Market has continued to trade positively yesterday with a push just before the US open thanks to the following triggers:

  • Gilead’s Remdesivir trial for Covid-19 has generated some positive data (still preliminary).
  • Mastercard reported well saying that there are some early signs of stabilization in spending.
  • Boeing rose 5.9% as the plan to cut 10% of workforce and cash burn is better than expected.
  • Crude oil bouncing 22% on June contract yesterday and 14% today, fully recovering the losses made at the beginning of the week.
  • Some technical breakouts and CTA covering shorts and possibly going long as we have traded beyond the 2924 level for medium-term signals.

But to us the most important aspect is that there is capitulation as investors were still very light and short and some of them are just getting in now. We warned over the last few days that this scenario would have been possible and nobody was prepared to run the market, the pain trade was on the upside.

After another very positive session in Asia and strong after-market earnings in US, European markets are indicated up 1.5% this morning.

The Eurostoxx has finally and decisively broken to the upside the trading range we had for the last three weeks and breaking the resistance of the 50-day moving average.

The S&P is on track for its best month since 1974! The Value rally/momentum sell off persisted even yesterday also because there has been a huge short covering on some value names as we head into the heart of big tech earnings season.

European Banks sector was up 5.1% yesterday (up more than 15% in 3 days), EU Energy was up 3.5% (up more than 7% in 3 days) and EU Auto sector was up 5.1% (up more than 12% in 3 days). On the Auto sector,  Chinese data has begun to improve and there are hopes that with the end of lockdowns there might be a degree of pent up demand for mobility. In the 4th week of April, in China retail car sales were at 48.7K, up 12% YoY. Volkswagen was up 5.8% yesterday and they gave a positive comment on results saying that they are working as hard as possible to get to “clean” positive net cash flow for 2020 and were emphasizing they will still invest and won’t step back from electrification ambitions.

Interesting to note that Credit spreads have started to diverge from the equity market, the chart is showing how the US 5-year CDS HY spread (inverted) is diverging from the S&P. An early sign of reversal for equities? Yes possibly as US Credit spreads are moving wider despite the continuous Fed intervention.

US BBB rated bonds have still got an historically elevated risk, outside the 2008 and the Great Depression, it has never been higher.

US BBB spreads (bps)

What is important to remind is that over the last decade, the volume of dollar-denominated debt has more than doubled, to satisfy the appetite for yield created by the background of virtual zero interest rates. This has happened even though the inventories of big banks that make markets in bonds have collapsed to levels last seen almost 20 years ago, largely as a result of banking re-regulation.

US credit market (bonds + loans) as a percentage of GDP vs dealers inventories


Oil second straight day of outperformance +15%, hovering around $17 per barrel. 5 main reasons: a) Russia to cut production by about 19% from February levels b) Norway will curb output by 250,000 barrels a day in June and 134,000 barrels in H2 c) Nigeria to ship the smallest volume since 2016 in May and June d) Yesterday’s US oil inventories reported a smaller than expected increase e) global fuel consumption is slowly picking up.

Tomorrow all eyes on OPEC+ meeting. The frontloading activity of the latest days of the June contract roll means that we might see very low or negative front contract WTI prices earlier relative to the weeks before the May contract expiry which is a positive factor.

The short base on the USO ETF remains very elevated and the chart below shows that quantity on loan of the biggest oil ETF. This quantity on loan spiked after the suspension of ETF share creation announced by the USO ETF provider on the 21st of April.

The still elevated short base and the still elevated number of shares in oil ETFs is making the roll more difficult as more contracts have to be eventually rolled. Hopefully with the anticipated roll by USO there should be less pressure during the month of May but the situation of oil prices on ETFs is still far from being linear.

Central Banks & Government actions

The Fed statement last night didn’t really add anything new as it’s leaving the asset buying program open-ended in terms of duration and size and didn’t adjust the IOER rate. As in March, the guidance on zero rates is also open-ended.  The message is that they are on the case but don’t plan any adjustment yet.

The Fed, as already planned, will increase the size of its asset holdings by an additional ~65%, or $4 trillion. Those purchases, paired with the Fed’s credit facilities, would bring the Fed’s balance sheet to a total size of about $12 trillion, or roughly 50% of GDP by the end of next year. Market is expecting the Fed to move to a regular monthly pace of purchases around mid-year. Very interesting chart showing the correlation between the Fed balance sheet assets and US financial conditions index tightening. This means that strong vulnerability still remains into the system.

