Market has continued to trend higher with both Europe and US closing on intraday highs on Friday and Asian being positive this morning. Nasdaq is growing bigger than the rest of the world’s stock market (Excluding US).

Ratio between the market cap of Nasdaq vs MSCI World ex-US

Lockdowns are easing in Europe and US and we had some encouraging numbers of new contagions over the weekend. European futures are today indicated up 0.5/0.6%, still within the trading range we had for a month with thin volumes. The new first page of the Economist really explain the main question mark that every investor is asking himself.

If 1 year ago we would have known the following data, would you have believed that the US market was trading at the same levels?

  • Fed would have decreased interest rates from 2.5% to 0.5%;
  • US Unemployment skyrocketing from 4% to 15%;
  • PMI dropping from 52 to 37;
  • Oil price having the biggest drop in 50 years with a 70% sell-off;
  • Gold bouncing by 32%;
  • Volatility exploding from all-time lows to 3x the levels where it was trading.

Do you know that the current market cap of Zoom (video-call app) is now worth more than the top 3 US major Airlines combined with Expedia?

It is well evident that Covid-19 has changed the underlying business dynamics. In US, “Stay at Home” activities such as Video chat apps (+1485% YoY), Home fitness apps (+288% YoY), E-commerce apps (+116% YoY), Delivery and Streaming apps (roughly +40% YoY) etc. have been booming at a tremendous pace.

Has this changed the structure of the economy? It may be possible, just the time can confirm it. It’s also very clear the real existing losers, are old-economy business, consumer discretionary models, “Back to Business”  such as OpenTable reservation (-100% YoY), Movie releases (-98% YoY), Airfare Spend (-89% YoY), Travel apps (-66% YoY) etc.

The result is that it is another tough year for active funds. As an example it is interesting to note that if you would have bought Berkshire in 1996, you would have underperformed the S&P and that the fund is now flat with the same levels it had in the middle of 2017. It clearly show how challenging has been to outperform market over the last few months.

Central banks and Government actions

On Friday evening it was announced that Euro-area finance ministers agreed to allow the region’s bailout fund to extend credit lines to each of the bloc’s governments on concessionary terms, paving the way for countries including Italy to draw cheap liquidity amid an unprecedented spending spree.

Under the emergency support instrument, euro-area governments will have access to cheap funds worth up to 2% of their output, without any of the onerous belt-tightening terms that were attached to the loans granted during the sovereign debt crisis.

Backed by Germany’s creditworthiness, the ESM borrows money at negative yields, which it then lends to euro-area member states after charging small service fees. The margin charged for the loans disbursed under the pandemic response instrument will be 10 basis points annually, the up-front service fee will be 25 basis points, and the annual service fee will be 0.5 basis points.

On the ECB front, they could decide to increase that program, extend it into 2021, or promise to reinvest the proceeds of bonds as they mature. The European Commission threatened twice over the weekend to sue Germany, with Commission President Ursula von der Leyen saying in a statement that “the final word on EU law is always spoken in Luxembourg. Nowhere else.” Lagarde said on Friday that governments could have to issue between 1 trillion euros and 1.5 trillion euros of extra debt. If the ECB doesn’t help mop that up, markets could push borrowing costs higher and undermine the recovery.

On Italy, Moody’s decided not to make any changes on Italy’s rating which stands at Baa3 with stable outlook. On one side, rating agencies will need further clarity on Covid-19 and its impact on the debt burden before taking any further decision. On the other, the European push for a recovery fund may provide some support to the economy (and rating). The next set of reviews are: 10th of July for Fitch, 23rd of October S&P, 30th of October DBRS and 6th of November for Moody’s.

The Spanish Podemos party leader, Pablo Iglesias, is calling for Europe to become an activist state, to guarantee minimum levels of demand and welfare. This takes into consideration the proposal of a sort of debt mutualization which may be a necessary condition of the continued existence of the Euro bloc.

