Markets are still trading in a range. Yesterday the US has dropped to intraday lows on bad macro data and on some comments from US secretary of state Pompeo attacking China on how they managed the pandemic. The rhetoric against China is increasing and going forward the Trump administration will possibly encourage if not force US companies from being dependent on China for supply chains citing national security.

This morning US futures are recovering most of the loss thanks to a positive close in Asia. European futures are flat.

Interesting to spot that in Europe, a combination of EPS recession and regulatory pressures, is showing an unprecedented decline in dividends which are now falling by 35%, surpassing the 30% peak to trough that we have seen in the entirely Great Financial Crisis.

Dividend cuts in Europe have been larger in Europe than in other regions.


Gold price has been hovering around 1700$ for a few days now, if you wonder why it is not increasing further despite the market weakness you should mainly look at positioning.

Gold-backed ETFs attracted huge inflows +298 tons in Q1, which pushed global holdings in these products to a new record high of 3,185 tons. Gold ETFs saw the highest quarterly inflows for four years amid global uncertainty and financial market volatility. Year-to-date inflows of more than 420 tons have far eclipsed the volume added over all of 2019.

Gold-backed ETFs AUM (red line)

Central banks buying slowed, but stayed in line with longer-term average level. Central bank net purchases totaled 145 tons in Q1, 8% lower YoY. Despite Russia announced that after Q1 it will suspend its gold purchases having bought more than 1,900 tons since 2005, we think global Central banks will continue to buy gold. Turkey added 72.7 tons in Q1, boosting gold reserves to 485.2 tons, 29% of its total reserves. It was by far the largest buyer during the quarter, having also been the leading buyer in 2019, accounting for 50% of the Q1 global total.

Global Central Bank purchases


The US Treasury will boost long-term refunding debt sales next week to a record $96 billion (first tranche of $3 trillion Q2 financing needs) to refund approximately $57 billion of privately-held Treasury notes and bonds maturing on May 15, 2020, and raising $39 billion in new cash. Among new issues, a 20-year bond for the first time since the 1980s for $20 billion nominal. The US Treasury also announced plans to shift the burden of financing from bills to coupons, with an emphasis on long-term issuance. Treasury glut should steepen the curve eventually.

In the chart below, from FT, we show that the global debt mountain has been rising at an incredible pace for the past decades.

Total debt as % of GDP, advanced 14 economies

And very interestingly, social inequality and debt have risen in lockstep. In the chart below, we show the strong positive correlation between household and government debt as % of GDP (blue line) and the income share of top 1% in the distribution (purple). This means that leverage makes rich richer and poor poorer.

debt as % of GDP (blue) vs income top 1% (purple)


We are seeing a surge in Commercial Mortgage Backed Securities on the brink of default. Why? The situation is different from the 2008/9 subprime crisis when residential foreclosures rose because Americans were unable to service their debt. Now, commercial real estate is being hit not because of building valuation but because of collapsing cash flows due to retail sales plunging at record low. And we saw the first casualties in the fashion retailer industries such as J. Crew, Neiman Marcus and JC Penny.

Interestingly, Fitch estimated that after Covid-19, borrowers with mortgages representing $150 billion, which is roughly 25% of all the outstanding debt, have asked about suspending payments. A staggering amount!

According to April data, 324 CMBS loans, accounting for more than $5 billion, are currently delinquent, an all-time high. The worse may be coming yet, considering that there are no US government program to save the industry. In the chart we show the CMBS’s delinquency rate skyrocketing for the past 10 years.

US Commercial MBS delinquency rate

Auto loans

90+ delinquent auto loans (those that are at least 90 days past due) surged by 13% in Q1 from a year ago to an historic high of 98bn$. These 90+ delinquent loans are now representing more than 5% of the 1.35trln$ total auto loans and leases basically at the same level we have reached in October 2010 after General Motors and Chrysler had filed for bankruptcy as the industry was collapsing.

