Snapshot  September 2020  
  –       COVID-19: Europe started to see a second wave; Vaccine developments progressed
–       Global equities fell, whilst USD rebounded; bond yields dropped
–       Global growth lost momentum
–       Geopolitical tensions grew: Brexit, US politics, US-China relations
  Equities Stoxx50 -2.41%, Stoxx600 -1.48%, DAX -1.43%, CAC -2.91%, FTSEMIB -3.15%, IBEX -3.63%FTSE100 -1.63%, OMX +3.57%, SMI +0.51%S&P 500 -3.92%, Nasdaq -5.72%, Hang Seng -6.82%, Nikkei +0.20%, SHCOMP -5.23% European Sectors Best Performing: Household +3.24%, Retail +2.91%, Autos +2.22%, Healthcare +1.28%Worst Performing: Banks -10.69%, Oil & Gas -9.49%, Insurance -6.68%, Travel & Leisure -5.13% European Themes Best Performing: EU Luxury +5.45% EU General Retail +3.29% US Exposure +1.59% Rising BY Losers +1.04%Worst Performing: Italian Banks -7.90%, EZ Political Uncertainty -7.08%, Beneficiaries of French -6.72%, Rising BY winners -5.10%Eurostoxx 50 namesBest Performing: Kering SA +10.30%, adidas +8.44%, Daimler +7.95%, Unilever 6.16% Worst Performing: Eni SpA -14.26%, BNP -15.29%, Societe Generale  -16.67%, Nokia OYJ -17.74% FTSE 100 namesBest Performing: GVC Holdings PLC +21.11%, DS Smith PLC +13.92%, Smurfit Kappa Group PLC +13.69%, Melrose Industries PLC +13.46% Worst Performing: BP PLC -14.76%, Polymetal International PLC -16.69%, International Consolidated Airlines Group -33.74%, Rolls-Royce Holdings PLC -46.08% Rates UST 2Y yield -0.39bps to 0.13%,UST 10Y yield -2.08bps to 0.68%Bund 10Y yield -12.50bps to -0.52%, Gilt 10Y yield -8.20bps to 0.23%, Italian 10Y yield -22.80bps to 0.87%Main +5.23bps to 59.56bps, XO +21.54bps to 345.68bps, EUR Infla Swap Forward 5Y5Y -0.10bps to 1.14 Foreign Exchange TWI Euro -0.30%, Cable -3.37%, JPM Dollar index +1.03% EURGBP +1.60%, TWI Swiss Franc -0.29%, JPY +0.43%, JP EMFX index -1.68% Commodities Brent -9.56%, WTI -5.61%, Gasoline -5.90%,Aluminium -1.97%, Copper -0.28%, Iron Ore -6.22%, Gold -4.17%, Silver -17.44%  
  Market context 
   EQUITY AND MACRO NARRATIVE(Stoxx600 -1.48%, S&P 500 -3.92%, MSCI -3.59%) Global equity markets retracted in September driven by a combination of a worsening COVID narrative, concerns over the durability of global economic recovery, growing geopolitical risks, and rising US political uncertainty through lack of a fiscal package and growing risks of a contested election outcome. Looking at each of these drivers in detail: i) COVID – A worsening narrative. The COVID infection picture worsened across most of Europe through September. France, Spain, UK were among the worst affected countries all seeing growing infection rates though hospitalization/fatality rates still remained fairly low. The worsening infection picture was met with tighter restrictions and or partial lockdowns across most countries in Europe with concerns growing of even tighter measures to come. In the US, the number of infections/hospitalization rates remained relatively subdued through September, though towards the tail end of the month there were signs of another wave potentially emerging. On a more positive front, after a brief pause, the Oxford vaccine trials were resumed. ii) Global economic momentum showing signs of fading, especially in the DM world. In Europe, while September flash PMIs pointed to continued expansion of the manufacturing sector, the services sector once again lagged (the Eurozone flash manufacturing PMI +2pts to a two-year high of 53.7; flash Services PMIs – 2.9pts, back into contraction territory of 47.6). Growing COVID infections is clearly affecting the economic outlook in the region and our euro area economists revised down their H2 2020 GDP path. In the US, September was a mixed month too with US labour market remaining resilient but some other indicators, for example, flash non-manufacturing PMI (which cooled from 55.0 to 54.6 vs manufacturing which rose from 53.1 to 53.5) pointing to slower growth. From a sentiment perspective, the lack of stimulus was one of the biggest macro concerns and an important factor why our economists cut their Q4 GDP forecast. Globally, the recovery in goods activity is likely to outpace that of services—leaving a considerable sectoral gap by year-end (Figure 1). Spending on durables and inventories is likely to support an overshoot in goods production relative to pre-crisis levels as pent-up demand from lockdowns is worked off. By contrast, we expect headwinds related the pandemic to constrain the service sector recovery, limiting the overall recovery in GDP. Growing geopolitical risks. Geopolitical risks became much more widespread through September. In addition to continued US-China trade hostilities, Brexit uncertainty was back on the agenda and tensions brewed between Germany and Russia too. iv) Rising US political uncertainty. Global investors grappled with US political uncertainty on two angles – one through continued lack of clarity around a fiscal package and another through rising uncertainty over the US election outcome. The growing uncertainty over the fate of the Phase 5 fiscal stimulus package is one of the key factors weighing on the US growth outlook. In addition, the debate around filling of the Supreme court seat, after Ruth Bader Ginsburg’s death, added to the existing uncertainty. On the election front, Democratic candidate Joe Biden maintained a lead in major polls through the month, but the margin narrowed. The US presidential debate on 29th September did little to change the outcome odds but increased the sense of contested election risk.

Equity markets in September:

In Europe, markets remained range bound. France and Spain underperformed in light of a second wave of infections (Stoxx50 -2.41%, Stoxx600 -1.48%, DAX -1.43%, CAC -2.91%, FTSEMIB -3.15%, IBEX -3.63%, FTSE100 -1.63%, OMX +3.57%, SMI +0.51%) whilst Sweden and Switzerland held up the best. Germany outperformed as the country announced an extension to their job subsidy scheme and the manufacturing sector continued to outperform its euro area peers. Spain lagged amid a pick-up in infections (the virus resurgence is most concerning in Spain, which led us to significantly revise our 2H Spanish GDP forecast). The UK continued its underperformance ahead of October’s fiscal cliff and Brexit stalemate.

US equities underperformed (S&P 500 -3.92%, Nasdaq -5.72%) with major indices falling in September, after logging five straight monthly gains. Focus was on the weakness in Big Tech, as the group retracted after driving the market higher since March. Growth actually underperformed while Value/Cyclical stocks fared better than the overall SPX.

In Asia, Japan continued to outperform whilst China fell behind (Hang Seng -6.82%, Nikkei +0.20%, SHCOMP -5.23%). Key drivers for the lagging performance of China equities include: (i) Elevated US/China tensions, especially on the technology front (ii) Stretched valuations required risk rebalancing. Despite the external factor of US Tech correction, the MSCI China P/E has already reached a multi-year high in August at ~15x and surpassed the 2015 peak level. Sector-wise, YTD winners led the corrections, with IT, staples and healthcare falling 6-8% this month. Energy lost 10% given the slowing demand prospects and weakening oil price. Nevertheless, ongoing positive developments, such as a domestic demand recovery, CNY strength and the upcoming 14th Five Year Plan, should provide some support for China equities.
While global equities continue to experience their deepest correction since bottoming in March, focusing only on stock market declines missed the equally-important erosion in cross-asset correlations that has emerged this month. Few of the safe assets are moving in the expected direction: USD is up 2% versus EM FX and 10Y German yields are down ~10bp, but US 10Y & 30Y yields, USD/JPY and EUR/CHF are almost unchanged. Gold is off 6%. So a typical basket of defensives is functioning about as well as fire insurance that covers just one bedroom in the house. 

