Markets have bounced yesterday from intraday lows on the bottom of the channel where we have been trading since the beginning of April. Oil price has continued to rise with crude above 21$ for the first time in nearly a month. In Asia, Japan was still closed but all other markets had a positive close with European futures trading this morning up 1.5% and US +0.8%.

Eurostoxx bouncing on support and heading towards the middle of the channel.

Nasdaq bouncing yesterday on the bottom of the channel.

Interesting to spot in US that while many headlines were reporting yesterday about one of the cause of the negative market to be also on US Airlines and recent comment by Berkshire, the combined market cap of Southwest, United Delta and American airlines is roughly 40bn$ or equivalent to a 3% share move of Apple.

This morning the German Federal Constitutional Court is set to release its final decision on the ECB’s PSPP (Public Sector Purchase Programme). What’s happened here? German politicians launched a legal action against the ECB, stating that the PSPP is against the mandate of the ECB and not compliant indeed. We saw a similar legal action on the previous OMT (Outright Monetary Transactions) which failed as well. Given that the European Court of Justice has already concluded that PSPP does not exceed the ECB’s mandate, we expect the German Federal Constitutional Court will approve the purchase programme.

M&A and IPO activity has collapsed around the world as it always does during a recession. The 2020 US IPO market experienced its slowest March and April in nearly a decade, as volatility quickly increased. Only seven IPOs were seen in the last 60 days, a 70% plunge from the 15-year average of 23 IPOs.

March/April US IPOs.

Last week, Equity ETFs saw outflows of $1.5 billion, Equity mutual funds saw outflows of $5.5 billion. Money market funds saw inflows of $83 billion. Dedicated Emerging Market equity funds (ex-China A) reported outflows of $2.89 billion, driven by outflows in ETF funds. Cumulative outflows in dedicated Emerging Market in YTD 2020 amount to $14.88 billion.

Dedicated EM Equity Weekly Fund Flows

On a separate matter, the US Fashion Retailer J. Crew has filed for bankruptcy protection, voluntary petitions for relief under Chapter 11 of U.S. Bankruptcy Code. Its main creditors are set to take control of the group in exchange for cancelling debts of $1.65 billion and also providing about $400 million of fresh financing to keep J. Crew’s operations afloat. J. Crew is joining other troubled US retailers such as Neiman Marcus and JC Penny which are on the brink of bankruptcies due to the global lockdown, and disruption in retailer spending.

Oil & ETFs

Oil price is heading for the longest run of daily gains in more than nine months on signs the worst of the supply glut may be over as production cuts start to take effect. Oil price is up more than 100% since April 28, after Genscape reported a 1.8 million-barrel build in inventories at Cushing, Oklahoma. Importantly, the discount on oil for June delivery relative to July narrowed to the least in a month.

Several index providers have suspended the creation of delta-one oil Exchange-Traded-Funds, such as the WisdomTree WTI Crude oil, a passive-strategy fund, which aims at replicating the WTI performance, by tracking the WTI future contracts at several expiries. It means that investors are not allowed to invest in these products anymore, because the size of these funds is getting too large, creating huge problems and price dislocations during month rebalancing procedures (To track oil performance, ETFs have to invest on oil futures, but before future expiry, ETFs needs to sell the future contract due to expire, to buy another contract with longer delivery date). In the past few weeks, WTI price has been extremely volatile (also negative), mainly due to large funds rolling futures due to expiry.

Important to note that is not only the OPEC+ cutting production but companies too.

Exxon has announced that it expects roughly 400k barrel per day of production to be curtailed in the second quarter, and 100k barrel per day of lower demand for European gas. In the Permian area, Exxon expects its rig count to fall by 75%, to end the year at approximately 15 rigs.

Chevron will cut oil output as well, reducing 2020 investment budget from $20 bn to $16 bn, or about 20%, Capex by a further $2 bn to $14 billion and Permian Basin spending. In line with other European and global peers,  these curtailments have been due to the current pricing environment no longer resulting in economic returns being generated as well as curtailments as a result of restrictions from governments around the world.

