The Daily Shot: 24-Mar-20
• The United States
• The United Kingdom
• The Eurozone
• Japan
• Asia – Pacific
• China
• Emerging Markets
• Energy
• Equities
• Credit
• Global Developments
• Food for Thought
The United States
1. The Federal Reserve announced a new set of policy measures designed to stabilize the credit markets and cushion the economic contraction. The scope of some of these actions is unprecedented, going beyond what we saw in 2008.
• Unlimited QE: Purchases of “Treasury securities and agency mortgage-backed securities in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy.”
• Support for commercial real estate: Including commercial mortgage-backed securities (CMBS) in QE.
• Support for consumers and businesses: Credit facility to provide financing to “employers, consumers, and businesses” ($300 billion).
• Support for corporate bonds: Two facilities to stabilize primary and secondary corporate bond markets. To support the secondary market, the facility will purchase ” corporate bonds issued by investment grade U.S. companies and U.S.-listed exchange-traded funds …” (see description).
• Support for consumer credit: Issuance of debt “backed by student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration” (TALF 2.0).
• Support for municipal finance:
– Expansion of the Money Market Mutual Fund Liquidity Facility to “include a wider range of securities, including municipal variable rate demand notes and bank certificates of deposit.”
– Including “tax-exempt commercial paper as eligible securities” in the Fed’s commercial paper facility.
• Support for small and medium-sized businesses: “Main Street Business Lending Program to support lending to eligible small and medium-sized businesses, complementing efforts by the SBA.”
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2. Investment-grade corporate and muni bonds rallied after the announcement.
The US dollar rally stalled, and gold rose.
Stocks shrugged off the Fed’s announcement and continued to sink. The stimulus bill impasse in Congress weighed on US shares, as the S&P 500 hit the lowest level since 2016.
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3. The US Economic Policy Uncertainty Index hit a record high.
4. Over the past five years, there has been an unprecedented divergence between the unemployment rate and the US federal deficit. The government was pumping significant fiscal stimulus into a growing economy, which, in combination with low interest rates, inflated asset prices.
Source: Alpine Macro
The United Kingdom
1. The UK is on lockdown.
Source: CNN Read full article
2. Over 40% of consumer spending is linked to social situations, and is at risk from “social distancing.”
Source: Oxford Economics
3. This chart shows the UK’s coordinated fiscal and monetary stimulus.
Source: Goldman Sachs
4. School closures are putting tremendous pressure on the UK’s workforce.
Source: Pantheon Macroeconomics
5. Is the pound oversold?
Source: ANZ Research
Traders remain bearish on the pound. Here is the 3-month risk reversal.
The Eurozone
1. Markit PMI measures showed business activity crashing in March. Here is Germany’s composite PMI. More on this tomorrow.
2. Consumer confidence has deteriorated sharply this month.
Retail sales will follow.
Source: Pantheon Macroeconomics
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3. Here is an overview of Germany’s fiscal stimulus.
Source: Goldman Sachs
4. Market-based inflation expectations continue to tumble.
5. Hopefully, Italy’s infection rate trajectory is following China and South Korea.
Source: Pantheon Macroeconomics
Japan
The March Markit PMI report suggests that Japan is in a deep recession.
• Manufacturing PMI:
• Services PMI:
• Composite PMI vs. the GDP (first chart) and services PMI vs. household spending (second chart):
Source: IHS Markit Read full article
Asia – Pacific
1. South Korea’s exports remained resilient this month.
2. Singapore is in deflation.
3. Next, we have some updates on Australia.
• Australian consumer confidence plummeted this month.
Here is the sentiment index on household finances.
Source: ANZ Research
• The March manufacturing PMI was resilient, but the index of new orders tumbled.
• Service sector activity crashed.
• The Aussie dollar bounced from the lows as global risk aversion moderated a bit.
China
1. The government is easing the Hubei lockdown.
Source: @WSJ Read full article
2. New infections appear to be all imported as students/expats return from other parts of the world.
Source: Goldman Sachs
3. Steel inventories remain elevated (chart below), but the demand is recovering (second chart).
Source: @WSJ Read full article
Source: Goldman Sachs
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4. Margin loans have been on the rise.
