Market has continued to be buoyant with very good flows yesterday, especially in Europe. The Eurostoxx 50 is trying to break the higher band of the trading range we had over the last three weeks (chart below) and the Eurostoxx 600 has managed to close above the resistance of the 50-day moving average for the 1st time since the 24th of February.

While in US the picture is a bit toppish with the S&P filling the gap left on the 9th of March before retracing and Nasdaq having difficulties staying positive after having created a “double top” figure. The VIX (volatility on S&P) has reached the lowest level since the 26th of February dropping an outstanding 61% from the highs made in March.

The market as we rightly predicted, has started to shift towards a stronger risk-on tone and a stabilization of oil price would also benefit the whole mood (oil price spiked more than 30% off lows on the news that the biggest Commodity index has already shifted away from the June contract).

Short covering on Banks and first long buying orders we have seen in a while are helping the market to shift towards the value sectors. The trigger yesterday was the change from the European Union to relax the so-called leverage ratio which basically means that banks can hold less capital for funds the keep at Central banks. The commission also highlighted flexibility that banks can use with expected loan losses, saying they should consider the longer-term risks to a loan and not just the sudden shock of the pandemic.

Big tech earnings do remain a concern (on retail concentration), as we saw with Netflix there is a tendency to be bought into the event and sell post (regardless of the result). The most important triggers for the week are however the Fed (today late afternoon) and the ECB (tomorrow) to anchor us going forward so generally expecting a messy micro outlook but with some key macro events that are likely to be supportive.

Last night we had the Fitch downgrade to Italy to one notch above junk (BBB-). Expects debt to jump by 20% to 156% of Gdp by the end of the year, compared with BBB median of 36% of Gdp. The ECB is the largest creditor of the country and has bought almost €400 billion of Italian bonds.

Interesting also to note that the forward P/E on the S&P is touching new highs while macro data are continuing to signal a sharp deterioration.

US present business conditions rated as “normal” (% of respondents). Shaded regions represent periods of US recession.

As far as positioning is concerned, European and US hedge funds net leverage’s positioning is below average and low.

Hedge Fund Net leverage US (yellow) vs Europe (blue)

Also, as reported yesterday morning, S&P500 Equity futures positioning is unusually short, down to -300k contracts, a level touched in 2016.

CTAs were estimated to be short ~5bn$ on S&P and the estimated trigger for the reversal on the S&P is 2894 for the long-term and 2924 for medium-term. The medium term trigger is more important as most of these trend following strategies use a ~1M (short term) or ~3M (medium term) look back to determine momentum/direction. We will have to watch these levels for potential trigger of their buying orders.

Oil price

Crude oil has finally managed to bounce from intraday lows yesterday and is up 11% this morning at $13.6 per barrel, following two days where it lost more than a quarter due to large ETF rebalancing. It may be short covering but prices will continue to struggle until a vaccine is found or stockpiles start shrinking.  Further, American Petroleum Institute reported U.S. crude stockpiles rose by 9.98 million barrels last week, a 14th weekly increase, vs 12 million barrels consensus.

Open interest on both West Texas Intermediate and Brent is higher for July delivery than for the June contract. While it’s not unusual for the second month to be more liquid than the first as expiry approaches, it’s less common so early in the period and indicates that concerns remain about the lack of storage capacity even as some countries discuss easing lockdowns and production cuts take effect.

The very recent cumulative effect of ETF rolling took off almost 50% of open interest of June contract in the past week. So, liquidity is decreasing, there were 318,000 open positions as of Tuesday, with 15 sessions left before expiration. May WTI had 610,000 at the same point before expiry.

We are in the middle of the sharpest downturn for oil in 50 years, with Brent losing 70% YTD, a decline that is deeper and faster than any downturn such as 1985/86, 1998/99, 2008/2009 and 2014/15.

Brent Sell-off – the sharpest ever.

Demand is under severe pressure as all countries under Covid-19 restrictions account for 90% of last year’s demand. The worldwide number of flights is down 60% YoY while driving (the largest oil users) has fallen 40-80% around the world and toll road date confirm it. It’s a real carnage on the demand side.

Countries under partial/full lockdown represent around 92 million barrel per day of 2019 demand

Oil inventories are rising fast, and we should see more inventory builds, roughly 1 billion, in Q2, with some real disruption for the industry’s capacity to store.

