Summary
Economic Data: Expectations had been set by economists regarding record levels of first time unemployment claims and non-farm payrolls in the U.S. last week, but the actual figures in both cases were absolutely shocking. Having said this, they are most certainly in line with an economy in which large clusters are largely on hold. Still, the figure of 6.6 million Americans filing for unemployment for the first time was a huge number, bringing the two week total to nearly 10 million. This graph from The U.S. Bureau of Labor Statistics provides a historical context of initial jobless claims (grey bars indicate recessions).
Non-farm payrolls were equally bad, decreasing by 701,000, the first decrease recorded in nearly a decade (since September 2010). Unemployment in March increased to 4.4%, the largest one-month increase since January 1975. Here is the gory detail of the March employment report from the U.S. Bureau of Labour Statistics should you wish to hear more about it straight from the horse’s mouth. PMI data was also poor in the U.S. as expected. The data will inevitably worsen as this crisis drags on. In the U.S. this week, the FOMC minutes will be released on Wednesday and core CPI for March will be released on Friday. In the U.K. this week, construction PMI will be released on Monday and 1Q GDP and manufacturing date will be released on Thursday. In the Eurozone, the ECB will release its report on monetary policy on Thursday. The week will be shortened in the U.S. and Europe as equity and bond markets will be closed for Good Friday.
The Global Equity Markets: Last week was a rude reminder that the short reprieve from the COVID-19 led turmoil in the global equity markets the week before was only temporary. Selling pressure increased mid-week and accelerated as the week wore on, following the release of abysmal first time unemployment claims and payrolls data in the U.S. and continued increases in deaths from COVID-19 globally. There is a lot of red in the table below, demonstrating the harsh reality that there is simply nowhere to hide in global equities at the moment.
If we turn to emerging markets, the Shanghai Composite Index is down “only” 9.4% YtD, closing Friday at 2,944.09 (source: marketwatch.com). Looking more broadly, the MSCI Emerging Markets index is down 24.6% YtD. The largest four countries in the index - China, South Korea, Taiwan and India – are all Asian and collectively account for two-thirds of the index. I continue to see very little on the horizon at the moment to constrain short-term selling pressure in the global equity markets across the board.
COVID-19, Update: The number of diagnosed cases increased 77% and deaths related to COVID-19 more than doubled last week globally, as the table below illustrates.
Whilst The methodology of counting the number of cases varies from country to country (and includes only those actually tested), deaths are perhaps slightly more reliable (although this metric has some flaws too). Still, it is clear that COVID-19 is continuing to spread in those countries that were slower to react in terms of taking steps to curtail the rate of transmission, including the U.S. and the U.K. The U.S. now has the largest number of cases and deaths in the world, with New York City remaining a major hotspot. The number of deaths seems to be falling in Italy and Spain, a sign of hope, although there is no sign of the curve flattening just yet either in the States or the U.K. PM Boris Johnson was admitted to the hospital last night due to persistent coronavirus symptoms, and The Queen addressed the nation. Below is the WHO COVID-19 dashboard as of April 5th.
Oil: President Trump said early last week that he intended to speak to Russian President Putin and Saudi Arabian leader MBS about production cuts in oil. He allegedly did so on Thursday, tweeting afterwards that the Russians and Saudis (on behalf of OPEC+ apparently) had agreed to reduce production by 15m barrels/day. This disclosure sent oil prices skyrocketing by the end of the week, up 45% from Monday’s close.
I am not an expert on oil, but I recognise the dilemma. Independent oil & gas companies in the U.S. have invested significantly over many years to increase their production, enabling the U.S. to eliminate its dependence on volatile producers like OPEC, Russia and several other developing countries. The U.S. has not only become energy independent, but in the process has become the largest oil producer in the world (and remains the largest consumer), as the tables below from 2019 illustrate.
Low oil prices will act as a fiscal stimulus at least once the economy returns to a more normal level of activity, and given the depth of this downturn, every little bit will help. In fact, President Trump tweeted about the positive effects for consumers of low oil prices right after the OPEC+ squabble when oil prices first collapsed. Now though, POTUS has changed his tune as U.S. independent oil & gas companies edge closer to mothballing production because their lifting costs (i.e. costs of extracting oil from the ground) are higher than the current price of oil, making extraction uneconomical. If U.S. oil production were to be seriously curtailed, this would therefore threaten the energy independent status of the U.S. Neither Russia nor Saudi Arabia has formally commented on production cuts, so this implicit “agreement” remains tenuous at best, illustrating once again that POTUS can have an itchy trigger finger as far as putting out unsubstantiated news via Twitter. We should know something soon though, as OPEC+ has apparently scheduled a virtual meeting for Monday to discuss production quotas. Related – and important to keep in mind – prolonged low oil prices curtail investment in alternative energy, which is at odds with the environmental focus on climate change.
Luckin Coffee, WeWork and U.S. retailers: High-flying Chinese coffee shop company Luckin Coffee (NASDAQ: LK), founded in 2017 and listed in May 2019 ($17/share), disclosed mid-week that it had overstated revenues for the second, third and fourth quarters of 2019. The company’s share price fell from $27.19/share on Tuesday, following the disclosure, to $5.28/share by Friday. The stock had been as high as $50.02/share in January. I have heard more than one pundit blame it on the company being Chinese, but I hardly find that a fair comment based on the long history of occasional corporate fraud in the U.S. and the U.K. You can read the company’s press release regarding this matter here. After much rumour, Softbank also announced last Thursday that it would renege on its agreement with WeWork to buy $3 billion of shares from existing shareholders, including founder Adam Neumann (circa $1 billion) and VC firm Benchmark amongst other early venture capital investors and institutional investors. Apparently, around 10% of the proceeds would have gone to WeWork employees. Softbank’s response has been somewhat vague, stating simply that certain conditions precedent to the tender offer had not been met. WeWork is considering next steps. Beleagured retailer Macy’s announced on Monday that it would furlough most of its 125,000 employees, joining other retailers which have taken similar steps including Gap, L-Brands (Victoria’s Secret and Bath & Body Works), Nordstrom, Ascena Retail (Ann Taylor and Lane Bryant), and Kohl’s.
Credit Markets: The trend in credit spreads last week demonstrated the two effects that might be expected given the stimulus measures recently adopted by the Federal Reserve and the U.S. government. Firstly, BBB spreads continued to grind tighter as the Federal Reserve’s asset purchase plan (primary and secondary) targeting investment grade rated bonds provided support for weak investment grade rated (BBB) credits. Secondly, spreads on B- and CCC-rated high yield bonds widened back out in the second half of the week as the equity markets sold off, illustrating the historical correlation between high yield bonds and the equity market. In addition, the Federal Reserve’s purchase programme does not extend to non-investment grade bonds, although the government's $2 trillion stimulus package does provide support to SME companies generally. I believe that spreads on BBB and B/CCC bonds will continue to diverge. The graph below shows the change in BBB and CCC spreads year-to-date.
One other issue is that the mechanics for distributing aid in the support of loans to SMEs in both the U.S. and U.K. remains somewhat problematic from an administration perspective. There are a lot of loans / loan guarantees to be processed and proceeds to be distributed to a broad base of needy companies in a short time, not an easy task to do expediently or efficiently.