week we reported that even as the world’s attention had shifted to the new global coronavirus outbreak epicenters of New York, Italy, Spain and other western nations, China – which rushed to restart its economy at any cost as the alternative was too dire to even consider – had put a major county on lockdown after a new cluster of coronavirus infection had emerged. To wit, last Wednesday we learned that in post on its social media account, Jia county – which has a population of about 600,000 – said that no one can travel out of Jia county without proper authorization after one person tested positive.
This new cluster emerged just days after China once again revised its virus reporting methodology to also include asymptomatic carriers of the disease, which naturally begged the question why China wasn’t reported his subset of infections previously.
We got the answer overnight when Mainland China reported 39 new coronavirus cases as of Sunday, up from 30 a day earlier, and the number of asymptomatic cases also surged, as Beijing continued to struggle to extinguish the outbreak despite drastic containment efforts.
China’s National Health Commission said in a statement on Monday that 78 new asymptomatic cases had been identified as of the end of the day on Sunday, compared with 47 the day before.
Of the new cases showing symptoms, 38 were people who had entered China from abroad, compared with 25 a day earlier, although how China keeps track of this on an instantaneous basis is unclear. Also it’s odd to blame “imports” as China also closed off its borders to foreigners, though according to Beijing most imported cases involve Chinese nationals returning from overseas.
Separately, one new locally transmitted infection was reported, in the southern province of Guangdong, down from five a day earlier in the same province. The new locally transmitted case, in the city of Shenzhen, was a person who had travelled from Hubei province, Guangdong provincial authorities said.
As Reuters reports overnight, imported cases and asymptomatic patients, who have the virus and can give it to others but show no symptoms, have become China’s chief concern in recent weeks after draconian containment measures succeeded in slashing the infection rate.
This means that whether asymptomatic or not, imported or domestic, Hubei-based or not, on April 5, China reported the most new Coronavirus cases in a month as slowly the disease appears to be reestablishing itself in the world’s most populous nation.
As a result, the Guangdong health commission raised the risk level for a total of four districts in the cities of Guangzhou, Shenzhen and Jieyang from low to medium late on Sunday.
In its panicked scramble to reboot the economy, China has been reporting that daily infections have fallen dramatically from the peak of the epidemic in February, when hundreds were reported daily, but new infections continue to appear daily. Despite a miraculous rebound in China’s latest PMIs, the truth is that China’s economy has been very slow to recover and by some metrics – as shown below – appears to already be double dipping.
Mainland China has now reported a total of 81,708 cases, with 3,331 deaths. The real number is likely orders of magnitude higher, and what’s worse, a rebound in cases likely means that round two of the pandemic may just be starting.
Recall that the initial deaths and related costs are only the first-order effects; policy makers have to consider the second-order effects.
Everyone who reckons that the lockdown is needless and more destructive than the pandemic that triggered it has to answer this question: then why did China lockdown half its economy?
The reasoning of those who reckon the lockdown is needless can be summarized as follows:
1. The lockdown is based on poorly executed extrapolations of faulty data; the death rate is much lower than expected, and most cases are mild or asymptomatic.
2. Therefore, the lockdown is doing far more economic damage than simply letting the pandemic run its course.
3. Alternatively, the pandemic and the lockdown are planned operations of elites, the goal being to further consolidate New World Order control in the hands of a few.
All of these rationales stumble on the question of why China locked down half its economy. It is a real stretch to claim that the Deep State et al. control China, therefore it’s unlikely China’s decision to lock down half its economy as the pandemic ravaged Wuhan was a U.S. Deep State operation.
As for the extrapolation of faulty data: what did the Chinese leadership learn that we don’t yet know? How can we assume China’s leadership over-reacted to faulty data in shutting down half their economy? More likely, they had the best available data and balanced the consequences of letting the pandemic run its course or accepting the immense economic damage of locking down most of their productive economy.
Why would China’s leadership have accepted the staggering economic losses of lockdown if the situation wasn’t catastrophically dire?
What other factors might have influenced China’s decision to lock down its economy that we don’t know? The true origin of the virus, perhaps? The true death rate in Wuhan? The actual number of dead piling up like cordwood in Wuhan?
If China’s lockdown was a decision reached by its leadership based on information known only to them, then it follows that the information effectively forced their decision to absorb the enormous economic damage of a full lockdown as the lesser of two evils.
It is quite reasonable to assume China’s leadership had the most accurate data available, and that they deliberated very carefully before choosing a response with such grave economic consequences.
Few commentators have speculated what the intelligence agencies of South Korea, Japan, Singapore and the Western nations might have discovered and shared with each other. China is not exactly a closed country, and there are ample intelligence-gathering opportunities via space-based assets, data collection and meta-analysis of that data, and so on.
It seems unlikely to the point of absurdity that all these intelligence agencies weren’t collating data from every available source and making their own assessments of the risks of letting the virus run its course.
If the lockdown is needless and more damaging than the pandemic in the West, then that is also true in China. Those claiming the lockdown is a planned operation have to explain why China would follow the directives of a Western cabal: how would kowtowing to a Western run operation benefit China, given that the operation required accepting enormous economic damage?
Those claiming the economic damage is much worse than the relatively light casualties of letting the pandemic run its course have to explain why China’s leadership chose lockdown. Given the extraordinarily high costs of choosing lockdown as the response, they must have had extremely sound reasons for choosing such a painful policy.
As many have surmised based on evidence, it seems beyond reasonable doubt that the actual death toll in Wuhan was somewhere between 10 and 100 times the official counts of around 2,500. Would China’s leadership shut down most of its economy for a run-of-the-mill flu that caused a mere 2,500 deaths in a nation of 1.3 billion people? It seems unlikely.
