What a difference a day makes. We were commenting that Europe had finally broken out the range we had for nearly a month and less than 24 hours after we have to note that the Eurostoxx is back within the range. Some are saying that it was profit taking after one of the most positive months in history. Both S&P and Dow had their best month since 1987 and best April since 1938. Nasdaq had its best month since 2000 and best April on record.

Is now the sell in May back in fashion? As you know we have been playing quite well this technical bounce but now believe that it is time to start to offload some weight from portfolios as we could witness at best some sector rotation or potentially a clear market correction.

In US last night after-market we had the reporting of:

  • Apple (-2.5%): great quarter for numbers, increasing dividend and for further 50bn$ buyback to be added to the exsisting program. Strong performance on services hashelped during the quarter. No guidance given.
  • Amazon (-5%): numbers slightly below estimates, predicting it may incur a loss in the current quarter due to increased spending to keep logistics operations running smoothly during the coronavirus pandemic. Amazon’s fulfillment costs surged 34% to $11.5 billion from the period a year earlier. Shipping costs rose 49% to $10.9 billion. Amazon Web Services, the cloud computing unit that in recent years has accounted for most of the company’s operating income, posted sales of $10.2 billion, up 33%.

Both stocks have been doing great this year and were possibly too heavy heading into numbers.

This morning US and UK Ftse are both indicated down 1.5%, Europe is closed.

The ECB yesterday has held fire on expansion of its main crisis facility, the PEPP, while giving a strong signal that it is ready to do more, saying that it was “fully prepared to increase the size of the PEPP and adjust its composition, by as much as necessary and for as long as needed”. In addition they have reduced the TLTRO interest rate to to 50 bps below deposit rate from 25bps.

It was basically as expected with the market hoping for a 500bn€ PEPP top up in June. Whoever has bought the market this week with the hope for an increase of PEPP has been of course disappointed.

The message we got yesterday from Fed was definitely more dovish. Chair Powell was at times firm, and quite aggressive in his message to act as necessary and stressed that there are no limits to the extent of policy accommodation the Fed can provide. Additionally yesterday the Fed announced new details on the Main Street lending program expanding it to borrower with higher leverage. Not a market mover but once again affirming that the Fed is doing whatever it feels necessary to prevent liquidity driven insolvency.

The chart showing the weekly changes of US Treasuries owned by the Fed (bn$) is really worth more than any description.

And similarly in the sense of market move….

We have seen an interesting analysis made on the market moves relative to weak volumes and flows. While several sources have reported how the US market tends to outperform during overnight trading, it is interesting to note a similar pattern in Europe.

In Europe, most of the rally we had since March has happened overnight between 4:00 and 8:00 am when volumes on futures were particularly light. Morgan Stanley has calculated that the Eurostoxx future since the 17th of February made a gain of 5% during the Asian hours while most of the drawdown happened when EU markets were open.

The chart clearly show how the performance could be broken down in 4 daily segments.

A similar but possibly easier to read chart is the following. It shows the intraday performance of the Eurostoxx in 3 daily hours.

On a separate matter, US has been reducing R&D spending since 1970s. In 2019, federal R&D spending equaled 0.6% of US GDP, the lowest in over 60 years. In April 2020, Trump announced that, pending review, he will suspend financial contributions to the WHO (US is the biggest contributor). The historically low level of R&D may have severe consequences for the long-term advancement of science and technology, along with very serious negative externalities on healthcare.

US basic research funding

In the Euro bond market, it seems that the proportion of medium-length deals maturing in 5/7 years has doubled since the outbreak, now accounting for 30% of senior high-grade sales since end the end of March. Interestingly, before the crisis ad the the jump in spreads, firms used to leaned toward longer bonds so they could offer investors a zero or positive yield.

5-7 years intermediate Euro corporate length (grey)


The euro-area economy plunged into a record contraction, adding urgency to demands for joint regional fiscal support. Output in the 19-country region shrank 3.8% in Q1 signaling that in Q2 this number could be much worse than feared.

Quite worrisome considering that Q2 GDP will be the most hit by the current recession (Q1 data only takes into account around 15 days of the economic freeze). In France Q1 at -5.8% vs -4% consensus, mainly due to lower exports, imports and household consumption. In Spain Q1 at -5.2% vs -4.3% consensus, the biggest decline since 1970. Italy Q1 bit better at -4.8% vs -5.4% consensus, but several high frequency data among which very low electricity usage, the length of lockdown, and very weak Macro data, suggest us that the initial print for Italy may be a substantial underestimate and will need to be revised down significantly.

Germany Retail sales fell 5.6% vs -8% in March (underestimated as higher retail sales at supermarkets offset losses elsewhere), while unemployment experienced a sharp increase in April, rising by 373k to 2.6 million vs 74.5k consensus. This implies that the unemployment rate jumped to 5.8% from 5% (chart).

Germany unemployment rate

US jobless claims jumped again up to 3.8 million vs 3.5 million consensus, down from 4.4 million previous week (chart). This brings the 6 week total to 30.3 million, which is over 12 times the prior worst five-week period in the last 50-plus years, implying a jobless rate of around 22%, which would be the highest since the Great Depression in the 1930s (unemployment was 10% in 2009). And of course as we show in the next chart, continuing claims are at the highest level ever touched in  US history, 18 million people vs 19.4 million.

Very interestingly, more Americans have filed for unemployment in the past month and half than jobs gained during the last decade since the end of the Great Recession, respectively 30.3 million jobs lost vs 22.1 million jobs gained.

US Initial Jobless claims

US Continuing claims

Here is a chart of the surge in unemployment insurance benefit payouts in March. They were up 143.8% year over year, to $65.3 billion. That amounted to 0.35% of total U.S. personal income, versus 0.14% in February.

US personal income came down 2% vs -1.7% consensus, the most since January 2013, reflecting a 3.1% decrease in wages and salaries. US Personal spending dropped 7.5% vs -5% consensus. This is the biggest annual contraction in US spending ever, larger than at the peak of the Lehman crisis. It makes sense people do not spend because they can’t or don’t want to or they are eventually scared. And the savings rate is up to 8.0% to 13.1% of disposable income, the highest since 1975.

According to a report from Green Street Advisors, the current crisis will speed up a consolidation process in the shopping mall industry. More than 50% of the whole US department store population may shut down permanently by the end of 2021. There are about 1,000 malls still open in the U.S. And roughly 60% of those have department store retailers. Already JC Penney and Neiman Marcus are being rumored to be on the brink of bankruptcies, with Amazon (e-commerce) competition speeding up this process.