EUROPEAN SECTORS & THEMESHousehold +3.24%, Retail +2.91% and Autos +2.22% were the best performing sectors Banks -10.69%, Oil & Gas -9.49% and Insurance -6.68% were the worst performing sectors Value L/S -6.22%, Cyclicals vs Def -1.13%, Earnings Momentum L/S +2.66%, 12m Price Momentum L/S +9.70% In Europe, Momentum saw another strong month with the long/short strategy up by +9.7% and Value was once again the worst performing theme down -6.22%. At a sector level, however, this theme was less visible/clear – Retail/Autos, regarded generally as Value sectors were amongst the best monthly performers. At the other end of the spectrum however, Value sectors dominated the worst performing bucket – Banks -10.69%, Oil & Gas -9.49% and Insurance – 6.68% were the biggest laggards.

For the US, S&P 500 Sector Performance:  Outperformers: Materials +1.09%, Utilities +0.80%, Industrials -0.84%, Consumer Staples -1.84%, Healthcare -2.29%, REITs -2.56%, Financials -3.67%, Consumer Discretionary (3.69%). Underperformers: Energy -14.64%, Communication Services -6.48%, Tech -5.42%.

RATES/CREDITU.S Treasury yield fell -2.1bps to 0.68%, US 2yr10yr -1.9bps to 55.3bps; US 10yr30yr 0.0bps to 77.0bps, UK Gilt yield fell -8.2bps  to 0.23%, German Bund yield fell -12.5bps to -0.52%, Ger-It 10yr spread tightened -10.25bps to 138.9bps Bond yields fell as the global rebound slowed and Corporate bond spreads widened (Main +5.23bps to 59.56bps, XO +21.54bps to 345.68bps). Treasury yields fell as election risks mounted and there was lack of a bipartisan stimulus package. European bonds outperformed as the region saw the beginnings of a second wave and central banks adopted a low for long stance. The BOE flirted with the idea of NIRP, not fully ruling it out as an option.

FOREIGN EXCHANGEThe Dollar (DXY) rose +1.89%, The Yen (JPYUSD) rose +0.43%. The Euro (TWI) fell -0.30%The Pound (TWI) weakened -2.62%JP EMFX index -1.68% The Dollar and Yen rose as a safe haven currencies as the COVID backdrop worsened. Intramonth fears of EUR/USD reaching 1.20 caused some caution surrounding Euro strength, but tapered as USD recovered. After a rally in August, the pound fell back to “where it belongs” as the UK made little progress in Brexit talks and threatened its international credibility with the Internal Market Bill. Fiscal stimulus is also fading; the newly announced job support scheme is less generous than the furlough scheme and the end of October is likely to lead to a rise in unemployment. Commodity currencies underperformed as oil fell.
COMMODITIES Brent -9.56%, WTI -5.61%. Gold fell -4.17%, Silver fell -17.44%. Aluminium -1.97%, Copper -0.28% and Iron Ore -6.22% & Steel -5.56%.Oil fell with other cyclical assets with WTI settling down 5.6% but ending just above $40/barrel as rising causes thwarted demand prospects and as supply increased with Libya’s oil industry reopening again. Gold was lower, ending the month below $1,900/oz. Base metals also fell.
July 2020  

–       COVID cases continued to rise in the US, reversing or halting re-opening efforts, whilst more countries globally saw a pick-up in infection rates
–       Global equities were mixed, whilst USD showed weakness; gold and silver reached new highs
–       Global PMIs went to expansionary territory, higher than pre-crisis levels, Q2 earnings season beat, from revised down estimates
–       Stimulus: EU recovery fund, UK fiscal package and pending US fiscal package      
  Overview       Equities
Stoxx50 -1.85%, Stoxx600 -1.11%, DAX +0.02%, CAC -3.09%, FTSEMIB -1.46%, IBEX -4.90% FTSE100 -4.41%, OMX +2.58%, SMI -0.39% S&P 500 +5.51%, Nasdaq +7.37%, Hang Seng +0.69%, Nikkei -2.59%, SHCOMP +10.90%
European SectorsBest Performing: Chemicals +4.84%, Utilities +1.76%, Food & Beverages +1.66%, Basic Resources +1.45%
Worst Performing: Media -7.52%, Telecoms -5.79%, Oil & Gas -5.43%, Banks -5.38%
European Themes
Best Performing: Italian Banks +2.88% COVID Stay @ home +2.53% Growth Long +1.71% Clean Energy Transition +1.56%
Worst Performing: COVID Disruption -6.95%, Beneficiaries of French -6.39%, EU Luxury -6.19%, Euro weak -5.79%
Eurostoxx 50 namesBest Performing: Linde AG +9.83%, Air Liquide +8.72%, SAP SE +7.61%, Unilever 5.99%
Worst Performing: BBVA -13.94%, Bayer AG -14.52%, Telefonica SA -16.46%, Banco Santander -16.83%
FTSE 100 names
Best Performing: Fresnillo PLC +46.48%, Polymetal International PLC +17.30% one of our long, Next PLC +11.36%, Antofagasta PLC +9.59%
Worst Performing: Burberry Group PLC -21.69% one of our shorts, ITV PLC -24.10%, Melrose Industries PLC -25.21%, International Consolidated Airlines Group -25.86%
UST 2Y yield -4.31bps to 0.11%,UST 10Y yield -12.79bps to 0.53%
Bund 10Y yield -7.00bps to -0.52%, Gilt 10Y yield -6.80bps to 0.10%, Italian 10Y yield -24.50bps to 1.01%
Main -5.88bps to 60.69bps, XO -5.02bps to 377.26bps, EUR Infla Swap Forward 5Y5Y +0.04bps to 1.17
Foreign Exchange
TWI Euro +1.86%, Cable +5.52%, JPM Dollar index -2.52%
EURGBP -0.63%, TWI Swiss Franc -0.18%, JPY +1.96%, JP EMFX index +2.41%
Brent +5.22%, WTI +2.55%, Gasoline -1.08%, 
Aluminium +6.58%, Copper +5.69%, Iron Ore +12.57%, Gold +10.94%, Silver +33.95%

Market context
Market update: Equities (Stoxx600 -1.11%, S&P 500 +5.51%, MSCI world +4.68%) were mixed globally. US equities outperformed (S&P 500 +5.51%, Nasdaq +7.37%), helped by big tech and vaccine optimism, despite a pick-up in infections, fears of a second wave, rising US/China tensions and a failure to agree on the 5th US stimulus before 31st July. Europe lagged (Stoxx50 -1.85%,Stoxx600 -1.11%, DAX +0.02%, CAC -3.09%, FTSEMIB -1.46%, IBEX -4.90%, FTSE100 -4.41%) with Spain underperforming amid a rise in infections. In Asia, China outperformed helped by improving data and bullish state media commentaries (Hang Seng +0.69%, Nikkei -2.59%, SHCOMP +10.90%). Economic data continued to improve, with the UK standing out; JPM UK Surprise Index rose 42 points from -9 to 33 versus Europe (JPM Eurozone Surprise Index +10.85 to 30) and US (JPM US Surprise Index -14.26 to 15), yet the country still underperformed amid stifled Brexit talks and a stronger pound. Q2 GDP saw historic declines in the US (-32.9% ar) and Euro area (‑42.8% ar) as expected, whilst China rebounded 56.5% q/q saar from -35.8% q/q saar in 1Q. JPM economists estimate that the global economy contracted 15.6% annualized in 1H20, a decline more than twice that recorded during the global financial crisis. 
For Q2 earnings season, EPS growth has contracted for the second quarter in a row, printing -34% y/y growth in the US, and -23%y/y in Europe. See Q2 Earnings Tracker here. Overall, earnings have beat EPS estimates, however, this is as a result of several companies reducing guidance at the peak of the COVID crisis. 