As many commentators have pointed out, China’s leadership is drawn from the ranks of technocrats, not lawyers. It’s likely technocrats can grasp the consequences of data presented to them and make rational extrapolations from that data.
If Covid-19 has a very low death rate and therefore wouldn’t disrupt the economy any more than a run-of-the-mill flu, then why did China’s leadership pursue such an extremely costly policy as lockdown? Those claiming lockdown is an over-reaction are also claiming that China made a terrible policy mistake in choosing lockdown.
But since the data that decision was based on is not known, then we cannot know if lockdown was the best available option or perhaps the only available option.
It’s likely that the intelligence agencies of South Korea, Japan and the Western nations probably have collected data that’s confidential. It’s also likely that they’ve shared data and that they’ve informed their political leaderships of the consequences of various policy choices.
As a thought experiment, let’s say 250,000 people died in Wuhan, not 2,500. Is lockdown still needless? Based on what assumptions about the economic damage inflicted by deaths on that scale?
Recall that the initial deaths and related costs are only the first-order effects; policy makers have to consider the second-order effects—consequences have their own consequences. For more on this, please review my COVID-19 Pandemic Posts dating back to January 24, 2020.
COVID-19 “Changes Everything” – Mark Cuban Welcomes “America 2.0”
Mark Cuban appeared on Fox News’ “Watters’ World” on Saturday night to discuss how he would approach the bailout of America a little more different than the current administration. Cuban said after the virus clears, “everything” will fundamentally change about this country.
“I would have set up overdraft protections for every single business,” Cuban told host Jesse Watters. “The way we’re doing it now, and trying to have everybody apply for a loan, that just adds friction to the process.”
“And the same with the $1,200 stimulus checks,” Cuban continued. “It’s not that it’s a bad program. It’s a good program at this time. But if I would have done a little bit different. So effectively, if you have a small- or medium-sized business, we would just cover all your checks and then the Fed would reimburse your local bank for anything that you bounce.”
“That way, you could keep all your employees employed, pay all your bills, pay your mortgage, pay your rent and utilities, and things can continue, somewhat at least, as normal,” Cuban said.
Mark Cuban appearing on Fox News’ “Watters’ World”
Cuban said once the virus is eradicated, “everything” about this country will change. He referred to the transformation process as “America 2.0.” However, he doesn’t elaborate on the duration of this transformative period – but adds that there’s no better place in the world to be than America when it comes to being an entrepreneur.
“When we get to the other side, you know, I’ve been calling it America 2.0. We’re going to see what’s in front of us,” Cuban said. “We really don’t know what to expect, what’s on the other side. But what I do know is that in this country, all the entrepreneurs that you referred to, all the capitalists that exist here … there is no better country.”
“There’s no other country I’d rather be in. Because I know whatever we find out there, companies are going to be invented. Entrepreneurs are going to adapt. United States of America, our people are going to adapt.”
As for socio-economic changes, the transformation of America is going to start with consumer choices. At least 67% of the economy is services-based, and much of that will be reconstructed as people opt to stay home more and avoid large crowds.
In a post-corona world, the days of going to large social gatherings, such as sports games, casinos, and or even restaurants, are over for the time being. Cuban makes this point in the interview.
As we’ve also noted, the exodus from cities has already started. Many will want the comfort of home and land where they can protect their families, instead of riding out months-long lockdowns in a 550 square foot studio apartment in a dirty city filled with viruses. Another big trend that will continue to push people out of cities is that many employers have just found out that much of their workforce can work remotely. And as long as there’s an internet connection, employees can work just about anywhere, even in rural communities.
And while Cuban did not put a timing on when this public health crisis would end. Harvard’s top scientist at the T.H. Chan School of Public Health published a recent paper that describes how the US could see “intermittent” lockdowns through 2022.
We noted over the weekend that Goldman Sachs does not see an earnings recovery until 2023, which could mean the economy is crashing into a depression for the second quarter has done enough damage that will lead to lower and slower growth for the next several years.
And if you really want to know the most significant change that Cuban did not mention in “America 2.0,” that is the virus crisis has been the perfect cover for governments and corporations to usher in a surveillance state that will rival China’s.
Submitted by Nick Colas and Jessica Rabe of DataTrek
Three points to cover today:
New York City is bracing for “Peak COVID-19” this week but there are hopes that we can avoid the worst-case outcomes.
The 2008 Playbook calls for 2-3 weeks of volatile stability for the S&P 500.
The 1973/1974 history is another guide for what happens when investors reset corporate earnings expectations sharply lower: a 2-year bear market and a 37% decline (just like 2008).
#1: Update from New York City:
Driving around town doing food shopping yesterday we saw very few people out and about. The local supermarket was well stocked (ex cleaning supplies and TP, of course).
Even the hardiest local store owners are increasingly choosing to close up for now. Our local corner bodega, owned/run by 2 Korean families, has been shuttered for a week. They are normally open 24/7/365.
Overall, the city is amazingly quiet. Anecdotal evidence says Manhattan families have left New York to isolate themselves at weekend/rental properties outside the city with more room for their children. Younger single New Yorkers, in many cases reliant on the city’s hospitality/services industries, have gone home to be with their families while they wait for unemployment checks.
Many businesses and individuals are simply not paying April rent, and obviously May is not looking good either. There is lots of chatter about apartment buildings with heavy Airbnb exposure that will see many broken leases in the coming weeks.
