Well, Is There A Future Or Isn’t There?

“Despite mounting risks out of Europe in a lack of progress at the EU summit, with leaders unable to agree on joint stimulus measures and possible Italian credit action tonight from S&P, much of the cross-asset landscape is trading relatively sideways in tight ranges, as the ongoing normalization of vol continues”, Nomura’s Charlie McElligott wrote Friday.

He echoed his comments from Thursday around the collapse in vol of vol, as traders price out the tails.

I suppose it’s easier to compress the distribution of forward-looking scenarios in one’s mind when the absolute worst-case scenario (short of a Filoviridae epidemic or an asteroid apocalypse, anyway) has in fact already happened. Nothing says “left-tail” quite like the complete cessation of economic activity across almost every economy that “counts” due to the rapid spread of a deadly respiratory pathogen.

The fundamentals continue to evolve (or devolve) about like you’d expect under the circumstances.

Barclays is out echoing JPMorgan in characterizing the early stages of earnings season as “just as bad as feared”. Only 62% of US companies reporting have beat estimates, the bank says, in a new note. That’s the lowest since 2009 (at least). Profit growth is currently tracking down 25%, a full 7% below consensus.

Germany now expects a 2020 GDP contraction of up to 7%, Spiegel says. German business confidence plunged to 74.3 in April, a record low on Ifo’s gauge. This comes a day after GfK’s index showed German consumers are the most pessimistic in decades.

“Sentiment at German companies is catastrophic”, Ifo President Clemens Fuest laments. “Companies have never been so pessimistic about the coming months. The coronavirus crisis is striking the German economy with full fury”.

Hope is alive that European political leaders can come together on a massive rescue package above and beyond the measures already deployed. There was more incremental easing out of China on Friday, as the PBoC cut the rate on its targeted medium-term lending facility to 2.95% while rolling a portion of maturing funding. Think of the cut as putting the finishing touches on the latest easing cycle, that included 20bps cuts to the 7-day repo rate, the MLF rate and, ultimately, the loan prime rate.

There are more signs that flows are “normalizing” or, if that’s not the right word, suffice to say the Fed’s actions have convinced at least some investors that credit markets won’t just collapse entirely overnight.

US investment grade funds saw another inflow last week, this time of $2.15 billion, Lipper data out Thursday evening show. That follows a $5.8 billion inflow the previous week and helps put March’s nightmare further in the rearview.

High yield funds, meanwhile, took in another $2.22 billion. That’s off last week’s record $7.66 billion haul, but it’s good news nevertheless.

The following visual speaks again to the notion that despite the extremely daunting backdrop for junk issuers, investors believe the powers that be aren’t likely to countenance anything that risks becoming systemic.

Indeed, Steve Mnuchin said Thursday that Treasury is pondering loans to the oil and gas industry, which is facing an existential crisis.

“One of the components we’re looking at is providing a lending facility for the industry”, he said, in an interview with Bloomberg. “We’re looking at a lot of different options”.

“Investment-grade companies will be able to either access the normal capital markets or will be able to access the Fed’s investment-grade facility”, he went on to remark, effectively ruling out a scenario where taxpayer funds would go to drillers that retain market access.

As far as whether Jerome Powell will become an oil buyer of last resort for junk borrowers anytime soon, Mnuchin said that in order for high yield energy companies “to fit into a Fed facility, they would have to fit into the normal constraints”. They don’t, of course, which is why Treasury is looking at “alternative structures with banks” for oil companies that can’t tap the Fed. It also seems as though Powell may end up altering the cut-off point for downgrades attached to its fallen angels program.

In any case, it’s the same question, different day: Can you look past the current brush with armageddon to a brighter future, or can’t you? Or, perhaps more aptly: Is there a future or isn’t there?

“It’s not for nothing that we have heard talk of a Q2 US GDP print of over -30% annualized, especially with another 4.3 million initial claims yesterday taking us up to over 26 million looking for work even as we are still in the early stages of this socio-economic crisis”, Rabobank’s Michael Every said Friday. “Nor that yesterday the ECB’s Lagarde reportedly warned European leaders that the Eurozone economy could shrink by 15% due to this virus”.

I’m fond of quoting American cinema, and I habitually reference Bill Murray’s Phil Connors (from Groundhog Day) in the context of “looking through” this particular crisis:

Yeah, sport, I know there’s a blizzard. When are the long distance lines gonna be repaired? … Well, what if there is no tomorrow? There wasn’t one today!


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5 thoughts on “Well, Is There A Future Or Isn’t There?

  1. I do not know the size of commercial real estate loan market in US- but this is in serious trouble. There is not a plan to deal with the upcoming May 1 and June 1 crises.
    A significant number of tenants (commercial office, retail, industrial) did not pay rent on April 1. Landlords were able to borrow on existing LOCs to make April 1 mortgage payments, but this is going to be worse on May 1 and June 1 because even more tenants will not pay, less is available to be drawn down on remaining LOCs, and banks are not making any meaningful concessions to borrowers (interest only for a few months- is the best that I have heard). Banks are holding firm – expecting borrowers to come up with equity to pay down loans.
    Landlords still have to pay real estate taxes (not insignificant in many cases), common operating expenses, as well.
    If a small business had any liquidity or access to liquidity and the owners do not have personal liquidity, they are accessing the business liquidity and distributing that liquidity to themselves.

  2. “Investment-grade companies will be able to either access the normal capital markets or will be able to access the Fed’s investment-grade facility”, he went on to remark, effectively ruling out a scenario where taxpayer funds would go to drillers that retain market access.

    A question: Isn’t the Fed’s investment-grade facility effectively taxpayer funds?

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