We called for the market bounce and as it often happens during bear markets, the magnitude is as violent as the downside.

Yesterday the Dax had the biggest gain since November 2008 (+11%) and the Dow surged the most since 1933 (+11.4%)!!

The bounce is for sure technical (excessive oversold, positioning, shorts and other factors) but the market is realizing that the backstop given by the Central Banks and Government is very important.

Some more hopeful preliminary info on containing the virus in Italy and overcoming it in China have also helped (China is lifting restrictions on travel to and from Hubei province at midnight, except for Wuhan, where travel restrictions will be lifted on April 8).

Since lockdowns result in exponentially decreasing numbers of cases, a comparatively short amount of time can be sufficient to achieve pathogen extinction, after which relaxing restrictions can be done without resurgence.

The size and breadth of policy response, both monetary and fiscal, will be sufficient to reduce market dislocations and volatility in the short-term.

However we believe that this relief will be only temporary and the outright lows for the market will be below the levels we have seen.

It is true that market tend to bounce on bad news and the PMIs we got yesterday in Europe and US has offered some ground for a bounce.

As we rightly predicted, volatility is coming down after the expiry and we might witness a significant market bounce over the next days.

We expect equity markets to see considerable short covering if the impact from the virus turns out to be less long-lasting or that measures taken by policy makers to support demand prove larger in magnitude than the equity market envisages at the moment.

As mentioned two days ago, the DeMark chart was giving a buy signal on most indexes and below you can find the chart of the Eurostoxx with the next resistance set at 2689 (future).

Please note that we estimate a significative month-end Pension fund buying power on equities with 175/200bn$ of global equity demand coming from the largest monthly rebalancing of recent years.

Central Banks and Government’s activity

The Fed’s pace of weekly agency MBS purchases is now running at eight times the highest level seen in any prior QE. For example, this week’s aggregate purchase target of $250 billion agency MBS is truly unprecedented, against  $67 billion MBS purchased last week. The Fed clearly saw a danger in the housing market, wants to help increase the flow of credit through lower benchmark rates and dramatically picked up the pace of its mortgage bond purchases in recent weeks.

There are rumors that the Trump administration struck a deal with Senate Democrats and Republicans on an historic rescue package that tees up almost $2 trillion in spending and tax breaks to bolster the hobbled U.S. economy and fund a nationwide effort to stem the coronavirus. No details have been leaked, the accord was reached after marathon negotiations between Senate Democratic leader Chuck Schumer and Treasury Secretary Steven Mnuchin.

The Senate is expected to vote today and then the House would need to pass the bill before Trump’s signature.

ECB has injected nearly €300 billion of € and $ liquidity into the system over the past week. The €80 billion take-up today follows the $116 billion cumulative $ MRO take-up and €109 billion LTRO take-up last week. It is likely, in our view, that further liquidity could be injected over the course of next weeks. Italian and Spanish banks are making up over half of the total take-up while Greek banks reduced their reliance on ECB funding. Interestingly, banks CDS have risen to levels last seen during Brexit, but are far from those of previous crises.

New LTRO take-up has LTRO funding above TLTRO2 levels

The Bank of Japan yesterday acknowledged unrealized losses of 2-3trln Yen (18/27bn$) on its holding of ETFs. This would be the 1st potential loss for the BOJ in nearly 40 years and it could  constrain the bank’s attempts to prop up market sentiment with continued aggressive stock purchases. The Japanese fiscal year ends next Tuesday and the BOJ currently holds almost 272bn$ of ETFs after it doubled down the positions this month.

Bank of England in response to financial market conditions has activated the Contingent Term Repo Facility (CTRF), a temporary enhancement to sterling liquidity insurance facilities.It basically offers unlimited 3 month money to UK banks/building societies to alleviate stressed funding markets, they already have access to 1 trillion in liquid assets.


There was never any doubt that the economy is now contracting rapidly, the data we got yesterday haven’t told us anything we didn’t already know but it is still a strong impact to see the first national survey data collected after the crisis began.

Markit Eurozone Composite PMI at 31.4 vs 38.8 consensus, Markit France Composite 30.2 vs 38.1 consensus and Markit Germany composite at 37 vs 41 consensus. In many European countries, the manufacturing sector declined further, but the services sector saw the sharpest slowdown, even more than anticipated.

Service PMI Germany (blue) vs France (green) vs UK (orange)

With the European governments recently increasing the severity of the lockdown, we should expect more of the same in April, indicating that both Q1 and Q2 GDP data will make for grim reading. We should expect Q2 headline to be even worse, reflecting very poor numbers in both April and May, before a potential rebound in June (to be seen).

