Equity markets bounced thanks to the “helicopter money” we got yesterday from the Fed & promises from different Governments with the potential of public bailouts. The S&P managed to close up 6% but with very little volumes in the close. Not an healthy trading pattern yet as liquidity stay scarce and everybody is still in risk-off.

This morning we are back to the same levels where we left on Monday evening, the whole bounce of yesterday has been more than erased as European futures are indicated down 5.6%.It is a very difficult market where not even Long/Short funds are able to contain the losses. The average US L/S funds have lost 9.7% Mtd and are now down more than 13% Ytd.

Meanwhile in Italy, the daily % growth of confirmed virus cases has stabilized at 3,500 per day with as the chart below is showing.

It was interesting to note that after a heavy week of cash selling, yesterday the future to cash ratio was back in favor of futures 2:1 maybe a sign that panic is slowing down.

The Dollar has started to strengthen yesterday at the strongest pace vs peers since 2017. This hint at the ongoing dollar funding pressure that are showing up in other parts of the market. The 3-month cross currency basis swap for euro-dollar, a proxy for how expensive it is to get dollar, traded at its widest, -130 bps, since 2011. Swaps for the dollar-yen were near record, and those for British pound blew out to 2008 levels. Again, all these means there are fears of funding squeeze. The Dollar shortage is exploding to crisis levels as, despite unlimited Fed swap lines, global basis swaps are soaring.

3-month Euro-dollar cross currency basis swap



While Gold and Silver have stabilized,  Palladium was down 3% and down 46% in just three weeks. Melt-down is everywhere with little space where to hide apart from being cash. Crude oil is down to new lows after having lost 18% in just 3 days back to the level of 2003!

The S&P has bounced back within the uptrend support started in 2009 but futures this morning are already indicated down 4% this morning.

It is also interesting to compare the current situation to what happened in 1987 on the S&P and MSCI Europe considering that the rate of drop is actually very similar. The market started to stabilize in the following months.

Currently, less than 5% of S&P 500 stocks are above their 200-day moving average, the lowest level since the GFC in 2008/9.

On a similar note is the chart coming from the Merrill Global Fund Manager Survey which shows how fund managers have reduced equity allocations by the most (month on month) on record.

The Fed has announced that it is reinstating the commercial paper facility as the commercial paper market is frozen which means that companies can’t roll over inventory loans.

This sound very familiar and the Fed had to restart its crisis-era funding program. The Treasury will provide $10 billion of credit protection to the Federal Reserve in connection with the CPFF from the Treasury’s Exchange Stabilization Fund (ESF).  Basically, the Treasury provides credit protection so the Fed can buy more CP via an SPV.

The Fed decided also to conduct another $500 billion extra repo operation in addition to the almost $200 billion two repo operations already scheduled for yesterday morning. No other repos were scheduled for yesterday, with the next $500 billion 84-day facility not due until Friday, until the Overnight General Collateral Repo rate jumped by 40bps to 60bps. The Fed decided to intervene another time with an additional repo operation in order to calm short-term funding panic.

Also importantly, Government action is starting to heat up.

 The Eurogroup statement on Monday night didn’t announce any fiscal package but there were strong words like “committed to do whatever it takes”, “immediate and coordinate action”. They basically committed to adopt a package of discretionary fiscal measures after their meeting last night (of about 1% of GDP on average for 2020) to be taken at the national level. They also committed to support the economy through national and EU-based provision of liquidity facilities (of at least 10% of GDP), consisting of public guarantee schemes and deferred tax payments. The Eurogroup also mentioned that the current amounts at stake could be much larger going forward, if needed.

Last night Merkel opened up the idea of setting up a joint European Union debt issuance softening the German opposition that could transform the finances of the 27-nation bloc.

The market expects US government to boost a series of fiscal measures to rump up the economy after having cut Fed Fund rate close to 0 in two emergency meeting, expanded reverse repo operations, adding $2 trillion of liquidity to the banking system and restarted quantitative easing with the purchase of $500 billion in Treasury and $200 billion in Mortgage-backed securities.

So far, on the fiscal side, Congress approved a $8.3 billion emergency spending package aimed at providing immediate funds for healthcare spending, while Trump, after announcing the state of emergency, pledged to distribute up to $50 billion in aid to states, cities, and territories.