Bottom line: New Yorkers actually go into the week with some modest hope that our peak-infection/hospitalization rate, due in the next 7-14 days, may not as be as bad as the worst-case scenarios. That’s what the latest data says, anyway, and no one will be happier than New Yorkers if the models prove dramatically incorrect. Anything better than awful will feel like a huge win at this point.
#2: 2008 Playbook Update: what’s happened so far…
19 days into 2020’s COVID-19 Crisis the S&P 500 is down 9.4% from March 9th, the first down +5% day of this period that we use as our starting point.
That is roughly half the 20.8% decline from September 29th, 2008 to October 24th, 2008, which had the same number of trading days as the 2020 comparison noted above and also started with a down +5% day.
The reason for that better 2020 performance is the speedy response by the Federal Reserve and Congress to address financial market liquidity concerns and household/business cash flow stresses.
Last week’s daily changes in the S&P 500 closely mirrored the ones from October 20th – 24th 2008 (the analog week then-to-now) in freakishly similar fashion: Monday (+4.8% then, +3.4% now), Tuesday (-3.0%, -1.6%), Wednesday (-6.1%, -4.4%), Thursday (+1.3%, +2.3%) and Friday (-3.5%, -1.5%).
The net result: in the 2008 Financial Crisis, the S&P fell by 6.8% in its comparable week to now; in 2020, the decline was 2.1%.
And what it says to expect over the near term:
Over the next 2-3 weeks: a lot of volatility that doesn’t really take us anywhere. In 2008’s comparable period the S&P ranged from 877 (the equivalent of Friday’s 2,489 level) to a high of 1,006 (+15% over 7 days) but closed the 3-week sequence essentially unchanged at 873.
Worth noting: the analogous 2008 forward 3-week period to now includes a US general election, where the S&P 500 dropped 10% over 2 days right after Barack Obama’s win.
Also worth a mention: the 2008 lows came in the week after the 3-week holding period we’re describing here. The S&P 500 fell 14% from November 14th to the 20th and bottomed on the latter date at 752.
Takeaway: even if 2020 continues to run a half-the-damage version of the 2008 Playbook, the next 2-3 weeks will still see pronounced day-to-day volatility and no net change in stock prices at the end of that period, but… The 2008 experience says to expect a fast flush after this, which:
If 2020 holds to its 50%-as-bad ratio would take the S&P 500 to 2314 (down 7% versus down 14% in 2008). That would be a minor new low from March 23rd’s close of 2,237.
If 2020 hews more closely to the 2008 final flush, that would take the S&P 500 to 2,140 (the full 14% drawdown from Friday’s close).
#3: 1973/1974 Playbook
You have to go back to the 1973 – 1974 oil shock to find a time when investors had to reset corporate earnings expectations because of a truly unexpected and profound exogenous shock. It is an imperfect comparison, of course, to now.
We got to wondering how the S&P 500 traded starting in October 1973 through December 1974.
At the start of October 1973, the S&P 500 was already down 8.1% on the year.
As the Saudi oil embargo kicked in during October and through the rest of 1973, the S&P fell by a further 10.0% through year end. Its total return in 1973 was -14.3%.
The index then fell through most of 1974, bottoming in October down 36% on the year before rebounding 10% to close the year with a negative 25.9% total return.
Takeaway: as we’ve highlighted regularly since the virus crisis started, the S&P 500 at 2,500 expresses essentially 100% confidence that structural corporate earnings power remains solid. That level is 21x trailing 10-year average S&P 500 earnings of $122/share; in 2009 we bottomed at 10x trailing S&P earnings.
Pulling these 3 points together:
New York City is not just the US epicenter of the virus; it is also Wall Street’s most-watched case study of peak health system stress and eventual economic recovery. Once the daily hospitalization rates start to convincingly stabilize (1 to 2 weeks away), the conversation will inevitably shift to restarting the city’s economy. How that happens and at what pace will be the market’s template for the rest of the United States.
Any local NYC or national restart will be unpredictable in terms of cadence and industry-specific fundamentals. Some days will bring good news, others bad. That narrative fits with the 2008 playbook of volatile meandering over the next 2-3 weeks.
The 2008 and 1973/1974 Playbooks highlight what we need to avoid: a wholesale market rethink of corporate earnings power. The effectiveness of US fiscal and monetary stimulus will need to act as the counterweight to those concerns until the domestic economy starts to come back to life.
Jamie Dimon Warns Of Coming “Bad Recession,” Repeat Of 2008 Crisis In Annual Letter
Sounding a markedly more somber note about the global economy than he has in the past few years, JPMorgan CEO Jamie Dimon released his annual ‘investor letter’ Monday morning, warning the world that, from Dimon’s vantage point, at least, the US appears to be on the verge of a “bad recession” that could be exacerbated by “financial; stress similar to the global financial crisis of 2008.”
Though, leaving off on an optimistic note, he warned that while the challenge ahead might be great, he believes the US economy can emerge from it “stronger” than in the past.
“We have the resources to emerge from this crisis as a stronger country,” Dimon said in the letter. “America is still the most prosperous nation the world has ever seen.”
This, after sell-side banking analysts have spent the last two weeks telling CNBC’s audience that the banks are much better capitalized this time around (though excessive corporate debt is keeping some up at night).
“At a minimum, we assume that it will include a bad recession combined with some kind of financial stress similar to the global financial crisis of 2008,” Dimon wrote in the letter to shareholders. “Our bank cannot be immune to the effects of this kind of stress.”