Along with ministers from PIGS countries + France, Spain is pushing for a post-pandemic recovery fund of €1.5 trillion, to be disbursed through grants not loans. This last point is very important, because the idea of lack of solidarity, austerity and cuts at European levels seems not be working anymore. In addition to debt mutualization, a proposal for a minimum income/wage for 450 million European citizens will be delivered at the next Euro meeting.

In the meantime, over the weekend DBank has cut German Gdp forecasts to -9% lowering the Bloomberg consensus to -6%. DBK says that asynchronous development of pandemic will make recovery less dynamic.


Emerging Markets have been hit hard during the recent crisis, with investors withdrawing capitals from high-risk economies. Countries with high hard-currency indebtedness, strong exposure to commodities, and high political instability have seen their currencies losing at double digits. In the chart below, we show the year-to-date FX return of some Emerging markets.

Turkey is one of the most challenging situations since the country still has to recover from a 2018 currency crisis which dwindled its Central bank reserves. So far, the Lira is at record low vs dollar, over 7 threshold.

Turkey’s net foreign exchange reserves have fallen sharply to nearly $25 billion from $40 billion this year. Its financing requirements for 2020, by contrast, are estimated at $170 billion. In addition, Turkey has large external financing needs, and a private sector that is highly indebted in foreign currency.

The Turkish Central bank has cut rates 8 times in a row in 2020. The easing cycle is leaving the lira exposed to a global selloff, with Turkey’s inflation-adjusted rates now among the lowest in the world. In addition to continuous open market interventions to prop up the Lira, which is burning foreign FX reserves, the government is banning several international players from trading the currency.  Foreigners are continuing to be net sellers year-to-date. There is no existing swap line with the Fed (to provide $).

The recession in Turkey is ongoing, with GDP expected at -5% and fiscal deficit 8% of GDP in 2020. Widening fiscal and external imbalances are creating serious headwinds for the Central bank. The IMF may step in, but Erdogan does not want any help for political reasons. Given the current pace of Central bank reserve depletion, time is fast running out for the lira and Erdogan in terms of economic policy choices.

Very interestingly, it seems that the Spanish banking sector is the most exposed towards the Turkish economy, followed by France and Italy (chart).


German exports post historic slump as coronavirus hits global trade. Monthly exports from Germany shrunk by a more-than-forecast 11.8% in March to report their biggest drop since the nation’s historic unification in 1990, when records started. Trade surplus contracted to €17.4 billion. In Germany tax revenues are in free fall due to Coronacrisis. 2020 tax income is said to be up to €100 billion less than estimates in autumn. Germany to get €40-€50 billion less tax revenue for 2021. Tax revenue would be €700 billion this year and 795 billion in 2021.

In US, we saw the most recent batch of catastrophic employment data. April change in Non-Farm payroll confirmed that 20.5 million people lost their jobs vs 22 million consensus, the biggest drop in history, and 10 times more than the 2 million jobs lost at the peak of the Great Depression, 1939. This translates into an US unemployment rate at 14.7%, more than tripled. Or also, all added jobs after 2009 are now gone.

The labor force participation rate decreased by 2.5% points over the month to 60.2%, the lowest rate since January 1973. The underemployment rate, which includes discouraged workers and those working part-time who want full hours, rose to 22.8% from 8.7%The employment-population ratio, at 51.3%, is the lowest rate and largest over-the-month decline in the history of the series.

Women, minorities and low-income were the most hit groups, 16.7% for Blacks, 14.5% for Asians, and 18.9% for Hispanics, the highest ever recorded. Average hourly earnings (cost inflation) rose a massive 4.7% from the prior month and 7.9% from a year earlier, more than double March’s pace, but those figures were skewed higher by the disproportionate loss of low-wage workers from payrolls, rather than any wage pressures boosting employee pay.


In Canada 2 million people lost their jobs in April.

Also remember that 125 million Indian people lost their jobs in April (at least those dubbed regular workers). It seems that India, third largest Asian economy, may need to borrow about 54% more than originally targeted for this year, up to $160 billion.

The IMF estimates that global gross government debt will increase by $6 trillion to $66 trillion by the end of 2020 (105% to 122% of GDP).