Also interesting to note the Debt/Gdp ratio vs the velocity of M2 Money Supply. A similar drop on M2 money supply happened in the 2008/9 crisis as it takes a great amount of monetary stimulus to generate some credit growth. This show that we are at the beginning of a recession, not at the end.

At US Government level, in addition to the US$484bn fiscal expansion which was approved last week (taking the 2020 fiscal deficit to 19.2% of GDP in 2020), there are now reports suggesting that another package for providing funding for state and local governments (of ~US$700bn) could be in the works.

Today at 13:45 there will be the ECB announcement with Lagarde speech starting at 14:30.



Microsoft: solid earnings release, +3% in post market. Q1 revenue +16% driven by Cloud services, Q1 EPS +10% vs consensus. Covid-19 had minimal net impact on total revenues and saw increases in cloud usage, particularly in Microsoft 365/Teams, Azure, Windows Virtual Desktop, advanced security solutions and Power Platform, as a result remote work and learning. Within the overall revenue mix continuing to shift towards cloud.

Facebook: strong results, stock +10% in post trading. Q1 revenue +18%, solid advertising demand with the first three weeks sales of April in line YoY, Q1 EPS +100% YoY, 2.6 billion monthly users on average in March, up 10% YoY. No guidance.

Tesla: another impressive quarter, mixed results, +9% post market. Small net profit in Q1, the third straight profitable quarter, stronger-than-expected first quarter global sales +40% YoY, negative free cash flow $895 million (Tesla burned through almost 40% of the cash it recently raised).

Mastercard: strong earnings release, +7% yesterday, Q1 adjusted EPS +6% vs consensus, Q1 revenue +2.5% in line with estimates, vowed to slow expense growth (+7.3% in Q1) in the “low single digits”, pick-up in spending on its cards after the US stimulus.

Humana: results well-above consensus, Q1 adjusted EPS +14% vs consensus, Q1 revenue +18% YoY and maintained its full-year EPS guidance at $18.25 to $18.75, driven in part by Medicare Advantage outperformance (full year expectation to 300-350k subscriptions from previous 270-330k).  Stock up 4% yesterday


We saw another bunch of some awful data yesterday.

The German economy ministry forecast its GDP to shrink by 6.3% in 2020, the worst since at least 1950, before rebounding to 5.2% in 2021.

French Gdp contracted the most since record started in 1949 with a -5.8% QoQ and after reporting  a small 0.1% contraction at the end of 2019, it is now in a technical recession.

Euro-area sentiment index drop the most since series began in 1985, with economic confidence -67 vs -73.1 consensus, industrial confidence -30.4 vs -25 consensus, services confidence -35 vs -27 consensus.

Euro-area economic confidence (black) vs industry confidence (blue)

Euro-area services confidence (purple) vs consumer confidence (red)

In China, weak April PMIs with Manufacturing at 50.8 vs 51 consensus down from 52 previous, Caixin China Manufacturing down into contraction 49.4 from 50.1 previous month, Non-manufacturing a bit more resilient 53.2 vs 52.5 consensus.  Although these data are not as bad as feared, the recovery is still very slow. It seems that there is domestic rebound but weak overseas demand.

In US here we are, recession has started, after over 11 years of expansion. US Q1 GDP contracted by 4.8% annualized pace in the first quarter, the biggest slide since 2008 and the first contraction since 2014, versus -4% consensus. To note, Q1 consumer spending fell at a 7.6% rate vs -3.6% consensus and slightly firmer Q1 core PCE (inflation) 1.8% vs 1.7% consensus.

This bigger than expected contraction (for Q1 GDP) suggests that a -40% Q2 GDP is not out of the question.


US March pending home sales fell 21% vs -13.5% consensus, the most since 2010.

Today we will see another painful weekly jobless claim data that will probably add up to 30 million the number Americans losing their jobs in the past 6 weeks alone. All jobs gained during the last decade, the most recent bullish economic cycle, are gone. But it may be underestimating the full number of Americans who have lost their jobs by as much as 50%. For every 10 people who have successfully filed unemployment claims, 4 people have been unable to register and another 2 people have not tried to apply at a time of the current crisis. Further, an additional 10 million people have been shut out of the system. All this sums up to 50 million Americans without a job.

Today’s Macro

  • Q1 GDP France
  • Retail Sales Germany
  • Q1 GDP Euro-area
  • ECB rate decision (+ Lagarde conference)
  • US Personal Income, Spending, Jobless Claims, Chicago PMI