The fact that the CEO’s 23-page letter is his shortest in more than a decade (since March 2008, just months before the global economy nearly collapsed) is hardly a surprise: Dimon suffered a sudden ‘heart tear’ requiring him to have sudden, emergency surgery earlier this month. The letter is roughly one-third the length of last year’s screed, where Dimon laid out his vision of a more ‘responsible’ and ‘equitable’ iteration of American capitalism, while also warning that ‘democratic socialism’ was not the way to go.
As far as JPM is concerned, Dimon reminds us that the bank’s 2020 submission to the annual Fed stress tests indicate that even in an “extremely adverse scenario,” JPMorgan can lend out an additional $150 billion for clients. The New York-based bank had $500 billion in total liquid assets and another $300 billion in borrowing ability from Fed sources, he added.
Notably, while JPM “will participate in government programs to address the severe economic challenges, we will not request any regulatory relief for ourselves,” Dimon added, echoing language he used during the financial crisis.
Because of his illness, Dimon hasn’t weighed in publicly about the virus since late February, during the bank’s annual investor day.
For a quick rundown, see CNBC’s Wilfred Frost below:
Futures Soar On Optimism Worst Of Virus Pandemic Is Behind Us (But Is It)
As prompted by Trump’s optimistic speech on Sunday evening in which the president said he saw signs the pandemic is beginning to level off, which came after a sharp drop in the latest number of NY corona cases, an optimistic mood of trader euphoria that the peak of the coronavirus pandemic is behind us helped boost stocks around the globe, and sent US equity futures as much as 4% higher.
Besides a potential inflection point in the global coroanvirus epicenter of New York, which however was challenged that there appears to be an odd decline for the second weekend in a row which then rebound sharply…
… Equity investors were encouraged as the death toll from the virus slowed across major European nations including France and Italy. London’s FTSE raced up 2%, indexes in Paris and Milan rose 3% and Germany’s DAX gained more than 4% after Japan’s Nikkei finished with similar gains overnight. Safe havens such as Treasuries and the yen fell, even as the dollar stay oddly strong and gold soared as new global coronavirus cases declined for two days in a row.
* “Global deaths 4.7k, down two days in a row
* NY: Gross new hospitalized down two days in a row; .. peak strain now exp within a week
In Europe, the Stoxx Europe 600 Index jumped led by automakers and travel and leisure shares after Italy and Spain said they had the fewest deaths in more than two weeks, and Germany and France reported the lowest numbers in days. Corona-optimism was so widespread it allowed traders to ignore the total collapse in the economy: iInvestor morale in the euro zone fell to an all-time low in April and the currency bloc’s economy is now in deep recession due to the coronavirus, which is “holding the world economy in a stranglehold”, a Sentix survey showed. Orders for German-made goods had already dropped 1.4% in February, German data showed. British car sales slumped 40% last month and Norweigen Air’s traffic plummeted 60%.
“Never before has the assessment of the current situation collapsed so sharply in all regions of the world within one month,” Sentix managing director Patrick Hussy said. “The situation is … much worse than in 2009,” Hussy said. “Economic forecasts to date underestimate the shrinking process. The recession will go much deeper and longer.”
Still, it wasn’t one of those days when data would spoil trader mood, and Wall Street S&P500 emini futures were up almost 4%, close to their upper limit too, bouyed by comments from U.S. President Donald Trump that his country was also seeing a “levelling off” of the crisis. “What is driving the market is the evidence that the number of new cases has started to turn the corner,” said Rabobank’s Head of Macro Strategy Elwin de Groot. As well as a slowdown in deaths in Italy, he said, improvements were starting to become visible in Spain and even in the United States there had been a little bit of a let-up. “When you see that happening you can start gauging when lockdowns can start to be gradually lifted. That gives a little bit more visibility and that is vital,” he added, although he stressed there were still huge uncertainties and risks.
Earlier in the session, Asian stocks were also mostly higher, with Australia’s benchmark index up 4.33%, Japan’s Nikkei added 4.24% even as that country moved closer to declaring a state of emergency. South Korea’s KOSPI index climbed 3.85%. Hong Kong’s Hang Seng index was 2.18% higher. That sent MSCI’s broadest index of Asian shares outside of Japan up 2%, on track for its best performance in more than a week. Markets in mainland China were closed for a public holiday.
The upbeat tone follows another negative week, and the mood among investors remains divided. As Bloomberg notes, bulls are pointing to more attractive valuations, unprecedented stimulus and now slowing death rates in several major countries. Bears are fretting the continued spread of the disease, dismal economic data and the rising corporate costs of the pandemic and subsequent shutdown.
“We are still optimistic that the administration will be able to get this virus under control and reopen the economy by the end of April, early May,” Lindsey Piegza, chief economist at Stifel Nicolaus & Co., said on Bloomberg TV. “If that does occur, it’s likely that we’re able to control the downturn from a depressionary scenario into a recessionary scenario.”
Worryingly, the number of new coronavirus cases jumped in China on Sunday, while the number of asymptomatic cases surged too as Beijing continued to struggle to extinguish the outbreak despite drastic containment efforts. “Focus in markets will now turn to the path out of lockdown and to what extent containment measures can be lifted without risking a second wave of infections,” National Australia Bank analyst Tapas Strickland wrote in a note. “Key to a strong rebound in China will be the ongoing lifting of containment measures, with Wuhan – the epicentre of the outbreak – set to lift containment measures on April 8.”
Optimism aside, there was plenty of news to demonstrate just how brutal the virus has been: eye-popping plunges in car sales and air travel in Europe, Britain’s prime minister being hospitalised, and Japan preparing to declare a state of emergency. But the markets appeared hopeful.
