Welcome to another update of the Weekly Overview Series.
In this week…
- Coronavirus daily deaths are plateauing in the worst-hit countries included the US and the UK. It will continue plateauing for two or three weeks more before starting to decrease. The number of cases reached 2 million worldwide, an increase of one million in just 12 days.
This is an optimistic and insightful timeline by Morgan Stanley about the evolution of COVID-19 and Returning to Work through 2020 and 2021.
- The People’s Bank of China (PBoC) offers $14 billion via the one-year medium-term lending facility, cutting the rate from 3.15% to 2.95% in line with expectations. PBoC already cut the 7-day interest rate and these two rates usually move together. In addition, they cut 50 basis points the banks’ reserve ratio (the minimum percentage of its deposits the bank cannot lend and must keep in its reserves), releasing 200 billion yuan more of funding.
- Trump halts U.S World Health Organization funding amid Coronavirus crisis. The U.S pays top proportion of member dues to the WHO, 22% of the total. “The WHO failed in its basic duty and must be held accountable” in Trump’s words. The WHO says it is not the time to reduce resources.
- Gilead Sciences, a major biotechnology company, has reported improvements in Coronavirus patients after treatment with a new developed drug. However, the study did not have a control group to compare with.
In this blog update, instead of explaining in depth two pieces of information, I will try to cover more essential headlines in various markets in a briefly way.
Earnings season it’s here!
As per usual in the U.S earnings season, big banking institutions are the first releasing their first quarter (1Q2020) data. Here, I will analyse JPMorgan earnings reports released on Tuesday.
JPMorgan reported a $2.9 billion net income, down 69%, predominantly driven by reserve builds across the firm. If we look at their revenue, it was $29.1 billion, down just 3% with a flat versus prior-year net interest income at $14.5 billion.
Why JPMorgan increased by a great amount its reserve builds?
They are allocating funds as a provision for credit losses because of borrowers defaulting on their payments. Banks are hedging themselves against the deterioration in the macroeconomic environment as a result of COVID-19 impact and pressure on oil prices. It is another evidence of the size of the coming recession.
In detail, the provision for credit losses increased by $6.8 billion, split between a Consumer reserve builds ($4.4 billion) in Card predominantly, and the Wholesale reserve, in Oil & Gas, Real Estate and Consumer & Retail Industries.
Overweight in Cash
In its monthly fund manager survey, Bank of America found that more than 50% of fund managers are overweight in cash relative to benchmark. The cash balances surged to 5.9%, highest level since 9/11. Money markets are a way to hedge your exposure to current volatility given the Central Banks’ coordinated response with huge liquidity stimulus and Quantitative Easing programs.
The U.S Dollar Index (DXY) shows the role of cash in this type of situations. When the pandemic started to impact the financial markets and we saw the big sell-offs in the global equity markets, the DXY was at its peak after a long rally, evidencing its global reserve nature. Then, it came down after the Fed started to unveil all the unconventional monetary policy (as the money supply increases, the value of the money decreases).
And today, as a decisive point is coming for equity markets whether to follow the typical bear market explained in the last blog entry of this series or to rally again, DXY is moving around an important technical point (100) waiting for that moment to come. Looking closely the DXY could give an idea of the future move in equities.
U.S Data and the three-step approach to end lockdown
- U.S Weekly Jobless Claims were released yesterday hitting 5.25 million. In a matter of a month, around 22 million Americans have filed for unemployment. The unemployment rate could peak at 20% if this trend continues.
- U.S retail sales, an essential indicator in the U.S, as consumption historically represents 70% of U.S GDP, plunged to -8.7%, being clothing, furniture and food services and drinking places the most affected sectors.
- U.S Industrial Output slumped 5.4% from a month earlier in March 2020 with motor services and parts leading the fall.
These three indicators show the worsening of the U.S economy as a consequence of the pandemic. Trump unveiled guidelines on reopening the U.S economy that could allow states to abandon most of the social distancing practices within a three-phase plan called “Opening Up America Again”.
The final decision is left to each state, what is thought as a strategy to cover his administration’s back for the upcoming elections. Any resurge in cases will involve going back to lockdown, with exhausted fiscal and monetary policy tools. Economic structural problems would be more likely and the recovery could resemble an L-shaped recovery.
As always, during this Coronavirus pandemic, I leave here two charts: the S&P500 heat map and the Coronavirus curve evolution by country.
Have a good weekend and stay safe.