The market has continued to rise yesterday with the Eurostoxx 50 reaching the middle point of the trading range we had for a month. Volumes have been very low this week, both on the downside and upside. Investors are awaiting for some clarity before committing to a new trend. Oil has bounced further with Crude above 24$ (+76% in 5 days) and Brent above 30$ (+32% in 5 days).

Efforts by many major economies to start easing restrictions are inspiring a fragile confidence and hopes for an economic recovery. However, stocks remain in a shacky ground as US-China tensions are increasing and traders weigh the chances of a second wave of infections. The Chinese Renminbi is threatening to break the 7.10 level vs USD which is to be considered a barometer for rising tensions. Only the currency market seems to be start pricing the likelihood to see another batch of tariffs.

The good news is that, despite the low volumes, we are almost back to normal in terms of bid/ask spreads. The charts underneath are showing the median S&P bid/ask spreads in terms of basis points.

In Europe yesterday morning we got the message from the German Constitutional Court on ECP PSPP program which is likely to give Lagarde a headache.

They gave the ECB  three months to fix its €2.7  trillion asset purchase program. In a 7-to-1 ruling, the judges said that some parts of the quantitative easing program aren’t backed by European Union treaties. The ECB’s controversial asset-purchase program has been a concern for the German court since at least 2015, when the case was filed. In 2017, the judges asked the European Court of Justice for an interim ruling aimed at limiting the ECB’s leeway, but the European Union tribunal rejected the restrictive reading of the law suggested by their German counterparts.

The ECB will need to show that measures taken for PSPP were proportionate. In an (unlikely) event, Bundesbank will theoretically no longer participate. The EUR dropped intraday vs all major currencies and peripheral spread have widened.

What has changed is the independence of the ECB. The PEPP, which is a merger of QE and IMT without conditionality will need to be rethought by the ECB. We suspect that the approach to do “whatever it takes” will no longer works.

This is obviously another hit to the whole European credibility, just think of what the US is doing to fight the pandemic through the Fed/Government intervention while in Europe we are still debating not only on the “Euro bonds” but now even on the past and current ECB actions.

US Treasury seeks to borrow a record 3 trln$ this quarter and the Fed has printed 2.5 trln$ in Q1, roughly 30% of annual Gdp in just a quarter.

In the chart below, we show the net positions in Treasuries currently held by US Primary dealers, 24 investments banks, which are obliged to buy new Treasuries when they’re auctioned, because they are creating the market. So far, current net positions in Treasuries are up to almost $250 billion.

Net positions US Treasuries Primary dealers

Considering the March’s Treasuries volatility and the massive supply, almost $3 trillion, the US government is set to deliver in Q2, Pimco and other leading US asset management are currently asking the Fed to be included in the liquidity providers’ club. The Fed’s programs and policies will be more efficiently transmitted throughout the financial system if it opens up its operations to a broader set of counterparties

Easing lockdown

In the chart below you can see that the percentage of people staying at home is falling and the time spent away from home is rising in US. As soon as the lockdown expires in several US states (New York, Arizona, Delaware, Washington DC, Michigan, Nevada, New Mexico, Vermont etc.) on May 15, the percentage of Americans staying at home should decrease to 40% from current 73%.

% of US Population under stay-at-home mandate

According to a survey from Jefferies, geo-location data show people are already leaving their homes with more frequency in Midwestern states, 72% of surveyed US consumers suggest they would return to work immediately if allowed, but US consumers may visit restaurants, Cinemas, Casinos, Public Transport (Public places) etc. less frequently once they are allowed to do so.

Europe is slowly reopening. Italian manufacturing and construction sectors have reopened in full, with the retail sector to follow on May 18. In Germany, schools have started to reopen, France and Spain have adopted a regionally differentiated approach to opening, while Belgium and Portugal lifted some restrictions on business.

Several economic tracking indicators still suggest a very low level of activity.

German lorry volumes, a proxy for industrial activity, remain far below previous years.

Electricity demand has decreased sharply in almost all European countries.

Germany (blue) vs France (yellow) vs Italy (green) vs Spain (light)

Trips planned are seeing a modest increase but still very low compared to early year average.

Berlin (blue) vs Paris (yellow) vs Milan (green) vs Madrid (light)

European Commercial real estate

We thought it would have been interesting to briefly discuss about the current situation of the commercial real estate in Europe.

Retail properties have long been suffering from the structural shift of where retail spending takes place, the shift from brick-and-mortar stores to ecommerce. This shift had been relentlessly progressing over the years. But in March and April, it exploded higher as brick-and-mortar stores were shut down and ecommerce operations boomed.

Tenants of retail properties are now having trouble paying rent, or are unwilling to pay rent, as their stores are closed. Some of them will go out of business altogether; others will attempt to stay in business but renegotiate their leases.

According to the Green Street Pan-European Commercial Property Price Index, which tracks prices of retail properties in the 25 most liquid real estate markets in Europe, all three sub-indices dropped in April, from March. But prices of retail properties plunged during the month:

  • Retail properties: -15.1%
  • Office properties: -6.6%
  • Industrial properties -0.7%,

The indices for office and industrial properties came off their all-time highs in March. But the all-time high of the retail index was the plateau period of mid-2015 to early 2016. Since then, the retail property index has plunged 29%.

The overall Green Street Pan-European CPPI, which is an average of the retail, office, industrial sectors, dropped 7.5% in April from March and is down 3.4% over the past 12 months.


The global headline manufacturing PMI fell to 39.3 in April from 48.6 in March and is now just above 2008 level of 36. Global ex China PMIs dipped sharply in March with the majority of economies reporting a lower PMIs in as well as record low new orders.

Global ex-China PMI Manufacturing

The US Trade Representative Office says it’s considering a possible exclusion extension for up to 12 months for some products that would otherwise be part of $200 billion tariffs imposed in 2018. US exports plunged by a record 9.6% from previous month and imports declined by 6.2%, the most in 11 years, with US trade balance deficit widening to $44.4 billion from $39.9 billion previous in March. The chart shows that trade deficit shrank before the Covid-19 outburst for two months.

US Trade Deficit

US Services PMI slumped down to 26.7 vs 27, from 39.8 in March, a record low and third consecutive month of contraction while US Composite declined to 27 vs 27.4 consensus, another record low, with new orders, employment falling at record speed.

The US ISM Non-manufacturing tumbled to 41.8 vs 38 consensus, the lowest since April 2009. Terrible data because although higher than estimates, it takes into consideration supplier deliveries which jumped to record high indicating longer lead times (although usually it’s a good sign, now it’s bad as it shows the disruption in the supply chain). Measures of business activity, new orders and employment all fell to record lows last month going back to 1997.

US ISM Non-Manufacturing

Just to note that in India 122 million people lost their job in March, which is 4 times above the 30 million Americans who filed for unemployment in just 6 weeks, an impressive amount which is bringing the unemployment rate at 27% in one of the most emerging country in the world.

We saw the lowest services and composite PMI anywhere this year in India, with service at 5.4 and composite at 7.2, a really worrisome data for a $3 trillion economy, with 1.3 billion people which is set to become the most populated by 2025 even overtaking China.