Earnings

In US, almost 70% of S&P500 companies have reported Q120 numbers. Last week, we saw Info-Tech mega-cap releasing mixed results. Although some firms surprised, showing a remarkable strength in high innovative core businesses (i.e. cloud etc.), the general sentiment seems to be quickly deteriorating.

Almost 30% of S&P500 cap withdrew their guidance, as a clear sign that uncertainty is rising in every sector. US next 12-month EPS revision is down 25% (chart) with 65% of companies having beaten their forecast, although the average print has been weak on average. To note that in previous quarters the % of companies beating consensus was higher.

US Next 12-month Earning revision ratio.

In Europe, so far have reported 30% of the Eurostoxx 600 market cap and on aggregate level, 42% of companies have beaten EPS estimates by 5% or more, while 34% have missed. This implied net beat of 8% must be seen in the context of the historically extreme cut to 2020 expectations, which have come down 23% in 2 months. Health Care stocks have posted the strongest beats vs consensus so far, with Energy and IT the weakest.

From a style perspective Value stocks have so far seen the broadest beat to consensus estimates. Analysts were already embedding a large decline in Q1 in their forecast and despite exceptional downwards revisions, the surprise have been small. However what is more important is that the earnings sentiment (number of upgrades vs downgrades to the FY2020 figures) remains negative with more than 80% of European companies Full Year earnings having being revised down over Q1 suggesting that outlook is deteriorating beyond Q1. We should therefore expect a continuous fall of earning estimates for the remaining of the year.

Macro

Yesterday was the April global PMI-manufacturing day. Overall, very weak set of results that are likely to deteriorate in the next months.

The South Korea PMI manufacturing came at 41.6 vs 44.2 consensus, the lowest point since 2009, along with Indonesia, Malaysia and the Philippines at record lows.

In Europe, Euro-area Manufacturing PMI slumped down to 33.4 vs 33.6 consensus. Output, new orders, export sales, and purchasing activity all fell at record rates. Another record, low consumer confidence.

In Germany record contraction, Manufacturing PMI at 34.5 in line with consensus, along with the deepest cuts to factory job numbers for almost 11 years. Much worse situation for Italy and Spain, respectively Manufacturing PMIs at 31.1 vs 30 consensus and 30.8 vs 34 consensus, with output, new orders, export trade, employment and purchasing at record low levels. In France too manufacturing deteriorated at a record pace.

The Atlanta Fed’s GDP now index, a mathematical model providing a nowcast of the official GDP estimate prior to its release or even better a running estimate of real GDP growth, forecasts a 16% US GDP contraction this quarter and 20% contraction in inflation (PCE). Current consensus is for a 27% US GDP contraction. Also, Q2 forecasts of real personal consumption expenditures growth and real gross private domestic investment growth decreased from -16.3% and -10.5%, respectively, to -20.4% and -21.7%.

US GDP now index.

Another very useful Macro indicator to gauge the health of the global economy, is the South Korean export tracker which continues to deteriorate. In the chart below, we show the South Korean daily export value, down by 25% YoY.

In US, Manufacturer new orders crashed by the most ever,  with new factory orders down 11.4% vs -9.7% consensus, the worst since the great financial crisis, durable good orders down 14.7% slightly worse than estimate and capital goods down -0.1% vs +0.1% consensus.  Interestingly, we saw the biggest monthly drop ever in US factory orders (chart).

US factory orders MoM

Hong Kong Q1 GDP slumped to record lows, down 8.9%, the biggest drop in data available from 1974 and the third straight quarter of contraction which is the longest stretch since 2009. Private consumption, the biggest expenditure component, fell 10.2%, Service exports plunged 37.8% and Exports tumbled 8.1% YoY along with Inbound visitors down a staggering 83% YoY.