Economic Facts – 24 April 2020


Equities: Based on the forward price-to-earnings ratio (12 months out), US shares are quite expensive. More people are embracing the view that stocks have “bottomed”. Even if they do not anticipate another sharp plunge, most observers hardly expect the market to soar, either. Investors who are wading back into the water are getting confusing signals: quarterly earnings are shrinking, and corporate reports provide few clues about the future, while rising stock prices are hard to square with the mounting toll of an unprecedented economic collapse.


Equities: Average cash positions are significantly higher than the average of 4.6pc over the past decade. This would traditionally be a sign of investors being too fearful of markets, making it a good time to buy back into stocks. The principle concern among fund managers is a second wave of the disease coming back after restrictions on movement are lifted, causing a repeat market fall and prolonged global recession.


Credit: The US speculative-grade default rate could end the year at 13.4% and edge higher to 14.4% by the end of March 2021, according to Moody’s. Corporate defaults are likely to climb as the coronavirus outbreak continues and oil prices remain low. Under a scenario of a sharp-but-short economic downturn, we project the trailing 12-month global speculative-grade default rate will climb to 6.8% in one year. In the event of a recession like the global financial crisis, our scenario analysis projects a default rate of 16.1%.


Credit: America’s banking giants are fortifying themselves for a potential tsunami of bad loans. The five biggest US lenders have stashed away $24 billion of loan-loss provisions as of the first quarter, almost five times as much as in the previous period, according to FactSet data.


Credit: This unimaginable amount of money is having one clear effect. Over the last four weeks, on days the initial jobless claims data has been released and even as Americans have lost those 22 million jobs, the S&P 500 has actually rallied (+6.2%, +2.3%, +1.4% and +0.6%); as has the Nasdaq 100 (+5.72%, +1.99%, +0.11% and +2.0%). Investors have seen the US markets stage their biggest weekly recovery since 1938.


Credit: Junk bond ETF’s now trade at a premium to their net asset values. The high-grade credit ETFs traded at a premium to their net-asset values after selling off more quickly than their underlying bond holdings in the weeks prior. The same dynamic took place in junk-bond ETFs just a few weeks later after the Fed included high-yield debt in its plans. With the fixed-income market stabilised, the central bank may not have to step in.


Oil: With a forecasted oil surplus of 10 million b/d from April, global storage infrastructure will be unable to take more crude and products in just a few months. The world currently has around 7.2 billion bbl crude and products in storage, including 1.3 billion to 1.4 billion bbl currently onboard oil tankers at sea. On average, 76% of the world’s oil storage capacity is already full.


Oil: For the first time in history, oil price futures went below zero to settle at negative, and as a contrarian, one must look at the sector. WTI crude oil contracts for May delivery slid into negative prices on Monday amid an unprecedented supply glut. With prices turning negative for the first time in history one would have to think the bottom is finally in.


Commodities: Dovetailing into the inflation thematic is commodities and resources stocks, which should benefit from rising prices. Commodities should be a beneficiary of inflation and money printing. There is a very good argument for potentially seeing a good run in commodities, maybe even a commodities super cycle, as inflation comes back into the global economy.




United States: Morgan Stanley expects the unemployment rate to drop below 6% by the end of next year after hitting 15%. Gross domestic product is forecast to fall 9% in the first quarter followed by a stunning 34% plunge in the second quarter that would be by far the worst period in post-World War II history.



United States: Bloomberg’s consumer comfort indicator points to further deterioration in sentiment. But the levels remain well above the 2008 lows. Data suggests that the free-fall in confidence would have been worse were it not for the expectation that the infection and death rates from covid-19 would soon peak and allow the economy to restart. However, anticipating a quick and sustained economic expansion is likely to be a failed expectation, resulting in a renewed and deeper slump in confidence.


US consumer credit change

United States: Consumer credit in the US increasing by $22.3 billion in February, rising from an upwardly revised $12.1 billion increase January. Year-on-year, credit grew by 6.4%, accelerating from a 3.5% expansion in January. This of course will increase markedly when subsequent months are reported, and many Americans flex their credit limits harder amid the recessionary environment resulting from the pandemic.