It is also interesting to spot that while everyone is watching the price-action on oil, the global market for natural gas it is also in a bad shape. At least 20 cargoes of U.S. liquefied natural gas (LNG) have been cancelled by buyers in Asia and Europe. The price for LNG in Asia was already crashing before the pandemic, owing to a substantial increase in supply last year. Prices for LNG in Asia for June delivery have recently traded at $2/MMBtu, only slightly higher than Henry Hub prices in the U.S. As recently as October, LNG prices in Asia traded at just under $7/MMBtu.

The problem for American gas exporters is that after factoring in the cost of liquefaction and transportation, gas breakeven prices for delivering to Asia are around $5.56/MMBtu, but prices are trading at less than half of those levels. The U.S. natural gas industry was also facing problems heading into 2020 because of oversupply. Exports may not provide the demand pull that it once did for gas drillers. Henry Hub prices are stuck at $1.80/MMBtu.



Google: strong earnings release, +9% post-market. Q1 Revenue up 14%, of which Youtube +33.5%, Cloud +52%, net income +2.8% and Q1 EBIT +21%. To note a significant slowdown in advertising revenues in march due to Covid-crisis. But Google continues to invest, Q1 Capex +29% YoY.

Interesting to note that it is maybe to early to judge the positive early signs…

Pfizer:  above expectation Q1 and maintains its full-year profit/revenue guidance. Revenue down 8.5% YoY but 1% above consensus, and EPS 10% above estimates. Pfizer projected significant Covid vaccine manufacturing capacity. Strong contribution by key drugs.


Caterpillar: in line results, and warns that Q2 will be worse than Q1. EPS $1.60 vs $1.69 estimates, revenue down 21% YoY but in line, with oil and gas business down 25% in Q1, due to very low oil prices. Caterpillar is not providing a financial outlook for 2020.

Merck: in line Q1 but decreases revenue guidance by 5% and EPS by 7% due to Covid and FX. Strong sales for the the key drug Keytruda in Q1 at $3.3 billion, above $3.2 billion consensus.  Merck is in discussion with multiple groups focused on viral vaccine platforms.

Today’s earnings

  • Microsoft
  • Facebook
  • Boeing
  • Tesla
  • Humana
  • General Electric

Virus & “reverting to normality” update

We are seeing social and economic life reverting to normality in Europe as well, although at a slow pace. Activity indicators are pointing towards stabilization at low levels. These data suggest that Germany is recovering more quickly than others, with Berlin traffic data only slightly lower than last year.

In the chart below, we show that energy demand is rising, with Germany leading at -10% (vs 5-year average) and France and Italy lagging at -20%.

Electricity Demand March 2020 vs 5-year average

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

Very interestingly, pollution levels quickly jumped in Berlin (blue line), +30% vs last year, where shops have just reopened while in Madrid are still down 80%. France a bit better with pollution at -20%.

Pollution levels

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

Germany is also outperforming in mobility, with congestion rising and Berlin traffic being quite close to normality. That’s the outlier though, because Paris is still down 10% of normal levels while Milan and Madrid are much lower.

Commute Congestion

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

Berlin traffic close to normal

2020 traffic (blue) vs 2019 traffic (yellow)

Of course, Air traffic is at record low as no one if flying anywhere. Check the number of total daily flights by country in the chart below.

Total flights Euro-area

Bonds & Credit

In the past weeks, the pace of downgrades within the leveraged credit market has already intensified, with energy, tourism, discretionary the most hit. In the broader high yield universe, we have seen 465 downgrades by S&P and Moody’s since the start of Q2 vs 251 downgrades during the whole Q219.

Loan rating actions have accelerated rapidly in 2020

Downgrades (yellow) vs Upgrades (blue)

The high yield universe has also seen a shift toward lower quality

HY credit downgrades (yellow) vs upgrades (blue)


US consumer confidence slumped to the lowest since 2014 in April, down to 86.9 vs 87 consensus, 31.9 points the sharpest drop since 1973. The US consumer confidence Present Situation crashed to 76.4 its biggest drop ever while Expectations slightly rebounded.

US Consumer Confidence

US Richmond Fed manufacturing was slashed down to -53 vs -41 consensus, its record low ever.

Today’s Macro

  • Germany CPI
  • Europe Economic, Industrial, Services Confidence
  • Europe Consumer Confidence
  • US MBA Application
  • US GDP, Core PCE
  • US Pending Home sales
  • FOMC rate decision