Weekly Market Insight

Latest Economic & Market Update 5th May 2020

05th May 2020

Latest Economic & Market Update: Markets react to fresh US & China tensions | Italy begin reopening their economy | Asymmetric recovery in Eurozone

Latest Economic & Market Update
Good Afternoon, it is 5th May 2020 and here is your economic and market update from BlackBee Today we are going to focus on: >  Markets react to fresh US and China tensions.
>  April sees biggest sale of junk bonds in 3 years.
>  Italy begin reopening their economy.
>  US banks take a more cautious tone than Europe regarding provisions for bad loans.
>  Asymmetric recovery in the Eurozone.
>  US Treasury to borrow a record amount in Q2.

Fresh tensions between the US and China saw US markets sink on Friday as investors worried that it would damage the economy which is already under severe strain. Monday saw worries ease as US markets recovered from a fall early in the trading session to finish in positive territory. As European markets were closed on Friday the reaction was delayed which led to European stocks closing in negative territory yesterday. The tech industry has led the rally in recent weeks and on Friday, two of the major players provided a worrying insight. Amazon has warned investors that due to the costs in hiring new workers and protecting employees from the virus, there is a potential operating loss in Q2. Apple has refrained from providing guidance on Q2.

The month of April saw the largest amount of sales in “junk bonds” for three years. Heavily influenced by the FED’s support, US companies sold a total of $32 billion in April compared to $14 billion in the same month last year. Nearly half debt offered in the “junk bond” market is secured against assets. The heavy increase in sales is a reflection of the FED shoring up credit markets.

Monday marked the start of factories and building sites reopening in Italy. Plans for a phased reopening of economies are being released throughout Europe and the US as governments hope to potentially halt the freefall of the economy while also hoping to avoid a second wave of coronavirus. The reopening of economies will prove insightful in terms of employment. We will learn how many people can return to their jobs and for those who have lost their jobs, the level of difficulty in finding new jobs. Governments are under pressure as they face a trade-off between risking another outbreak by reopening the economy or making many job-losses permanent if lockdown gets drawn out. It is looking ever more likely that businesses will have to rethink their business models, which could potentially see a second wave of layoffs.

Provisions for bad loans by European and US Banks have hit their highest levels since 2008. The tone from US banks appears much more cautious. US Banks have boosted reserves by over 350% as provisions reach $25 billion. In comparison, European banks have considerably less set aside with reserves were boosted by 269% to €16 billion. Deutsche Bank stood out among European banks as in the past decade, for at least 7 quarters, they have set aside more for bad loans. Deutsche Bank have only set aside €500 million. Varying business may be used to explain the amounts set aside for each bank, for example, Deutsche Bank have less exposure to consumer credit which would be one of the most vulnerable areas, however, if there is a surge in defaults on loans on their books, the equity buffer might not be enough to sustain a higher than expected level of defaults.

The debate over state aid has heated up as Southern European countries are arguing that recovery in the Eurozone will be asymmetric. So far Germany accounts for over 50% of approved state aid. Over €1.9trillion has been approved to date. Member states are helping companies through injections of equity, which is allowed by the new relaxed rules. Northern countries have much deeper pockets than the Southern countries, therefore they will likely recover faster and shape the asymmetric recovery. The sharp contrast of access to liquidity has led Spain to call on Germany for a common issuance to insure that recovery throughout the Eurozone is equal. A more fragmented Europe may appear as recovery will be clearly visible in Northern countries if recovery remains dependent on access to liquidity in each member state.

In Q2 2020, the US Treasury is set to borrow nearly $3 trillion. This amounts to over five times of what was borrowed in the peak of the 2008 Financial Crisis. It is mainly driven by the expenditure under new legislation which supports individuals and businesses and the deferral of tax payments from households and businesses.

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