In terms of themes, Defensives outperformed Cyclicals whilst Value gave way to momentum; Growth also outperformed. In the rates/credit space, bond yields fell over the month as global COVID cases neared 18mn. Peripheral spreads tightened as the €750bn recovery fund was passed, whilst corporate credit spreads also tightened further from June (Main -5.88bps to 60.69bps, XO -5.02bps to 377.26bps). Commodity prices rose: Oil was driven higher as OPEC+ agreed to curb output limits as demand prospects increased. Base metals improved as China continued to rebound, whilst previous metals outperformed with Gold reaching fresh highs of $1,976 per ounce as Treasury yields fell -12.8bps to 0.53%; silver rallied (+33.95%) and reached new highs of $24.49. In FX, the dollar weakened as the USD safe haven bid unwound while the global economy recovered; The pound rallied, helped by fresh stimulus and despite fraught Brexit talks. 
Markets were likely driven by the following
1) Covid-19: July saw of a pickup in new infections in Western Europe, Japan, and other Asian economies where containment had been more effective. In the US, COVID slowed, or in some cases reversed, the US reopening process.
2) Stimulus: EU: The recovery fund added a further €750bn (over 5% of GDP) to be committed over 2021-2023, split between €390bn of grants and €360bn of loans. For Southern Europe/the periphery, the grants amount to an average 1% of GDP stimulus over 2021-25.
UK: Chancellor Sunak announced measures which appear to be worth around 1% of GDP (£21bn) over the next 6-9 months. However, this is still small compared to emergency measures worth 7% of GDP that will be rolling off from 2H20; fiscal policy is still set to turn into a significant net growth drag during 2H20. 
US: Though the US congress failed to meet the July 31st “deadline”, we still anticipate at least an extra $1tn of stimulus spending being passed by Congress. It looks like there will be at least some lapse in the FPUC program that provided an extra $600/week of unemployment insurance through the end of July. FPUC payments accounted for almost 5% of total personal income in June and over 3% of income on average in 2Q. The current proposal by House Democrats calls for around $3tr in spending and includes an extension of FPUC, while the current proposal by Senate Republicans looks for around $1tr of stimulus and reduces the FPUC program. The Democratic plan also calls for significant aid to state and local governments while the Republican plan looks for more aid to small businesses. Both plans call for a new round of stimulus checks. More from M. Feroli here
3) Better than expected earnings season: Q2 earnings continue to print stronger than admittedly-low expectations, with 84% of reporting companies beating expectations in the US and 63% in Europe —
Percentage of S&P500 that has beaten consensus for Q2 (x axis) versus difference between Q2 actual EPS growth and consensus (y axis).

Chemicals +4.84%, Utilities +1.76% and Food & Beverages +1.66% were the best performing sectors. Defensive sectors overall fared better than cyclicals, though Chemicals were helped by a rise in Linde and Air Liquide. Media -7.52%, Telecoms -5.79% and Oil & Gas -5.43% were the worst performing sectors. Value L/S -6.36%, Cyclicals vs Def -2.98%, Earnings Momentum L/S +4.17%, 12m Price Momentum L/S +8.57% Growth and Momentum outperformed value and cyclicals, as bond yields stayed near record lows and precious metals rallied. Though, value and cyclical plays did find some pockets of support from favourable vaccine headlines. For European themes, Italian Banks +2.88%, COVID Stay @ home +2.53%, JP Growth Long +1.71% outperformed as well. Whilst COVID Disruption -6.95%, Beneficiaries of French -6.39%, EU Luxury -6.19% underperformed.
In the US, big tech names were in focus (AAPL +16.5%, AMZN +14.7%, FB +11.7%, GOOGL +4.9% and MSFT +0.7%). The stocks were supported by their earnings growth profiles, balance sheets, leverage to secular trends like e-commerce and work-from-home (which have only been accelerated by the coronavirus outbreak), as well as expectations that they will emerge from the crisis even more powerful.
U.S Treasury yield fell -12.8bps to 0.53%, US 2yr10yr -8.5bps to 41.9bps; US 10yr30yr -9.0bps to 66.3bps Treasuries rallied as the US COVID situation caused many states to reverse or slow down re-openings, and the labour market rebound slowed down with initial jobless claims rising for the last two weeks of July. Data misses (JPM US Surprise Index -14.26 to 15) and uncertainty over the size and scope of further fiscal stimulus also helped. UK Gilt yield fell -6.8bps to 0.10%, German Bund yield fell -7.0bps to -0.52% European bonds underperformed the US as the UK announced a stimulus package worth 1% of GDP and the EU recovery fund worth over 5% GDP were passed. Ger-It 10yr spread tightened -17.61bps to 153.7bps Peripheral spreads tightened as peripheries stood to benefit the most from the recovery fund. 
The Dollar (DXY) fell -4.15% Our FX strategists note that “although the broad dollar sell-off has felt monolithic, there are in fact a multitude of driving factors including: (1) The global V-shaped rebound in growth as shutdown ends and USD safe haven bid unwinds; (2) Europe-centric outperformance of the EUR-bloc on the region’s fiscal and structural optimism; and (3) Negative idiosyncratic US political and fiscal risks reinforcing a sense of inverse US exceptionalism playing out. These factors have mutually reinforced recent USD weakness, but do not necessarily always move in unison, and in fact are unlikely to persist concurrently.” here The Yen (JPYUSD) rose +1.96%, The Euro (TWI) rose +1.86%The Pound (TWI) strengthened +3.06%JP EMFX index +2.41%.

Brent +5.22%, WTI +2.55% Oil prices rose as OPEC+ chose to curb output restrictions from August, and as country re-openings increased demand prospects. US stockpiles also decreased. Gold rose +10.94%, Silver rose +33.95% Gold had the biggest monthly gain since 2012, as the global rebound was threatened by a second wave, and investors weighed a weaker dollar and record low US real yields. +6.58%, Copper +5.69% and Iron Ore +12.57% & Steel +5.33% Base metals continued to improve as China continued its ‘First in, First out’ rhetoric with June macro data confirming that the economy continued to recover; production activity has largely normalized, with domestic demand recovery mainly led by infrastructure, real estate and the auto sectors, along with gradual recovery in consumer spending. (China is an outsized demand factor in base metals, representing 20% – 50% of global demand across metals)
Key Dates
Aug 4
RBA rate announcement
Aug 6
BOE rate announcement
Aug 7
NFP and Unemployment rate (Jul)
Aug 12
RBNZ rate announcement
Aug 14
China Activity Data (Jul)
Aug 20
Norges Bank rate announcement
Aug 21
Flash PMIs (Aug)
Main stories of the month
July saw of a pickup in new infections in Western Europe, Japan, and other Asian economies where containment had been more effective. 

For Europe, the last 3 weeks of July saw a rise in new infection count across the EU 5, with cases increasing in all countries and by 27% in aggregate to the highest level since the middle of May. R Vosser notes that “although we aren’t classifying this reacceleration in daily cases as a second wave, it is clear that further local lockdowns in France, Belgium and even Germany are likely to be needed.” Spain in particular saw a substantial increase in the daily number of new infections as the country tried to deal with infection spikes in at least two regions and continues to be a concern. 
Daily New Infections since Lockdowns were eased for the EU5 Countries
The US continued to see a rise in cases with California, Florida, Arizona and Texas remaining areas of concern. Though, N. Panigirtzoglou states that COVID second wave concerns may be exaggerated. COVID exhibits persistent not season patterns, meaning that this existing COVID situation may not be exacerbated in the winter. 