According to Politico, Mnuchin is currently seeking a package of 1.2trln$ or more in fiscal stimulus , including direct payments of $1,000 or more to all Americans within two weeks. What’s particularly interesting, even before pandemic the US budget deficit was on track to exceed $1 trillion in the current fiscal year, ending September 30.

It’s extremely likely that the current US budget deficit will sharply increase due to lower tax revenues (economic slowdown), more spending programs for healthcare etc (virus), and more fiscal stimulus (tax cut, higher federal spending etc.)

During the past 5 recession deficit increased up to 2% of GDP, which would translate into $1.4 trillion (base case scenario), close to the record $1.5 trillion in 2009. From our point of view, Trump will be very likely to push for a massive stimulus to support the market.

Banks and Investors are in the meantime adjusting their grow estimates.

From what we see, it seems that Global recession is now granted and while China should see the worst in Q1 where GDP could contract even by 5%, the rest of the world would take a hit in Q2 with a potential slow recovery from Q3. Depending on the duration of lockdowns and curve of infections we will be able to better predict the entity of the hit in Q2.

The table below show the main latest estimates for Q2.

What it seems certain now is that there won’t be a V shape recovery but it is likely to be more a U shape.

 The chart below show how is the current situation of Price/Valuations and how quick has been the adjustment.

On Credit, the situation is deteriorating further and we confirm, once again, that is the most worrying part of the market.

 US Investment-grade Bond spreads have more than doubled in a month, blowing out to the most since 2011

Spreads on High Yields are breaking 2016 highs and Junk Bonds had the 2 worst days since the collapse of Lehman Brothers. Junk CDS spreads are now pricing in a 43% 5-year default probability. In recent years only in 2009 has been higher with a 60% default probability.

In terms of companies, yesterday we had Kraft Heinz tapping for 4bn$ credit line and Boeing continuously falling after the recent downgrades by rating agencies.  It went from a 225bn$ market cap to just 60bn$ in a month and lost 43% in the last two days. Hertz, the car rental company, was placed on watch negative by S&P. Yesterday there were rumors about US Casinos in Las Vegas asking for a Federal bailout.

In Europe, Lufthansa was cut to junk by Moody’s losing its investment grade rating saying that it could have been cut further.

The ECB has provided the first installment of interim financing of as much as €109 billion designed to prevent money markets from seizing up during this liquidity crisis. 110 banks took part in this week’s 98-day offering.

Interestingly, the Sub CDS of Deutsche Bank spiked to the highest level since 2016. It seems the market is worried by a systemic fear from lending banks that one of the borrowers is a far greater risk than ‘risk-free.

As we warned several times, be careful with the large overhang of BBB- bond that if downgraded would create tensions on High Yields.

One of the most dangerous charts is about US credit which has grown from 2trn$ in 2008 to 7trn$ now. It is mainly composed by more BBB and single A bonds and importantly, BBB could become Junk should the economy go in recession.

The USD Investment Grade and High Yield corporate bond markets have almost doubled in size since 2019.

DoubleLine CEO, who manages a bond fund of 10bn$ said that he predicts “en masse defaults” in some parts of the high-yield debt market, and ratings downgrades “should be coming fast and furious” as spreads widen.

A final important note on Buybacks.

We have always considered the Buyback effect a positive one for the US market and sometime we have even criticized the excessive usage of this tool vs investing in Capex. During the market sell-off, US corporates have been buying 10bn$ a day vs a 2019 average of 4bn$ providing a decent support for markets. The bad news is that from today Corporates are starting the blackout period until the 24th of April as Q1 numbers are approaching. On average, we typically see a ~35% decrease in activity during blackout.

It is interesting to note that US Banks have suspended already last week their buyback in order to focus capital instead on providing lending support to the economy. If other companies adopt similar measures in sympathy this would obviously remove a huge area of support from the market).

US Airlines are on the bad spot at the moment and they will be requiring Government funding soon. Bloomberg is reporting that the biggest US Airlines spent 96% of free cash flow over last decade on buying back their own shares. A difficult situation that could get very political.


We saw a confirmation of deteriorating data in Europe and US. In Germany, March Zew Survey expectations, a leading indicator for the German economy similar to the ifo Index, at -49.5 vs -30 consensus while March Euro-area Zew at -49.5 vs positive 10 prior month. In US, Manufacturing production continues to contract YoY for the 8th straight month, while US Industrial Production jumped into YoY growth for the first time since August, beating consensus.

US Industrial Production YoY (blue)