Beside the ramp in stock, the other big overnight move was in crude which pared a decline of as much as 11% though it remained lower as uncertainty swirled over a proposed meeting of the world’s top producers.
In FX, the dollar barely budged against the euro; the yen weakened as haven demand receded and Japanese Prime Minister Shinzo Abe said he will propose to declare a state of emergency in prefectures including Tokyo and Osaka for about a month. Commodity currencies advanced, led by Norway’s krone, after the reported death tolls in some of the world’s coronavirus hot spots showed signs of easing over the weekend. The Mexican peso slumped over 3% to a record low in Asian trading before paring losses after the nation’s stimulus pledge fell short of some investors’ expectations The pound fluctuated before turning higher even as U.K. Prime Minister Boris Johnson was admitted to hospital for tests after suffering from the coronavirus for 10 days.
In rates, the 10Y yield jump as high as 0.67% after trading around 0.60% on Friday; yields on safe-haven German government bonds crept higher in fixed income markets too, reflecting the slightly brighter tone in world markets despite some painful data.
Market Snapshot
S&P 500 futures up 3.6% to 2,572.75
STOXX Europe 600 up 2.5% to 316.64
MXAP up 2.5% to 135.67
MXAPJ up 2.1% to 437.12
Nikkei up 4.2% to 18,576.30
Topix up 3.9% to 1,376.30
Hang Seng Index up 2.2% to 23,749.12
Shanghai Composite down 0.6% to 2,763.99
Sensex down 2.4% to 27,590.95
Australia S&P/ASX 200 up 4.3% to 5,286.81
Kospi up 3.9% to 1,791.88
German 10Y yield rose 1.8 bps to -0.423%
Euro down 0.06% to $1.0794
Italian 10Y yield rose 8.3 bps to 1.379%
Spanish 10Y yield fell 2.0 bps to 0.722%
Brent futures down 2.2% to $33.36/bbl
Gold spot up 0.7% to $1,632.32
U.S. Dollar Index up 0.2% to 100.74
Top Overnight News from Bloomberg
Germany saw the lowest number of new coronavirus cases in six days, a tentative sign that lockdown measures are easing the outbreak
Oil pared earlier losses amid signs Saudi Arabia and Russia are making progress on an agreement to curb crude output as the coronavirus wreaks havoc on the global economy
Congress‘s near unanimity on last month’s $2.2 trillion coronavirus rescue bill has given way to partisan finger-pointing that threatens to poison the debate when lawmakers try to construct another emergency boost to the struggling economy
The Bank of Japan set itself up to buy more bonds in the key 5-to-10 year maturities, showing an intent to maintain yield-curve control amid growing expectations of further debt-fueled stimulus from the government
Asian equity markets traded mostly positive and US equity futures also began the week on the front-foot as participants saw a glimmer of hope from a slowdown in the pace of coronavirus deaths for several hotspots including New York, Spain and Italy in which the latter had its lowest daily death toll since March 19th. ASX 200 (+4.3%) was underpinned amid broad gains across its sectors and with notable outperformance in healthcare following reports that Australian scientists found that Ivermectin which is produced by Merck for treatment of parasites and head lice was successful in killing coronavirus within 48 hours and that the next phase will be for human trials. Nikkei 225 (+4.2%) coat tailed on the favourable currency moves and ahead of this week’s expected roll out of the stimulus package which is said to include increased subsidies, tax deferrals and cash payments to households. Hang Seng (+2.2%) was also positive following the recent monetary policy efforts in the region including the PBoC’s 100bps RRR cut announcement and with the HKMA halving the amount of reserves banks are required to set aside against bad loans, although gains were somewhat limited amid a lack of mainland participants due to the Ching Ming holiday in China. Finally, 10yr JGBs were lower with prices pressured amid gains in stocks and anticipation for increased supply with the Japanese government set to announce a stimulus package and state of emergency declaration which could occur as early as tomorrow.
Top Asian News
Japan’s Abe Moves to Declare Emergencies in Tokyo, Osaka Areas
Japan Banks Weigh Branch Cutbacks Ahead of State of Emergency
Japan Consumer Confidence Tanks to Lowest Since Financial Crisis
Singapore Adds S$5.1 Billion to Stimulus, Boosts Handouts
European equities remain firm (Eurostoxx 50 +3.8%) following a similarly positive APAC session, in which sentiment was bolstered amid positive COVID signals in key hotspots across Europe. In terms of regional performance, UK’s FTSE 100 (+2.0%) lags its peers across the channel as exporters in the index are weighed on by a firmer Sterling, whilst heavyweight energy names (Shell -0.5%, BP -2.5%) also pressure the index amid price action in the complex, with the latter also reducing production at three US refineries by ~15%. European sectors are mostly in the green (ex-energy) with cyclicals outpacing the defensives – reflecting risk appetite. Looking at the sector breakdown, Travel & Leisure leads the gains following multiple consecutive sessions of underperformance, while oil and gas reside at the bottom. Despite the energy sector overall on the backfoot, Tullow Oil (+47%) and Subsea 7 (+8%) see themselves at the top of the Stoxx 600, having seen detrimental losses from the oil market crash. Looking at other individual movers, Rolls-Royce (+14.8%) shares soared higher after announcing the securing of an additional GBP 1.5bln (vs. Exp. above GBP 1bln) revolving credit facility, thus increasing overall liquidity to GBP 6.7bln. Co. also announced that around GBP 300mln of headwinds are seen from COVID-19, whilst cost-cutting measures include a minimum 10% reductions in salaries across the global workforce this year. Rolls-Royce also confirmed it is withdrawing its FY20 guidance. GVC Holdings (+6.4%) sees strength on the back of an undrawn credit facility worth GBP 550mln, whilst expecting a virus impact of GBP 50mln per month. Pirelli (+1.9%) trades higher after announcing further cost-cutting measures, albeit the Co. reduced its FY revenue guidance to EUR 4.3-4.4bln from EUR 5.4bln whilst cutting its EBIT margin target to 14-15% from 17%. Elsewhere, NN Group (-9.5%) resides at the foot of the pan-European index after postponing its dividend and suspending its EUR 250mln share buyback scheme. Broker-led price action includes BBVA (+7.8%), ADP (+6.2%), Carrefour (+2.5%), Carlsberg (+1.5%) and Nokian Renkaat (-1.0%). Finally, as US equity futures hover near session highs, it is worth keeping tabs on today’s limit-up levels: E-Mini S&P (M0) 2601.50, E-Mini Nasdaq (M0) 7888.00 and E-Mini Dow (M0) 21972 – levels which have not yet been reached.