On the vaccine front, vaccine optimism remained fairly elevated in July. Pfizer and Biontech announced two experimental coronavirus vaccines which received fast track designation from the FDA. The Moderna coronavirus vaccine produced antibodies in all patients tested in a Phase I trial. Results of an early clinical trial of the Oxford candidate revealed that the vaccine generated an immune response. As part of its Operation Warp Speed program, the US government announced multibillion dollar procurement deals with a number of different companies that are close to developing a successful vaccine. 
Looking ahead, among DM economies, we expect Western Europe to outperform the US even though its lockdown was more severe and peak-to-trough fall in GDP was larger. Our research suggests that the region has managed its opening successfully and has broken the chain that links mobility and the virus. By contrast, our US research shows that this link has not yet been broken in most states.
PMIs have largely rebounded, and the global manufacturing PMI is now higher than it was before the pandemic-led lockdowns impacted the global economy.
Flash estimates for the G-4 also suggested a rebound to above pre-crisis levels.
EU: The Euro area flash composite output PMI rose 6.3pts to 54.8 in July. This is the third consecutive increase after the 13.6 April trough, and the series now stands above the pre-virus January-February level (51.4). R. Brun- Aguerre here
UK: The flash PMI for July rose from 47.7 to 57.1. A. Monks here The composite number stood at 53.3 in February.
US: The Markit flash composite PMI rose to 50.0 in July versus 49.6 level in February.
Japan: The Jibun Bank flash composite PMI index rose 3.1pts to 43.9 in July, versus 47.0 level in February. 
The State Department on July 22 ordered the Chinese consulate in Houston closed “to protect American intellectual property and Americans’ private information.” Two days later China demanded the US close its consulate in the southwestern city of Chengdu. The US is conducting a formal review of TikTok, and Trump has suggested he might ban its use in the country (as India has done). With regards to Hong Kong, global financial institutions in particular could face penalties if they knowingly do business with Chinese officials targeted by US sanctions for their involvement in Hong Kong. China has vowed to sanction US officials and entities and take other equivalent countermeasures, without elaborating. Summary from Bloomberg here As the US election gets closer, tensions are expected rise further. 
Mislav notes that we are halfway through the Q2 earnings season, with 50% of companies having reported in both the US and Europe, and 23% in Japan. EPS growth has contracted for the second quarter in a row, printing -34% y/y growth in the US, and -23%y/y in Europe. However, this is still better than the extremely low consensus expectations going into the earnings season. In fact, the percentage of US companies beating EPS estimates is at historical highs of 84%. Of the sample that has reported so far, EPS growth is running at -34%y/y, surprising positively by 17%. Energy and Industrials stand out with the most negative EPS growth, while Defensive sectors have fared better. Topline growth in the US is negative at -10%y/y. 
In Europe, 63% of Stoxx600 companies beat EPS estimates. Current EPS growth is at -23%y/y, surprising positively by +18%. Cyclical sectors, Financials and Energy have done poorly, while Tech has delivered healthy earnings. Revenue growth is also weak at -27%y/y. 
In Japan, 56% of Topix companies beat EPS estimates, with overall growth at -16% y/y. Topline growth is running at -20%y/y this quarter, with 54% of companies having beaten revenue estimates. 
Last quarter saw a record number of companies withdrawing their profit outlooks for the year, given the significant uncertainty brought on by the COVID-19 pandemic. However, as activity has been improving of late, the guidance is also picking up. Out of the 39 companies that have provided guidance updates in the US thus far, most have issued better guidance and only a small proportion of companies have revised their outlooks lower. M. Matejka here

Sunak’s budget announcement: Chancellor Sunak announced measures which appear to be worth around 1% over the next 6-9 months. For job retention scheme Sunak highlighted furlough cannot go on forever, saying ‘it’s in no one’s interest’ and will wind down in October per the current plan. However, there was a new jobs retention bonus announced for employers who rehire furloughed workers- 1k bonus per employee through to Jan (if every worked furloughed goes back to work this will cost £9bn, but that’s unlikely). For job creation, there was a focus on ‘green jobs’, and on housing; Treasury will cut stamp duty on transactions up to £500,000 effective immediately and running until next year. To support vulnerable sectors, a VAT cut from 20% to 5% for hospitality and tourism sectors was added. Lastly, for the month of August the government will give everyone in the UK eat out vouchers worth 50% off, from Monday to Wednesday, up to £10 per head. Overall the budget delivered on most expectations. A. Monks notes that more stimulus measures are likely to be provided alongside the Budget this Autumn, to further smooth the fiscal cliff edge. But it looks increasingly likely that these will be accompanied by tax hikes for next year which are skewed towards higher earners. We expect the fiscal deficit to come in around 16% of GDP for 2020/21. We have a 6% deficit pencilled in for next year, an estimate which incorporates higher taxes and a significant but still incomplete economic recovery. We think fiscal thrust for this year is now looking closer to 8%, with an implied tightening worth around 7% for next year.

As widely expected, the ECB made no policy changes at the July meeting. G. Fuzesi notes that “ECB policy is very accommodative, with rates very low and set to stay very low, and further TLTRO-IIIs and significant asset purchase (APP and PEPP) still to come. This policy setting has helped to stabilize financial markets and is helping to support the economic recovery that is driven by the lifting of COVID-19 restrictions. However, all of this leaves in place big questions about the medium-term inflation outlook, with ECB staff forecasts (from June) showing core inflation far below the target even in 2022 at only 0.9%oya. At the meeting, the ECB acknowledged again that the medium-term outlook look is weak but did not obviously engage with the question of what to do about it. Lagarde also expressed that it’s likely the full PEPP package would be used. We continue to expect the ECB to increase the PEPP envelope by another €750bn during 4Q20 and to innovate further with the TLTRO-IIIs, and would expect the new forecasts at the September meeting to kick off the debate about what to do next.” 
EU Recovery fund: EU leaders agreed on the €750bn stimulus package, composed of joint debt to help member states mitigate the economic downturn. The fund required the unanimous approval of all 27 member states. In the end, it largely came down to offering enough concessions to a group of fiscally hawkish northern countries made up of Austria, Denmark, the Netherlands and Sweden, who pushed for a smaller package. To bring them on board, Merkel, Macron and leaders from Europe’s South agreed to reduce the grants envelope from €500bn as proposed. The emergency fund will give out €390bn of grants and €360bn of low-interest loans. Italy will likely be the biggest recipient with about €82bn in grants and about €127bn in loans. Crucially, the final compromise also included cash rebates for these nations from the EU’s regular budget, reducing their annual net contributions. Denmark, Germany, the Netherlands, Austria and Sweden will get more than €50bn in rebates over seven years. Bloomberg
M. Barr, M. Protopapa highlight that the ‘recovery fund is large relative to the “regular” EU budget and breaks new ground for the region. The periphery is set to be main beneficiary, although smaller countries in Southern and Eastern Europe benefit comparatively more than larger ones. Germany, France, the “frugals” and Ireland are the biggest contributors to the recovery fund. Though far from the EU’s “Hamilton moment” this is an important step in the federal direction.’

The BoJ kept policy unchanged. At the press conference, Governor Kuroda argued that the current level of accommodation was appropriate, and that the banking system was functioning properly. He also added that the BoJ will pay close attention to developments in credit costs, which could rise if the negative effects of COVID-19 persist. But he also argued that even if firms’ solvency becomes a serious issue, this should be addressed by the government and the private business community, not by the BoJ. Although the BoJ remains committed to taking additional action if downside risks were realized, Kuroda’s remarks implied the BoJ sees limited ability to address the pandemic-related hits to growth and inflation. The BoJ appears to think that a plunge in demand due to the COVID-19 crisis will be hard to offset with monetary policy as long as social distancing continues, accepting that inflation will undershoot the target for some time. This pares back our expectation for stronger forward guidance later this year. Y. Mera here
The FOMC had a dovish tone to its statement but did not make any major policy changes, and most importantly, signalled that changes in forward guidance are coming soon. We continue to think that the FOMC will introduce outcome-based forward guidance based on its 2% inflation target at the September meeting. M. Feroli here
June nonfarm payrolls showed an increase of 4.8mn jobs versus 1.8mn expected; this triggered a decline in the unemployment rate from 13.3% in May to 11.1% in June. Labour force participation also increased to 61.5% from 60.8% the prior month. The level of employment last month remains almost 15mn below where it was in February. M. Feroli noted that “the virus’ second wave (or stubborn first wave) has raised doubts as to whether this can be sustained. There is little question that the recovery got off to a bang in May and June, though we are beginning to see risks to our second half 12.0% GDP growth expectation tilt to the downside.”
D. Silver  comments that “there have a been a few signs that the economy has lost momentum in recent weeks as the spread of COVID-19 intensified in many areas and the recent jobless claims data point to some weakening in the labour market. Initial jobless claims increased by 12,000 to 1.434mn during the week ending July 25, which was the second straight weekly increase. While the recent increases have been relatively modest (by COVID-19 standards), they marked the end of a run of fifteen straight weekly declines for the claims data.” here