We believe that the Q2 contraction would be more than three times bigger than that seen in Q1 2009, pushing the Euro area growth rate to –9% for 2020. Looking across countries, we expect larger contractions in Italy and Spain than in northern Europe, including a 7.5% decline in UK real GDP in 2020

In US, Manufacturing and Services data tumbled into contraction. The IHS Markit PMI Composite tumbled 9.1 points to 40.5, marking the steepest drop in data back to October 2009. Even here the service sector struggled the most, with US Services PMI down to 39.1 vs 42 consensus, a record low and the US Manufacturing PMI down to 49.2 vs 43.5 previous, a 127-month low.

The March PMI is roughly indicative of US GDP falling at an annualized rate approaching at 5%.

In the chart below, you can see the steep downturn in March PMI Composite is global, with China and Europe being the worst countries.

Composite PMI US (green) vs Eurozone (red) vs Japan (blue) vs China (red)

Also, new home sales plunged 4.5% MoM.

Looking at upcoming data, guidance from various states and the Department of Labor reveals that widespread layoffs across the manufacturing and services industries appear to have jumped sharply last week. When these numbers are reported Thursday, jobless claims could move from 281k to ~3.4mn, nearly 5X the previous record.

Here you can spot what Morgan Stanley is forecasting.

Bonds & Credit

More and more market commentators are highlighting how the Fed is now being able to purchase directly corporate bonds for the first time.

This measures effectively allowed the Fed to entry into the universe of investment-grade credit, with the central bank launching a facility that will enable the purchase of corporate debt that has already been sold with a maturity of less than five years, and also of ETF that track the sector

Credit spreads tightened over the last two days but volumes and activity is not as hectic as headlines might suggest.

We are currently seeing many companies cancelling 2020 guidance, wiping off dividends and blocking share buybacks. Intel is among the Tech bemouth to suspend share buybacks which planned to be at $20 billion over 15-18 months, after only having repurchased $7.6 billion in shares in Q4. Chevron recently cut capital expenses and suspended share buybacks too, along with European rivals such as Royal Dutch and Total. According to IATA, the airline industry could lose up to $250 billion in revenue in 2020, which is a staggering 45% of the total revenue for 2019. Also check the CDS market which is pricing 50% default probability for General Motors, after the company drew down $16 billion from its credit lines and suspended its guidance for 2020.

The Fed’s announcement of a corporate bond buying program was more beneficial to high grade rather than lower quality bonds. The chart below shows AA and A credit spread narrowing (higher total return), while BBB remained mostly unchanged.

Total Return BBB (black) vs AA (orange)

Junk went the other way, booking a loss of more than 2%, pushing the month-to-date slump to almost 19%. Most of that market, even ex-energy, trades at a spread above 1,000 bps, typically associated with distress.

Total Return CCC (purple) vs B (blue)

Some bad signs are still present in the short-term money market industry. The Ted spread (difference between 3-month Treasury bill and 3-month LIBOR based in $) rose to the highest levels not seen since the financial crisis, 2008, as Libor rose and T-bill yields plunged to -0.2% with money-market rates turning negative. The widening is a sign that lenders believe the risk of default in interbank loans and counterparty risk are increasing.

However, other key benchmarks of short term credit risk are improving, with FRA/OIS (indicator of stress in the US banking system)  and Cross-currency basis swaps (main culprit of recent dollar shortage) denominated in yen, euro and pound all narrowing, which is good in term of market liquidity and stability.

Ted Spread (3-month T-bill minus 3-month Libor)

Liquidity it is still an issue for funds and we might few headlines of funds unable to cover the margins or to be forced to do redemptions over the next days.

Yesterday we had Invesco Mortgage Capital Inc., a real estate investment trust that invests in mortgage-backed securities, told counterparties that it was no longer able to fund margin calls.

The company said in a statement Tuesday that it couldn’t meet calls received the previous day and probably won’t meet expected further calls in the near term. It’s negotiating forebearance agreements with its financing counterparties, according to the statement.

The company will also delay the payment of its previously announced quarterly cash dividend.


Was up 5.1% yesterday and has bounced 9.4% since the Fed’s intervention and despite the market bounce.

It illustrates what can happen to Gold as a natural hedge vs Central Banks interventions and money printing. We have increased last week the gold positions for our clients after having reduced them in February.