Top European News
Europe’s Virus Outbreak Shows Signs of Slowing on Lockdowns; Europe Stocks Rise Most in Nearly Two Weeks
Germany Tells Italy, Spain to Tap ESM If They Want Quick Aid
Dividend Halt Puts HSBC at Risk of Losing Core Investors
Tullow Jumps Most in at Least 31 Years; Volume Quadruples
In FX, Somewhat contrasting starts to the new week for the Euro and Pound as the former loses grip of the 1.0800 handle again vs the Dollar, but the latter pares losses close to 1.2200 and briefly trips stops at 1.2300 on the way to a circa 1.2320 recovery high on news that UK PM Johnson may be heading back to 10 Downing Street soon having been hospitalised over the weekend for nCoV related tests. Eur/Usd has been undermined by a sharp deterioration in the Eurozone Sentix Index and Eur/Gbp selling that has cushioned Sterling to an extent from a deeper than anticipated sub-50 collapse in the UK construction PMI.
AUD/NZD/CAD/NOK/SEK – A clear risk on divide across the rest of the G10 currency spectrum, but with the Greenback gleaning more traction to counter post-NFP weakness via gains vs safer havens that have a greater weighting in the DXY basket. Indeed, the index is nudging the upper end of a 100.850-460 range even though the Aussie, Kiwi and Loonie are all benefiting from less angst over COVID-19 following a decline in the number of confirmed cases and fatalities recorded in epicentres outside China including Italy and Spain. Aud/Usd is firmly back up above 0.6000 eyeing Tuesday’s RBA policy meeting when rates are expected to remain unchanged after recent emergency and scheduled easing, although money market pricing is more even between another 25 bp reduction and no further move. Nzd/Usd has reclaimed 0.5900+ status ahead of NZIER Q1 confidence, while Usd/Cad is hovering around 1.4100 vs 1.4260 at one stage as oil prices recover from another sharp retreat on a degree of OPEC+ disappointment given a delay to the emergency meeting from today until Thursday, at least. Relative calm in crude is also underpinning the Norwegian Krona along with reports that the Government may mull cutting oil output if there is general international consensus, and the Swedish Crown is tagging along.
JPY/CHF – The major laggards amidst renewed risk appetite on the aforementioned seemingly encouraging coronavirus developments, as the Yen falls below 109.00 and Franc meanders between 0.9762-89 in the run up to BoJ and SNB FX reserves data due tomorrow that will be monitored to see how much intervention, if any has been curbing demand for the safe havens. On that note, latest weekly Swiss bank sight deposits already reveal hefty activity as Eur/Chf remains entrenched around 1.0560.
EM – Whippy trade in regional currencies as positive vibes from overall risk sentiment vie with far less upbeat independent factors, like the Rand having to digest another ratings cut following Fitch deciding to downgrade SA deeper into junk territory. However, Usd/Zar has managed to pare back from new 19.3400+ record highs and Eur/Huf is off its all time peak around 368.00 awaiting Hungarian PM Orban’s economic stimulus plan that could equate to 20% of GDP.
In commodities, WTI and Brent front-month futures remain subdued, albeit way off the lows posted at the electronic open in which the contracts fell some 10% after OPEC+ postponed its tentative meeting, whilst Saudi and Russia played the blame game over the weekend. In terms of where we stand, the OPEC+ meeting will now be conducted on Thursday instead of the initially planned Monday – with sources noting the delay was to convince other countries to join in on output curtailment plant. Prices were also pressured after Russian President Putin partly blamed Saudi Arabia for the collapse in prices, whilst the Kingdom points the finger at Moscow’s hesitation at the March OPEC meeting – sources also noted that a lack of US commitment is complicating talks. That being said, the CEO of RDIF Dmitriev noted that Moscow and Riyadh are said to be “very, very close” to a deal on oil production cuts. Meanwhile, US President Trump on the weekend said he was considering slapping tariffs on oil imports, or even take other such measures, in order to protect the US energy sector from falling oil prices; Canada is reportedly considering similar measures. Following calls by leading lawmakers in recent weeks for such action. For reference, the US’ imports of petroleum were around 9.1mln BPD in 2019, of which Saudi and Russian imports measured just over 500k each. WTI May futures dipped below its 21 DMA (USD 25.89/bbl) at the open to a low of USD 25.28/bbl before recouping losses amid the overall risk appetite and the prospect of US intervention in the oil markets. Similarly, Brent June printed a low of USD 30.00/bbl, ahead of its respective 21 DMA at USD 29.26/bbl, with prices eyeing USD 34/bbl at the time of writing. The spread between the contracts has also widened to ~USD 6/bbl from Friday’s almost USD 4/bbl. Elsewhere, spot gold gains ground above USD 1600/oz as the USD retreats, and from a technical standpoint, the yellow metal could see mild resistance at USD 1637.50/oz (30 Mar high) before some psychological play at USD 1640/oz. In terms of news-flow for gold, gold refiners PAMP, Valcambi and Argor-Heraeus have been given approval to restart operations at 50% max capacity, having been asked to shut operations in late March. Copper meanwhile remains contained within the tight USD 2.15-2.25/lb range seen over the past 4 sessions, with the red metal again mimicking price action in global stocks.