In its FIFO role, China’s report of a 56.5% ar 2Q20 GDP confirmed that an even a partial normalization in mobility can deliver a strong initial growth rebound. Here, the message is that an effective health care and economic policy response to COVID-19 can deliver a V-shaped recovery. We forecast China’s activity to return to its pre-pandemic growth path by the end of this year. B. Kasman here
MSCI China advanced 8.9% in July, outperforming EM and World by 0.5% and 4.2%, respectively. In particular, domestic A-shares took the lead, with CSI300 rising 14% and reaching a multi-year high before some consolidation from the peak. JPM economists note key drivers for the outperformance: (i) Robust capital inflows over Stock Connect in early July and surging equity/mutual fund issuance driving A-share turnover. (ii) Solid incoming economic data confirmed recovery outlook, driving catch-up of cyclical laggards such as financials and materials. (iii) Accelerated capital market reform, such as refinancing rule revision for STAR and increasing equity investment threshold for insurers. here
OPEC+ decided to taper from the 9.6 mbd cut to a 7.7 mbd reduction. JPM economists note that “an additional 1.2 mbd of bonus cuts implemented by Saudi Arabia, Kuwait and UAE were also ceased. The group envisioned that the 3.1 mbd of tapering will be partially offset by 0.842 mbd of production cuts in Aug and Sep from countries making up for prior under-compliance. Our estimates show that full compliance plus compensation could result in up to 2 mbd of production being potentially taken offline. A pushback of 0.7 mbd of Libyan production also provides some breathing room. Additionally, Russia joined Saudi Arabia in saying extra production will not be exported but rather consumed domestically, as many OPEC+ participants expect an increase in demand for utilities. The main risk to OPEC+’s tapering decision is demand, where stalling mobility data could erase up to 2.6 mbd of gasoline demand growth. Under such a demand scenario, the OPEC+ tapering decision could assist in adding almost 4 mbd to global oil balances, on net.” N. Kaneva here
The ECB extended its recommendation to banks on dividend distributions and share buy-backs until 1 January 2021 and asked banks to be extremely moderate with regard to variable remuneration. It also clarified that it will give enough time for banks to replenish their capital and liquidity buffers in order not to act pro-cyclically.
Month in review May 2020
 –       Most countries peaked in COVID-19 new cases and started easing lockdowns
–       Global Equities rose further while USD declined; oil strongly rebounded
–       Labor market deteriorated and unemployment rose but Global PMI surveys for May bounced back from April’s lows
–       Political tensions between the US, China & Hong Kong rose again
–       Q1 earnings season reflected the magnitude of COVID shock
Stoxx50 +4.18%, Stoxx600 +3.04%, DAX +6.68%, CAC +2.70%, FTSEMIB +2.87%, IBEX +2.52%
FTSE100 +2.97%, OMX +3.29%, SMI +2.10%
S&P 500 +4.53%, Nasdaq +6.17%, Hang Seng -6.83%, Nikkei +8.34%, SHCOMP -0.27%
European Sectors
Best Performing: Basic Resources +7.67%, Construction & Materials +7.55%, Technology +7.10%, Industrials +6.54%
Worst Performing: Insurance -2.31%, Banks -0.52%, Oil & Gas -0.50%, Travel & Leisure -0.39%
European Themes
Best Performing: German domestic plays +10.22% EU General Retail +10.15% COVID Stay @ home +8.21% Beneficiaries of French +7.03%
Worst Performing: European M&A -0.09%, Rising BY Losers +0.50%, JPDEVALU +0.61%, Rising Oil Px Winners +1.16%
Eurostoxx 50 names
Best Performing: Siemens +16.36%, ING Groep +15.93%, adidas +13.38%, BNP 12.48%
Worst Performing: Allianz SE -3.59%, BBVA -6.49%, Eni SpA -6.78%, Societe Generale  -7.21%
FTSE 100 names
Best Performing: TUI AG +37.79%, Ocado Group PLC +36.55%, Hargreaves Lansdown PLC +27.28%, JD Sports Fashion PLC +24.37%
Worst Performing: Compass Group PLC -11.38%, Imperial Brands PLC -12.66%, Micro Focus International PLC -15.57%, Rolls-Royce Holdings PLC -17.70%
UST 2Y yield -3.53bps to 0.16%,UST 10Y yield +1.33bps to 0.65%
Bund 10Y yield +13.90bps to -0.45%, Gilt 10Y yield -4.70bps to 0.18%, Italian 10Y yield -28.70bps to 1.48%
Main -8.44bps to 72.21bps, XO -62.71bps to 428.81bps, EUR Infla Swap Forward 5Y5Y +0.07bps to 0.98
Foreign Exchange
TWI Euro +1.68%, Cable -1.99%, JPM Dollar index -1.59%
EURGBP +3.41%, TWI Swiss Franc -0.36%, JPY -0.58%, JP EMFX index +3.40%
Brent +39.81%, WTI +88.38%, Gasoline +47.02%,
Aluminium +5.66%, Copper +3.04%, Iron Ore +20.10%, Gold +2.60%, Silver +19.34%

Market context
Market update: Equities (Stoxx600 +3.04%, S&P 500 +4.53%), rose further through the month, extending April’s rebound as investors remained optimistic about the economic outlook while shrugging off rising political tensions. As Covid remained front and center and as economies continued to reopen, there was particular strength in the US (S&P 500 +4.53%, Nasdaq +6.17%, Russell +6.36%) and in Japan (Nikkei +8.34%, Topix +6.81%), while Asia underperformed (SHCOMP -0.27%, Hang Seng -6.83%). Europe was mixed (Stoxx50 +4.18%, DAX +6.68%, FTSEMIB +2.87%, FTSE100 +2.97%). In terms of themes, Cyclical outperformed Defensives while Growth gained against Value despite a strong reversal at the end of the month for the latter. In the risk-on mode, Bond yields pushed slightly higher while curves bear steepened and credit/peripheral spreads tightened. Commodity prices jumped while the dollar and Japanese yen dropped.
Markets were likely driven by the following:
1) Covid-19Vaccine & Reopenings: New infections peaked in most countries, though cases still continue to rise globally. As the situation became more manageable governments rebooted their economies, sparking optimism in investors and pushing markets higher. In the US, all 50 states took measures to ease lockdowns (though many activity restrictions remain in place). In Europe, EU5 states continued to ease their strict measures and the positive was that there was overall there no evidence that the lifting of the lockdowns is leading to rising infection levels. Though within Europe Russia experienced a surge of cases. Factories and schools reopened in parts of Europe and Asia.Some negatives come from Asia where numbers picked up in India, South Korea, and some parts of China. In South America numbers picked up as hot spots shifted to developing countries ill-equipped to contain the virus spread.  Latin America now accounts for 40% of daily virus deathsA significant difference for May compared to previous virus hopes was the advancement of a virus vaccine, as investors hoped that one of at least 10 coronavirus vaccines under development will eventually come to market. Responses from CBs and govts continued but none were significantly incremental, although some positives came from Europe as the EC proposed a €750bn recovery fund made up of €500bn in grants and €250bn in loans.
2) Global rebound: China continued its ‘Frist in/first out’ rhetoric, leading the global rebound as May activity showed a large bounce.IP beat expectations in April (+1.6% m/m sa, or 3.9%oya), Fixed investment returned to positive annual growth of 0.8%oya in April, but labor market pressure remains high. Prospects for an economic recovery outside of China improved over the month, with G4 flash PMIs rising across the DM economies in May to 33.1 from an all-time low of 22.3 in April. Though, the state of the economy remained very weak with US unemployment rate for April reaching 14.7%, (highest level in post-war history) and with around 10 million additional people claiming unemployment insurance. Similarly, US retail sales nosedived a record 16.4% in April, a fair bit worse than expectations for a 12% decline. Q1 GDP also showed massive declines (US -5%, UK -2%, Euro Area -14.2%, Jap -3.4%), and Q2 is expected to be abysmal (US -40%, UK -25%, Euro Area -45%, Jap -32%).
3) Rising geopolitical tensions: US/China tensions rose again as well as tensions within Europe as the German court challenged the legality of the ECB’S QE programme and with regards to the aforementioned EU recovery fund. For the US/China tensions, Trump’s ‘Blame China’ Campaign reflected another pillar of uncertainty (recall 2018, 2019), and acted as a headwind for markets. Earlier this year when trade deal was signed that was assumed to be a plateau but it was sensical for Trump to start attacking China again; the US economy was already hurt because of COVID (which has also affected approval ratings and damaged the assuredness of being re-elected), so blame shifted towards China – an easy target. This resulted in a series of retaliatory actions between the two nations (see main stories) and was aggravated as Hong Kong and China relations deteriorated. In Europe, the German court challenged that the ECB acted ultra vires, i.e. beyond its remit, because it did not provide sufficient justification that APP is a proportionate policy measure. The EU recovery fund also caused some tension in the region, as nations such as Austria, the Netherlands, Denmark and Sweden resisted it.