Source: @WSJ Read full article
5. The nation’s total debt reached record levels last year.
Source: @WSJ Read full article
Emerging Markets
1. According to the World Economics SMI report, India’s business activity remained resilient this month.
Source: World Economics
2. EM sovereign borrowing costs spiked this month.
Source: IIF
Energy
1. With prices near the lowest levels in years, ETF investors are flooding into crude oil.
Source: Further reading
2. Gasoline prices are extraordinarily low. Is this the bottom?
• Wholesale:
Source: @markets Read full article
• Retail:
Source: GasBuddy
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3. Nigeria is selling its crude oil at record discounts.
Source: @adam_tooze, @JavierBlas, @TheTerminal
Equities
1. The Fed’s drastic stimulus measures and optimistic comments from the White House boosted stock futures.
Source: Bloomberg Read full article
The Nikkei is up sharply.
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2. Next, let’s take a look at some historical data on market corrections and recoveries.
• The fastest crash ever (2 charts):
Source: @dollarsanddata
Source: @WSJ Read full article
• US and EM drawdowns:
Source: Pavilion Global Markets
• Declines and recoveries:
Source: BlackRock
• Length of recovery (2 charts):
Source: Investopedia
Source: Statista
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3. Technicals suggest that the S&P 500 could stabilize soon.
Source: @DantesOutlook
4. Earnings growth consensus estimates continue to tumble.
Source: Yardeni Research
5. Equity long/short hedge funds had a rough month as they shrunk their exposure.
Source: Deutsche Bank Research
Source: @markets Read full article
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6. Dealers have been stuck with short-gamma positions amid client demand for equity puts. That exposure has been exacerbating equity volatility.
Source: @markets Read full article
7. The number of equity sales, trading, and research jobs at the largest investment banks has been declining over the past decade.
Source: @WSJ Read full article
8. This chart shows fund flows by factor/style.
Source: Deutsche Bank Research
9. Next, we have some sector updates.
• Below is the number of S&P 500 companies by sector mentioning coronavirus on their earnings calls.
Source: @FactSet Read full article
• Will airline stocks follow a similar path of auto stocks in 2009 – with a potential bailout?
Source: BCA Research
• Nasdaq has consistently outperformed the S&P 500 since 2002.
Source: @markets Read full article
Credit
1. While investment-grade bonds rallied after the Fed’s announcement, the rout in leveraged-finance debt continued.
• High-yield:
• Leveraged loans:
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2. The Fed’s action came just in time to ease forced sales in muni bonds and …
Source: @markets Read full article
… ETF price dislocation in investment-grade corporate bonds.
Source: @WSJ Read full article
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3. The non-financial commercial paper market (short-term financing for corporations) remains stressed.
4. According to BCA Research, the US recession could be shorter in length than recent recessions. This suggests a peak default rate closer to 9%.
Source: BCA Research
5. Which sectors in the securitization market are most vulnerable to the current downturn?
Source: Moody’s Investors Service
Global Developments
1. The global economic contraction is likely to be deeper than in 2008, but the recovery is expected to be faster, according to Oxford Economics.
Source: Oxford Economics
Here is a forecast from Goldman Sachs.
Source: Goldman Sachs
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2. High-frequency indicators don’t look encouraging.
Source: Alpine Macro
Layoffs around the world are accelerating.
Source: World Economics
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2. The global weighted average monetary policy rate is now well below post-financial-crisis lows.
Source: Morgan Stanley Research
And the G4 central banks are expanding their balance sheets.
Source: Morgan Stanley Research
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3. This chart shows the number of coronavirus-related fatalities.
Source: Gavekal
If the rest of the world follows China’s trajectory, the total number of infections could flatten out in mid-April, according to Alpine Macro.
Source: Alpine Macro
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Food for Thought
1. The top 20% households’ share of US income:
Source: @pewresearch Read full article
2. Germany’s and Japan’s aging populations:
Source: Alpine Macro
3. The aging population of US state prisons:
Source: The Marshall Project Read full article
4. Working longer hours at home:
Source: @markets Read full article
5. The coronavirus panic index by county:
Source: Cognovi Labs
6. Concerns about getting tested:
Source: Gallup Read full article
7. How long can the coronavirus survive on surfaces?
Source: The Economist Read full article
8. Foreign tourism spending in the US:
Source: ANZ Research
9. Job offer rejection rates by industry:
Source: @WSJ Read full article
10. TV ratings:
Source: Statista
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