US Event Calendar
Nothing major scheduled
DB’s Jim Reid concludes the overnight wrap
I listened to a talk radio show on Saturday that was unsurprisingly centred around the current pandemic. A 95 year old dialled in and said he lived through the global flu pandemics of the late 1950s and 1960s and was amazed at how much our thinking had changed over the last 50 years. Back then he said that people had so many threats to life that they just accepted the health risks of a new virus and got on with everyday life. He cited that Polio killed over half a million people per year worldwide at its peak in the 1940s and 1950s. Other illnesses that are now trivial also killed numerous people. It made me think that our generation and that of our parents have been so brilliant and successful in minimising death by contagious infections and disease that we really struggle when we are exposed to a new threat. Maybe in around 300,000 years of human existence this is the first pandemic where we have a near zero tolerance for risk given all that we’ve achieved medically over the last several decades and as such this is the first that has prompted a near global economic shut down.
On this it is still unclear to me what the exit strategy will be in the West from the lockdowns. In our note of the same name from last week (link here ) we used our Hubei model to speculate that restrictions would likely start to be lifted around mid-May with some countries slightly earlier and some slightly later. These restrictions would be eased in phases with domestic functioning economies prevailing with limited international travel for a while. At the point of publishing I felt the risks were balanced between a slightly better outcome than this and a worse one. However in a week where we’ve seen new cases emerge (albeit in relatively small numbers) in HK, Singapore and China with new restrictions being put in place, I’m starting to wonder how you can loosen restrictions in the West very quickly without seeing new cases increase again. Another argument for a later date of restrictions being lifted is the fact that while those most advanced through the cycle, namely Italy and Spain, are seeing their new case and fatality growth rate slow encouragingly, if you look at the graphs in our Corona Crisis Daily they are not falling as quickly as Hubei province did. I suspect to successfully reopen economies without fear of subsequent mini shutdowns or holding back significant amounts of activity we will need the antibody test rolled out so that a certain part of the population can work through regardless of the state of the viral spread. That will be the real breakthrough until we get a vaccine. Without that I fear it’s going to be tough to fully control the virus in the West. The U.K. is on the more liberal side of the lockdowns restrictions at the moment and from media reports it was noticeable that a very sunny weekend led to a number of people using parks and outdoor places more than the current restrictions intended. All this and we are only coming to the end of the second week of official lockdown here. It wouldn’t be a surprise if the U.K. felt the need to move to more strict rules in the days ahead.
In terms of new cases and fatality rate growth rates the U.K. had a better weekend as you’ll see in the Corona Crisis Daily. However we did see a similar trend over the last two weekends with the numbers not catching up until early in the “working” week. So if Monday and Tuesday’s numbers continue to see percentage growth rates slow then this is good news. But we need to be cautious for now. Elsewhere Italy and Spain growth rates in both variables continue to slow but as discussed above the absolute number of deaths are not falling on a daily basis as aggressively as Hubei/China saw at a similar stage. Overall global new case growth and fatalities are slowing but are they slowing quickly enough to work out when economies can reopen?
As we start Easter week, Asian markets are on the front foot this morning with the Nikkei (+2.33%), Hang Seng (+1.11%) and Kospi (+2.55%) all up. Chinese markets are closed for a holiday and futures on the S&P 500 are up +3.36%. In FX, Sterling is down -0.28% after Prime Minister Boris Johnson was admitted to hospital for tests after suffering from the coronavirus for 10 days. Elsewhere, yields on 10y treasuries are up +3.1bps to 0.628%.
Oil has fallen overnight with Brent currently down -2.23% and WTI -3.99% however that does compare to drops in the double digits when markets opened. This follows news over the weekend that the OPEC+ meeting planned for today has been pushed back and only tentatively rearranged for Thursday with the main protagonists in behind the scenes chat as to whether there is scope for production cuts.
Overnight, Bloomberg is reporting that the Japanese government will release the economic stimulus package in response to the coronavirus pandemic in two phases with the first phase of measures designed to prevent job losses and bankruptcies. The second phase of the package will be implemented once the spread of the virus is contained to support a V-shaped recovery. Meanwhile, various Japanese media outlets are reporting this morning that PM Shinzo Abe is set to declare a state of emergency within days, after coronavirus cases in Tokyo jumped over the weekend to top 1,000 for the first time and raised worries of a more explosive surge. The Yomiuri newspaper reported that Abe will announce the plan as soon as today, with the formal declaration for the Tokyo area coming as early as Tuesday.
In other overnight news, the FT has reported that the largest US banks will defend their plans to pay dividends in their annual capital plans due for submission to the Federal Reserve. Elsewhere, President Donald Trump and Vice President Mike Pence said overnight that they are seeing signs that the US coronavirus outbreak is beginning to level off or stabilize, citing a day-to-day reduction in deaths in New York.