The Dollar (DXY) fell -0.68%, The Yen (JPYUSD) fell -0.58%. The Euro (TWI) rose +1.68%, The Pound (TWI) weakened -2.70%. JP EMFX index +3.40%. The dollar and Japanese yen declined as equities and risky asset rose through the month. The broad USD index finally broke out of its extended sideways range, falling on continued growth optimism. The EUR was lifted by positive negotiations within the EU area after EU commission proposed a €750bn recovery fund, made up of €500bn in grants and €250bn in loans. J.P Morgan FX strategists believe It is premature to fade the rally in EUR on technical grounds alone, yet too early to position for a fundamental extension as well. As a result, our systematic growth model is still defensive/ long USD and we estimate that for this framework to become neutral on USD, growth forecasts need to be stable for four more weeks (FX Macro Quant Monitor). EMFX took advantage of the broad positive environment and the dollar weakness to rally.
Brent +39.81%, WTI +88.38%. Oil jumped as demand in China returned to near pre-virus levels and output curbs continued in the US and elsewhere. Rallying equity markets also supported oil’s rise. State-run Saudi Aramco (which earlier this year initiated a war by offering massive discounts on its crude) raised prices on almost all grades for June. The move came as the kingdom and its OPEC+ partners have embarked on record production cuts in a bid to balance a glutted market. Are Oil Prices Potentially at an Inflection Point? J. Chang hereGold rose +2.60%, Silver rose +19.34%. As the dollar declined, precious metals managed to post some gains in the risk-on environment. Aluminum +5.66%, Copper +3.04% and Iron Ore +20.10% & Steel +5.68%, after China continued its ‘Frist in/first out’ rhetoric, leading the global rebound as May activity showed a large bounce, with Copper getting close to a bull market. Iron ore surged more than 20% as Brazil becomes the world’s second most-infected nation, driving concerns about the impact on miner Vale SA. 
Month in review April 2020  
–       Global Equities bounced from March lows, led by short covering
–       Global Economic data dropped far below the GFC levels as the economy entered the worst recession since WWII
–       Curves flattened around the world but Covid-19 cases rose further
–       Historic OPEC+ deal failed to save oil and prices collapsed with WTI temporarily dipping far below $0       

Overview       EquitiesStoxx50 +5.06%, Stoxx600 +6.24%, DAX +9.32%, CAC +4.00%, FTSEMIB +3.75%, IBEX +2.02%FTSE100 +4.04%, OMX +6.44%, SMI +3.41%S&P 500 +12.68%, Nasdaq +15.19%, Hang Seng +4.41%, Nikkei +6.75%, SHCOMP +3.99%
European Sectors
Best Performing: Autos +13.20%, Travel & Leisure +12.25%, Technology +9.87%, Healthcare +9.35%
Worst Performing: Oil & Gas -1.78%, Utilities +2.09%, Banks +2.20%, Insurance +3.09%
European Themes
Best Performing: JPDEECYC +11.35% European M&A +10.17% JP Value Long +9.24% COVID Stay @ home +8.67%
Worst Performing: French Domestics +2.10%, Italian Banks +2.38%, EU Luxury +2.59%, JPDEEDEF +2.68%
Eurostoxx 50 names
Best Performing: Volkswagen +20.01%, Fresenius SE & Co  +16.80%, Nokia OYJ +15.86%, BMW 14.72%
Worst Performing: Eni SpA -5.49%, Societe Generale  -7.09%, TOTAL SA -7.18%, Banco Santander  -8.14%
FTSE 100 names
Best Performing: Flutter Entertainment +36.02%, Just Eat +35.40%, Ocado +31.52%, Taylor Wimpey +25.15%
Worst Performing: TUI -12.76%, RSA Insurance Group -14.08%, Pearson -16.79%, Hiscox -24.04%
RatesUST 2Y yield -4.99bps to 0.20%,UST 10Y yield -3.02bps to 0.64%Bund 10Y yield -11.50bps to -0.59%, Gilt 10Y yield -12.50bps to 0.23%, Italian 10Y yield +24.00bps to 1.76%Main -15.13bps to 80.66bps, XO -80.25bps to 491.52bps, EUR Infla Swap Forward 5Y5Y -5bps to 0.91
Foreign ExchangeTWI Euro -1.25%, Cable +1.40%, JPM Dollar index -0.03%EURGBP -2.07%, TWI Swiss Franc -0.11%, JPY +0.32%, JP EMFX index -0.76%
CommoditiesBrent -10.72%, WTI -23.13%, Gasoline +21.74%,Aluminium +8.42%, Copper +5.66%, Iron Ore +5.93%, Gold +6.93%, Silver +7.13%     