Chicago Fed’s National Activity Index

United States: The reality is the US is surely already in a recession, as typically measured by authorities in the US. Chicago Fed’s National Activity Index (CFNAI) in the US sank to -4.19 in March from a downwardly revised +0.06 reading in February. The reading hit its lowest since January of 2009, with all four broad categories making negative contributions.



United States: Housing starts in March slumped 22.3% month-on-month to an annualized rate of 1.216 million, marking the lowest since July of 2019 and below market expectations for a print of 1.3 million. Declines in housing starts were seen in all regions. Year-on-year though, housing starts were still a marginal 1.4% higher.


United States: A steep economic downturn and massive coronavirus rescue spending will nearly quadruple the fiscal 2020 U.S. budget deficit to a record $3.8 trillion, a staggering 18.7% of U.S. economic output. U.S. public debt by the Sept. 30 fiscal year-end would exceed 100% of U.S. GDP, from just under 80% prior to the coronavirus crisis.





Europe: The Eurozone is in lockdown. Hotels, restaurants, and retail stores are shut all over the Eurozone, while social distancing commandments imply productivity has taken a nosedive. Fewer blue-collar workers can work in a factory at the same time, while white-collar workers are bound to work from home – while teaching and entertaining their children at the same time.


Europe: Sentiment data suggests the economy is contracting big time. Sentiment has imploded across sectors and countries with southern member states and the service sector seeing the most severe declines. The EU’s services sector experienced the largest monthly drop in business expectations for the coming quarter since records began in 1996.

Europe: Consumer confidence also recorded the largest drop on record and it seems to be just a matter of time before it will also reach previous crises lows in level terms – currently consumers are still less pessimistic than during the Eurozone debt or global financial crisis. Moreover, passenger car registrations, usually a good predictor of retail sales, have shown an unprecedented contraction.



Europe: Assume that lockdown measures will be (gradually or stepwise) lifted all over the world by the end of the second quarter, which gives room for a gradual recovery from the third quarter. We forecast the Eurozone economy to contract by 5.2% this year and to grow with 4.3% next year. Hence the dip is larger than during the Global Financial Crisis, but so is the recovery.

Europe: GDP shows a sharper contraction vis-à-vis the GFC but we project a larger rebound close to previously forecasted level Its believe that Germany and France will be back on their feet faster than Spain and Italy. Both because of more economically damaging containment measures in the first half of this year.



Europe: Many firms have already applied for support via short-time work schemes. In most countries companies can send their employees home temporarily, while the state (partly) compensates those workers’ income. Firms will have to put these employees back on the payroll after a certain amount of time or once the crisis is over – Eurozone as whole unemployment will rise over the current quarters, to average 9% in 2020 as a whole, compared to 7.5% in 2019.





Japan: Weighing on sentiment was the growing acknowledgement of the huge costs to the global economy of the lockdowns and the Reuters Tankan index measuring business confidence fell to a decade low. Although valuations in Japan are undemanding and an improvement in corporate governance is a strong structural story, the economy remains highly cyclical and is therefore enduring a significant amount of pain due to the pause in global economic activity.


Japan: Japan’s emergency stimulus reaches ¥117 trillion as the virus crisis deepens. The government’s emergency package to cushion the economy from impacts of the COVID-19 pandemic has reached ¥117.1 trillion after the government approved a revised supplementary budget for fiscal 2020. The increase from the initial package worth ¥108.2 trillion comes after a sudden policy shift to provide universal cash handouts of ¥100,000 per every individual in Japan, instead of the original plan to give ¥300,000 to each household whose income had fallen sharply due to the virus outbreak.




China: China’s return to normal economic activity has been unbalanced so far, with most industrial enterprises and construction sites resuming work, but small businesses, service providers and exporters struggling to get back on their feet.


