The sell-off has continued in US (and UK) on Friday with markets closing on intraday lows and the S&P erasing the weekly gains. Grim warnings about the second quarter from much of Corporate America, especially from mega-cap tech names after Amazon and Apple are clearly spooking the market. Small caps were also taking a hit, with the Russell 2000 declining by over 5%. The Trump vs China narrative didn’t help either and we had a new escalation over the weekend with the US Secretary of State Pompeo clearly attacking China about responsibilities of originating the virus. Pompeo’s media blitz fits into the Trump administration’s broader strategy of pushing for independent probes into whether China mishandled its outbreak response and pressuring China to open its virology labs to international inspectors amid questions about the origins of the virus.

On a market technical note, it is interesting to spot that the SPY (larger Etf on S&P) the day before the crash on the 1st of May 2019 was trading at 294.95. On the 29th of April this year, before the market started to fall, the SPY was trading at 294.88.

This morning Asia was partially opened (Japan & continental China closed) but we had Hang Seng -3.9%, India -4.7%…. as a result Europe will reopen today with futures indicated in gap down 3.3/3.5%testing the support of the trading range we had in April. We have been in the range for nearly a month and in just 2 trading days we have gone from a breakout to a re-test of the support!

In terms of positioning, last week we have seen some short covering and in particular on Wednesday there has been the largest $ short covering in more than 4 years (+4.1 standard deviations move) driven by both single names (accounting for 51% of total $ covering) as well as Macro Products (49% of total $ covering). With the exception of Health Care, all sectors saw short covering led in $ terms by Consumer Discretionary, Comm Services, Info Tech, and Financials.

We continue to think that a further outperformance of Value vs Growth is on the cards. As we know Europe is rich of value and we shouldn’t be therefore surprised by the fact that the underperformance of Europe vs US on a 60/40 Equity/Bond portfolio is now at a 30-year low.

A stable Bund Yield would be an important relief for value. Historically Bond yields have tended to fall ahead of QE announcements and rise thereafter. While more QE is on the cards, new announcements are likely to slow in the medium term. Value also tends to outperform when the PMI will through and we are possibly going to get the worst in the current month of May.

Central banks

Last week the Fed balance sheet rose by 83bn$, the smallest weekly increase since they started flooding money on the 15th of March and already down 86% from the peak-bailout reached week ended on the 25th of March.

This is shown well on the chart below

On the 1st of January the balance sheet stopped expanding as the Fed’s repo market bailout had ended. However, in late February, with virus pandemic exploded, the Fed first increased its repo offerings and then on the 15th of March, started massively throwing freshly created money at the markets, peaking with $586 billion in the single week ended on the 25th of March.

We should therefore expect the Fed’s balance sheet to start slowing down over the next days and weeks. On Treasuries the Fed added only 62bn$ last week, down 83% from the 362bn$ during peak helicopter money.

Since the 11th of March, the Fed has printed $2.34 trillion to inflate asset prices, restart the chase for yield to where investors would lend to companies with deep-junk credit ratings, already too much debt, and business models that have run aground.

If the Fed would had spread that $2.34 trillion equally over the 130 million households in the US, each household would have received $18,031. For many households, this would have gone a long way to helping them through the crisis. But this was helicopter money for Wall Street.

On the fiscal front, the global fiscal policy response now looks larger than over the 3-year period following the global financial crisis.


On Friday, the report of US factory output dropped in April at the fastest pace since record begun in 1948.

Data from the ISM showed its measure of factory production plummeted more than 20 points to 27.5, while its employment index also slid to 27.5, the weakest in almost 71 years. Readings below 50 indicate shrinking activity and the latest figures indicate an economy that’s rapidly deteriorated into a recession.

Have a look at the employment component.

Interesting to note that in US the Commercial bank loan delinquency rate is about to jump as it highly correlated with the US unemployment rate.

At the same time, US bankruptcies since the beginning of the year are already more than half of 2019’s total and on pace to top 2008. Of the 71 companies that have filed year-to-date with liabilities of more than $50 million, 19 declared last month.