In April few US specialized subprime lenders have closed their business. Ally Financial reported that “about 25% of auto-loan borrowers had asked for a deferral of payment, and 18% had already enrolled in the program by the end of the month”. Importantly, these deferrals are not yet officially considered delinquencies, so the worst has to come yet.

Also worth to note that even Prime Loans could soon become delinquent as well, as many of these people too have lost their jobs and their cash flow disappeared. In good times, subprime auto-loans are an immensely profitable business, with very high interest rates, often in the double digits, in a near-zero interest-rate environment.

Lenders have been able to securitize these loans and sell the asset-backed securities (ABS) which were very liquid until 3 months ago. Now the situation is radically different as auction volume has plunged, and there is a flood of used-vehicle supply on the horizon from rental car companies trying to unload a big part of their now useless fleets, or creditors of rental-car companies taking possession of their collateral (the vehicles) and unloading them at the auctions, into very low demand.

We believe that the Fed will possibly need to scrutinize these ABS very soon before they will start to have the “snowball effect”.


China is considering dropping the numerical target for economic growth this year. Current market consensus sees China GDP economic forecast down to 1.8% from 6% in 2019.

China GDP economic forecast

The European Commission has released its latest economic forecasts, lowering Euro-area GDP down to 7.7% in 2020, from previous 1.4% rise in February (pre-Covid). This would be the worst economic shock since the Great Depression in the 1930s. In 2021 Euro-area GDP should increase up to 6.3%.

The unemployment rate in the Euro-area is forecast to rise from 7.5% in 2019 to 9.5% in 2020 before declining again to 8.5% in 2021. Consumer prices are expected to fall significantly this year, inflation rate is now forecast at 0.2% in 2020 and 1.1% in 2021.

The Commission sees Italy, Spain, Greece shrinking more than 9% this year. More properly, Italy H1 2020 real output should slump 18%, while Italian public debt is set to reach 158.9% of GDP this year and its public deficit is set to soar to 11.1%. These are the first estimates since European countries introduced lockdown measures to stop the spread of the virus.

As far as Macro is concerned, we saw very weak European PMIs in April. In Italy, Services and Composite PMI at 10.8 and 10.9 vs 9 and 10.4 consensus, in France Services and Composite PMI at 10.2 and 11.1 vs 10.4 and 11.2 consensus, in Germany Services and Composite PMI at 16.2 and 17.4 vs 15.9 and 17.1 consensus and in Euro area Services and Composite PMI at 12 and 13.6 vs 11.7 and 13.5 consensus.

Further, German factory orders at -15.6% vs -10% consensus in March while Euro-area retail sales plunged down to -11.2% vs -10.6% consensus. All Euro-area data are very weak, at record low.

Euro currency dropped for a third day in a row after the ECB’s catastrophic estimates.

Eur vs USD

April’s ADP Non-Farm employment change (estimated change in the number of the employed people in USA, during the previous month, excluding the farming industry and government) forecast a loss of over 20 million jobs ahead of Friday’s Non-Farm Payroll report. Take into consideration, the largest monthly job loss during the great financial crisis was just 835k.

US ADP employment change

According to a recent survey, New York’s average unemployment rate may triple to 12% this year, with more than 900k people losing their jobs.

Importantly, while the Non-Farm Payrolls might drop by more than 21 million during the month with unemployment rate reaching 14%, the S&P, on the same period, has gained almost 13% and had its best month since January 1987.

Investors are therefore following the rhetoric of believing that although economic activity was deeply depressed in April, global infection rates stabilized, and as most countries turn their attention to managing the reopening process, economic activity has probably bottomed now.

In China, Services and Composite PMIs reported overnight were below expectations and in contraction territory, respectively 44.4 and 47.6 vs 50.1 consensus. Surprisingly, China’s exports rose up to 3.5% vs -11% consensus, in April aided by stronger shipments to South East Asia while imports declined 14% slightly more than estimates. The trade surplus was $45.3 billion in April, well above the median forecast of $8.7 billion.