The highlight this week could be the Eurogroup meeting held tomorrow via video conference which follows the invitation from the European Council on 26 March for the Eurogroup to present proposals within two weeks. I had the fortune of speaking to DB’s Mark Wall yesterday who gave me some advice on what to expect tomorrow. He said that various press reports suggest that the Eurogroup will be debating a three-part proposal for a centralised response. This is said to consist of a healthcare funding plan from the ESM worth up to EUR200bn, EIB credit guarantees worth as much as EUR200bn and an EU-wide short-shift or partial unemployment scheme from the European Commission modelled on the German Kurzarbeit scheme worth EUR100bn. A package of this size would be an impressive 4.5% of GDP. The ESB, EIB and Commission each issue the equivalent of common European bonds, so the need for a “coronabond” would be circumvented in the interest of expediency. The details will matter and the three elements are only temporary. As the risk of a protracted pandemic rises, so too does the need to follow up this plan with a centralised demand stimulus package, for example, a large-scale EIB investment programme. So a big meeting to watch.
Elsewhere the Fed minutes from the unscheduled emergency meeting on March 15th will be released. This was the meeting they cut rates 100bps and announced that they would increase their holdings of Treasury securities by at least $500bn and of agency mortgage-backed securities by at least $200bn. Things have moved on since and they injected more stimulus and announced new schemes but it will still be interesting to see how they were thinking at the time. For the rest of the week ahead see the day by day guide at the end.
Looking back at last week and Friday now. Economic data across the world showed massive signs of deterioration last week, especially employment numbers and service sector PMIs, as the economic shutdowns continued to take their toll. Equity markets were relatively calm in the face of it though but with most of the big stimulus announced in the prior two weeks they struggled for positive momentum. Overall, after 3 weeks of over 8% absolute weekly moves, the S&P 500 fell a relatively tame -2.08% over the week (-1.51% Friday), even as the US became the clear epicentre of the coronavirus crisis with over one quarter of the total cases worldwide. The index now sits -26.5% down from the recent all-time highs. Large cap European equities outperformed their US counterparts slightly on the week, with the Stoxx 600 down just -0.59% (-0.97% Friday), though European banks in particular lagged the index, down -13.17% on the week (-3.52% Friday). Equities were down across the continent as countries extended lockdowns even as new case growth recedes in the harder hit regions – Spain and Italy in particular. The DAX fell -1.11% (-0.47% Friday), the IBEX dropped -2.90% (+0.11% Friday) with the FTSE MIB -2.61% (-2.67% Friday), after the three indices gained over 5% the previous week. Asian equities were mixed on the week. The Nikkei fell -8.09% (+0.01% Friday), while the CSI was mostly unchanged at +0.09% (-0.19% Friday) and the Kospi was up slightly at +0.45% (+0.03%) on the week. The VIX fell -18.7pts over the course of the week (-4.1pts Friday) to finish at 46.8 as the S&P 500 saw relatively smaller daily moves. On the back of China increasing oil reserves and President Trump citing the need for intervention in the Russia and Saudi Arabia oil price war, both Brent and WTI crude oil rallied strongly. Brent crude was up +36.82% (+13.93% Friday) and WTI was up +31.75% (+11.93%) on the week. It was the best week for Brent since the data starts in 1988 and far outpaces the next largest 1 week gain – +22.3% in January 2009, while WTI similarly had its best week on record, beating the previous 1 week gain of +28.4% in August of 1986.
Fixed income also saw smaller weekly moves as markets attempted to settle into the new QE regime. US 10yr Treasury yields fell -8bps (-0.2bps Friday) to finish at 0.595%, just 5.4bps from the lowest closing levels on record. Meanwhile in Europe, 10yr Bunds saw yields rise +3.3bps (-0.8bps Friday) to -0.44%. The bigger moves in sovereign bonds last week were with spreads widening to Bunds. French 10yr yields widened +10.0 bps on the week (+3.1bps Friday), while Italian yields widened +19.1bps over the 5 days (+9.2bps Friday), and Spanish 10yr bonds widened +17.0bps (+4.2bps Friday). Credit spreads bifurcated last week. US HY cash spreads were 44bps wider on the week (+26bps Friday), while IG was -16bps tighter on the week (+2bps Friday). In Europe, HY cash spreads were -13bps tighter over the 5 days (-1bp tighter Friday), while IG was 1bp tighter on the week (+1bps Friday).
Friday’s services and composite PMI readings from around the world showed large declines in activity. The final Euro Area composite PMI fell to 29.7, a record low and below the flash reading of 31.4. In February, the PMI had been at 51.6, above the 50-mark that separates expansion from contraction. Germany saw their composite index fall to 35 from 50.7, while the UK’s composite came in at 36.0, down 53.0 a month ago. The Italian numbers were the worst of the major European economies, with the composite PMI falling to 20.2 and the services PMI coming in at 17.4. Incredible numbers. The US Markit service PMI fell to 39.8, slightly up from the flash reading of 39.1. The composite came in at 40.9 vs the flash of 40.5, and down 8.7 points from a month ago.
Also in the US on Friday nonfarm payroll data was released, falling by -701k in March, far below the -100k decline expected. This is the first time nonfarm payrolls have shrunk since September 2010 and this is the largest monthly decline since the -800k reading in March 2009. Notably, the survey reference period was for the calendar week containing the 12th of the month, so the jobs report did not cover the second half of the month when the more serious levels of economic disruption occurred, when nearly 10 million jobless claims were filed. Given that shutdowns in the US are due to stretch to the end of April, next month’s data is likely to be off the charts.