Equities (Stoxx600 +6.24%, S&P 500 +12.68%). In another very volatile month for financial markets, equities jumped, reversing further some of March weakness. Stocks rose sharply, led by short coverings. Stocks shrugged off ugly economic data and oil prices and were helped by further responses from govts and CBs, whilst Covid curves flattened around the world. Volatility strongly declined through the month although from a very high level, with the VIX and V2X both averaging ~42 while the dollar fluctuated amid the start of earnings season.
There was particular strength in the US (S&P 500 +12.68%, Nasdaq +15.19%, Russell +13.66%), While Europe (Stoxx50 +5.06%, Stoxx600 +6.24%, DAX +9.32%, CAC +4.00%, FTSEMIB +3.75%, FTSE 100 +3.98%) and Asia (Hang Seng +4.41%, Nikkei +6.75%, SHCOMP +3.99%) underperformed. In terms of themes: Value and Cyclicals jumped (led by Autos and Travel & Leisure) against Growth and Defensives (dragged by Utilities and REITs), reversing some of March’s very sharp moves, while Oil & gas co. dropped with oil prices (Brent Jul20 -10.72%, WTI Jun20 -23.13%). Treasuries traded in a tight range (10yr yield fell -3.0bps to 0.64%), the Dollar (DXY) jumped further before reversing to flat, while Credit markets strongly tightened (Main -15bps to 81bps, XO -80bps to 492bps), and precious metals gained (Gold +6.93%).
Markets were likely driven by the followings:
1) Covid-19 & Responses: Covid global cases surged even further, reaching more than three million cases and forcing countries around the world to implement/extend lockdowns and social distancing measures. Numbers improved through the month and curves flattened with most European countries and many US states peaking and with numerous countries announcing schedules for partial reopening at the beginning of May. In particular, Italy, France, Denmark, Austria, Switzerland, Germany, Norway and Belgium while there was limited visibility in the UK as the country continued not to report recoveries and with the limited testing making it hard to call a peak. Responses from CBs and govts were logically smaller after March’s historic announcements, but the Fed did take several more actions to cushion the economy by providing up to $2.3tn in credit to businesses and state and local governments through new lending facilities (in particular the Fed upsized and broadened its APP to include fallen angels (BBs) and High Yield ETFs). The ECB also moved slightly and changed its rules to accept “fallen angel” bonds as collateral to maintain banks’ access to its ultra-cheap liquidity. It also eased conditions in loans while govt increased their fiscal responses. Finally, the BoJ emphasized that it will conduct the maximum easing it can to prevent the sharp deterioration of the economy and decided to expand the credit policies more boldly than expected and increase purchases of JGBs without any limit depending on the needs to maintain the low yield curve.
2) Growth: Forecasts for H1 and also for FY 2020 were sharply cut to numbers far below the GFC levels. Economists now expect global growth to contract by -22.0%saar in Q2 and -4.8%oya in FY20’. Global PMIs for Apr came out largely below consensus and far below the worst point in the GFC (headline and details). In the US, jobless claims spiked to numbers consistent with a 20% unemployment rate in the country and Q1 GDP contracted by -4.8%. In Europe, PMIs, German IFO for Apr dropped as a result of 1) further lockdowns, 2) further deterioration in the labor market, and 3) longer than expected recovery. Some positives came out from China after recent eco reports confirmed its first-in/first-out status: both China Mar & Apr PMIs rebounded from Feb (although details were a key concern). Q1 GDP and Mar activity data came out weak but there were some notable improvements (esp. in IP).3) Oil became a big area of focus this month: First OPEC+ reached a historical agreement in a deal facilitated by Trump to slash output in order to support prices. Then after record oil oversupply (by about 25mbd, so 10x more than a typical oil market imbalance) and related storage concerns drove unprecedented energy price moves, including a 40% drop in Brent to sub-$20/bbl and an intra-week drop in WTI to -$37/bbl. Oil volatility (basis OIV index for 1-month implieds) spiked to over 1400%, which is a degree of price uncertainty never witnessed on a global benchmark 
SECTOR & THEMES: Autos +13.20%, Travel & Leisure +12.25% and Technology +9.87% were the best performing sectors. Autos spiked, lifted by Valeo +39%, Fiat +22% and German companies +15-20%. Oil & Gas -1.78%, Utilities +2.09% and Banks +2.20% were the worst performing sectors. Oil & gas was logically weighed by weak oil prices with heavyweight BP -4%, RDS -5%, ENI -5.5% and Total -7% leading the weakness. Through earnings season, Banks underperformed with Eurozone & peripheral leading the weakness on wider spreads. Natixis -27%, HSBC -9%, STAN -9%, Santander -8%, SocGen -7%, ISP -4%.Value L/S +1.89%, Cyclicals vs Def +8.55%. Earnings Momentum L/S +1.70%, 12m Price Momentum L/S -0.36%. 
In the rally, Cyc jumped against Def while Value strongly outperformed Momentum, partly reversing moves from Mar. Earnings momentum managed to post some gains, Covid [email protected] basket remained amongst the best performers and outperformed Covid-Disrupted companies despite the rebound. Oversold cyclicals and most shorted names also ended up among the best performers as short covering supported the broader market. In the UK, Homebuilders and Consumer baskets strongly bounced while UK Banks and UK Value Traps {JPQSUKVT} largely underperformed.
RATES/CREDITU.S Treasury yield fell -3.0bps to 0.64%, US 2yr10yr +2.2bps to 44.2bps; US 10yr30yr -0.3bps to 64.4bps. Treasuries traded in a tighter range (0.55%-0.75%) as further responses from the Fed, weaker oil prices and very ugly economic data offset the risk-on environment in Global equities. German Bund yield fell -11.5bps to -0.59%, first rising with the markets before declining as economic data in the region came out very ugly and after Lagarde said ECB was prepared to increase PEPP size. Ger-It 10yr spread widened 35.49bps to 234.9bps amid further Euro group negotiations, a downgrade of Italy’s debt from Fitch and after ECB kept monetary policy broadly unch at the Apr meeting with Lagarde not giving clear signals on its asset purchases or OMT. UK Gilt yield fell -12.5bps to 0.23%, in line with core, on very weak numbers
The growth framework remains substantively long USD since early Feb while giving bearish signals for the EUR, CAD and JPY. The Dollar (DXY) fell -0.03%, sharply rose through the month before reversing its gains on month end flows. Overall the currency has remained extremely strong and has also been 2-3x more sensitive (both in terms of correlation and beta) to drops in equity markets than to rallies through this crisis. It has remained very resilient in broad index terms compared to the revival in risk sentiment, which could continue to put some pressure on EMFX currencies & commodities (see Bull vs Bear). The Yen (JPYUSD) rose +0.32% managed to post some gains despite equities pushing higher and the country potentially extending the emergency situation (with further eco downgrades expected). The Euro (TWI) fell -1.25%, dropped through the month on ugly economic data (JPEASI Eurozone -54.63 to -13) and as the Euro Group failed to agree on significant fiscal risk-sharing to cope with the Covid crisis. This underscores the lack of a fiscal union (i.e. debt mutualisation) which many regard as being essential to the long-term viability of the single currency. All countries will see their debt burdens. Italy’s downgrade by Fitch didn’t help. The Pound (TWI) strengthened +1.34%, in a volatile month. Ccy rose alongside equities and helped by seasonality (Apr) and was sometimes dragged lower by ugly numbers (JPEASI UK -33.93 to -5) and further deterioration in Covid numbers with the country lagging behind EU5 in terms of recovery. JP EMFX index -0.76%, mixed performance with some high beta currencies rallying in the risk-on environment and with China numbers pushing the EM surprise indices higher while oil volatilityCOMMODITIES
Brent -10.72%, WTI -23.13% (see main section). Gold rose +6.93%, Silver rose +7.13%, as the environment remained cautious and with lower yields and a pretty flat dollar, precious metals managed to rally, recovering from March selloff. Aluminum +8.42%, Copper +5.66% and Iron Ore +5.93% & Steel +3.02%, rose alongside equities and helped by some positive numbers coming from China (JPEASI China +60.60 to 27) and signs that the Covid crisis is beginning to ease.       Key DatesMay 5RBA Rate AnnouncementMay 7BOE Rate AnnouncementMay 7Norges Bank Rate AnnouncementMay 8Change in NFP and unemployment RateMay 13RBNZ Rate AnnouncementMay 15China Activity Data for AprilMay 21May Flash Composite PMIMay 22China’s National People’s Congress Meeting       Main stories of the month       OPEC+ DEAL FAILED TO SAVE OILOPEC+ agreed on production curbs of 9.7mbpd, equal to 10% of pre-pandemic demand, relative to reference output level. However crude still declined 10%the week of the announcement here.  As storage shortages became more prominent and demand stayed depressed due to COVID-19, oil fell further, with WTI reaching negative territory for the first time ever as the May contract entered its final trading session: Futures in NY traded at around $2 a barrel after sinking to as low as – $40.32. The June contract, however, had trading volumes more than 40 times higher and rose toward $22. The spread between the two reflected the growing fear that those who take physical delivery of crude in the near future may not find any outlet or storage for those barrels as refineries curb operations. Oil rebounded from record wipeout. After this, volatility remained high and WTI took another tumble to below $11 a barrel after the biggest oil ETF unexpectedly began selling all its holdings of the most active contract amid rapidly dwindling storage capacity.June WTI contract roll brought forward•June WTI contract prices are coming under downward pressure earlier than during the dynamics seen in the weeks before the May contract expiry.•It appears that oil funds including ETFs are trying to frontload their June contract roll earlier than normal to avoid a repeat of the price dynamics experienced in the weeks before the May contract expiry. Expectations of frontloading of the June contract roll also intensified today after the S&P, the biggest commodity index provider behind GSCI commodity indices, announced an early move of all its WTI exposure away from June.
GLOBAL DATA REACHED NEW LOWSGLOBAL FLASH DM PMIS PLUMMETED FURTHER(flash) DM PMIs validated the unprecedented magnitude of the COVID-19 shock. The April G-4 flash PMIs plummeted sharply, with the services sector hit especially hard. Readings ranged from 27.0 in the US to 11.7 in the Euro area—reflecting declines of between 11 (Japan) and more than 22 (UK) points from March’s already depressed levels. Manufacturing was not spared, declining in April for each G-4 economy. In contrast to the record declines in the regional Fed surveys in hand, the US flash manufacturing PMI decline was surprisingly more modest than expected. The all-industry output composite for the DM economies fell to 22.3 for April, from 36.7 in March; it had stood at 52.1 in January. Note that if restrictions on activity start to be loosened in the DM during May, as we expect, then next month’s PMIs should rebound appreciably. US DATA
PLUNGED Employment: Initial Jobless claims sky rocketed to record highs of 6.9mn during the week ending March 28 and again to 6.6mn during the week ending April 4. Then in the following weeks, initial claims declined from around 5.2mn (Apr 11) to around 4.4mn during the week ending April 18, coming out close to expectations. The initial claims has been declining for the last three weeks, but the levels of claims filings remain massive compared to pre-virus norms.
Actvity Data:  (US retail salesIP, housing) confirmed a historic collapse in output at the end of Q1Surveys: April survey data (Empire StatePhilly Fed) indicated more was to come. The good news is that May should mark a turn given that COVID-19 infection curves have flattened enough to allow governments to announce schedules for partial reopenings.
The German IFO fell sharply in April, which is not surprising given that the restrictive measures were only implemented during March and were fully in force in April. The IFO expectations index (-10pts to 69.4) did not fall quite as far as the German composite PMI and it also did not fall as far as the last 10% of the responses between the flash and final reports for March. But, that still leaves the IFO looking extremely weak, including relative to the lows in the 2008/9 recession. At the sector level, the declines were very broad-based, with manufacturing holding up only modestly better than services. We stick with our near-term forecasts, which have GDP collapsing 12%q/q saar in 1Q20 and 45%q/q saar in 2Q20. This implies that the IFO will begin to improve in May. 