China: China’s official manufacturing purchasing managers’ index rebounded above 50 in March, indicating growth in the sector. But the National Bureau of Statistics cautioned the result only showed the situation was better than February’s dismal performance, when the index hit a record low, and did not mean manufacturing had returned to normal.


China: China’s top economic planner approved eight fixed-asset investment projects with combined investment totalling 77.3 billion yuan (about 11 billion U.S. dollars) in March, official data showed. The projects were mainly in energy and transportation industries Fixed-asset investment includes spending in infrastructure, property, machinery and other physical assets. Infrastructure construction has gathered pace across China as the government ramped up funding to spur investment in the sector following basic containment of the epidemic.

Spreads are measured relative to average yield of 1, 3, 5, and 10 year bonds issued by the China Development Bank.


China: In this chart, we can see that interest rates for the private sector fluctuate, whereas the interest rates paid by state-owned enterprises (SOEs) are stable.


China: The percentage of overdue household loans has risen sharply. The main reason for people to borrow right now is to pay off debt, and those borrowers are likely to default in an economic downturn. Beijing is looking to personal loans as a partial way out of the economic crisis even though analysts have warned there could be more defaults. The Industrial and Commercial Bank of China slashed interest rates on personal loans to 4.4 percent from over 6 percent at the end of 2019. The lender has also upped how much loan money people could borrow by up to a third. The virus has given a huge boost to overdue loans because many people have lost their jobs and are unable to repay debt.


China: China’s massive consumer base. Disposable incomes in China fell by 3.9 per cent in the first three months of the year, the first such decline on record. Retail sales, meanwhile, continued to dwindle, falling by 15.8 per cent in March from a year earlier. Retail activity still appears sluggish. The crisis has highlighted the number of poor people in China and the extent of the inequality that has emerged during four decades of growth.




Emerging Markets

Emerging Markets: Capital outflows have been unprecedented. The COVID-19 shock has resulted in a pronounced sudden stop in capital flows to emerging markets While a expect recovery of flows to emerging markets in the second half of 2020, it’s  not believe that the pickup will be strong enough to bring about a return to 2019 levels. The recovery in flows will most likely follow that of economic activity, with EM Asia leading the way, while Latin America and frontier markets remain subdued the longest. For many EMs, weaker inflows mean that they will not be able to run large current account deficits.


Emerging Markets: Spreads in the high yield portion of the index, in particular, have suffered and are currently near 1,100 bps, a level that would normally imply significant default risk. Another sign of the extreme levels of valuations: Some 15% of the index (a higher proportion than in 2008) reached distressed levels (i.e., a spread in excess of 1,000 bps) during the quarter.






Australia: Our current net government debt has been rising, but it is just 18 per cent of GDP. The Government can spend many billions more and keep net government debt well below 100 per cent of GDP.


Australia: The IMF is obviously painting a gloomy picture near-term and has warned that Australia’s economy could shrink 6.7% this year as containment measures bite, curtailing business activity, and inflicting the world’s worst economic downturn since the Great Depression.


Australia: The worst case scenario would be that we ease restrictions and there are undetected cases that set off an outbreak, if we can eliminate cases in Australia, we could largely get back to normal activities, but we would have to maintain very strong border quarantine until a vaccine arrives.


Australia: The economy added 5,900 jobs versus expectations for a 30,000 drop. Clearly the Job Keeper subsidies have been a big driver, while the supermarket chains of course have been hiring furiously. The unemployment rate ticked up only slightly in March to 5.2%, and the participation rate held firm at 66%. The employment data for April will surely be a lot worse, so we need to be mindful of that.


Australia: CoreLogic’s hedonic house price index had already been showing a loss of momentum in housing value growth rates since mid-March. Data through to mid-April has seen a continuation in this trend, with the combined capital city measure slipping into negative territory week-on-week for the first time since early August last year.


Australia: We have not seen a wholesale collapse in commodity prices and given that “markets have memory”, it seems to me that the prescient message that is being sent is that demand for raw materials is about to through the roof. Just like the local supermarket ran out of “loo paper” several weeks ago, there will be a bull run on commodities – and precious metals.



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