The NBS manufacturing PMI fell 1.2-pt to 50.8 in April, following the rebound of 16.3-pt in March. Besides, the Caixin/ Markit manufacturing PMI eased 0.7-pt in April, falling below the 50-threhold to 49.4, following the rebound of 9.8-pt in March. Overall, the April manufacturing PMIs confirms further normalization in in manufacturing activity as the domestic virus situation calms down, with increasing policy support for factory re-opening and work resumption. Indeed, beneath the easing in the headline manufacturing PMIs, the output components held up relatively well in April (with modest decline of 0.4-pt for the NBS reading, and rising 0.5-pt for the Caixin/ Markit reading). 

EARNINGS WERE NOT AS BAD AS EXPECTEDEUROPE: Based on 34% of companies that have reported so far, 63% are beating 1Q EPS estimates and 68% are beating revenue estimates. For companies that have reported, 1Q Revenue Growth is around -4.5% and EPS Growth is -17.9%.US: Based on 24% of S&P 500 companies that have reported so far, 42% are beating 1Q earnings and 41% are beating revenue estimates. Earnings have surprised to the downside by -20.2% (vs. 3.3% on avg. through past 4Qs) and 1.5% (ex-Financials). For companies that have reported so far, 1Q Revenue Growth is around 1.5% y/y and Net Income Growth is -21.1%.  EPS estimates are lower: 1Q20 has been revised down -4.7% and 2020 Consensus EPS by -7.0% since the beginning of the earnings season.JAPAN: Based on 18% of companies that have reported so far, 50% are beating 1Q earnings and 44% are beating revenue estimates. For companies that have reported, 1Q Revenue Growth is around -2.1% and EPS Growth is -15.1%.

Month in Review: March

  –       Global Equities plunged in their worst month since the GFC while volatility, bonds and the dollar spiked.–       COVID-19 prompted the eighth recession of the past century, and the steepest global GDP slide since WWII.–       Global Central Banks and Govts took major policy actions to limit financial market stress and cushion household and business income losses.–       Oil fell to its lowest level since 2002 and posted the worst quarter on record after OPEC relationship deteriorated.
  Equities: MXWD -13.73%, Stoxx50 -16.30%, Stoxx600 -14.80%, DAX -16.44%, CAC -17.21%, FTSEMIB -22.44%, IBEX -22.21%FTSE100 -13.81%, OMX -11.17%, SMI -5.28%S&P 500 -12.51%, Nasdaq -7.66%, Hang Seng -9.67%, Nikkei -10.53%, SHCOMP -4.51%European SectorsBest Performing: Healthcare -3.94%, Food & Beverages -8.02%, Retail -9.30%, Chemicals -9.59%Worst Performing: Banks -29.52%, Travel & Leisure -29.13%, Autos -24.33%, Real Estate -21.94%European ThemesBest Performing: Defensives -8.29%, JP Quality Long -10.74%, EU Luxury -11.22%, US Exposure -12.01%Worst Performing: Italian Banks -32.41%, JP European Value Long -29.33%, Rising BY winners -29.23%, EZ Political Uncertainty -30.66%Eurostoxx 50 namesBest Performing: Koninklijke Ahold +0.50%, L’Oreal -0.87%, ASML -2.28%, Sanofi -4.52%Worst Performing: Engie SA -37.38%, Societe Generale -40.02%, ING Groep -44.46%, Airbus -45.11%FTSE 100 namesBest Performing: Ocado Group +14.66%, Fresnillo +10.43%, Reckitt Benckiser +7.50%, J Sainsbury +7.48%Worst Performing: Centrica -47.20%, IAG -54.43%, Melrose Industries -56.30%, Carnival -59.70%RatesUST 2Y yield -66.75bps to 0.25%,UST 10Y yield -47.91bps to 0.67%Bund 10Y yield +13.60bps to -0.47%, Gilt 10Y yield -8.60bps to 0.36%, Italian 10Y yield +42.10bps to 1.52%Main +31.37bps to 95.78bps, XO +268.50bps to 571.77bps, EUR Infla Swap Forward 5Y5Y -0.16bps to 0.96Foreign ExchangeTWI Euro +1.23%, Cable -3.14%, JPM Dollar index +4.17%EURGBP +3.25%, TWI Swiss Franc +0.76%, JPY +0.53%, JP EMFX index -8.37%CommoditiesBrent -54.99%, WTI -54.24%, Gasoline -58.93%,Aluminum -13.12%, Copper -12.49%, Iron Ore -4.82%, Gold -0.54%, Silver -16.15%UK FocusFTSE100 -13.81%, FTSE250 -21.88%, Gilt 10Y yield -8.60bps to 0.36%, Cable -3.14%, EURGBP +3.25%Best Performing: Ocado +14.66%, Fresnillo +10.43%, Reckitt Benckiser +7.50%, Sainsbury +7.48% 
  Market context 
   EQUITY AND MACRO NARRATIVEEquities (Stoxx600 -14.8%, S&P 500 -12.5%): In very extreme moves for financial markets, equities collapsed in March, falling as much as -30% through the month after COVID-19 hit the economy and as govts implemented lockdowns to slow the spread of the virus. Equities pared some of their losses in the last week of the month after govts and central banks responded to the outbreak through large packages of monetary & fiscal stimulus. Markets around the world dropped with MSCI world falling -13.5%US 10yr yields dropping -48bp and with the VIX temporarily spiking to 85 and averaging ~58. Oil (Brent -55.0%) plummeted, also dragged by the Saudi-Russia oil war and Credit markets sharply widened (Main +31.4bps; XO +268.5bps), while even Gold (-0.54%) ended up slightly lower. There was particular weakness in Europe (FTSEMIB -22.4%, DAX -16.4%, Stoxx50 -16.3%, FTSE100 -13.8%), in the US (Russell 2000 -21.9%, S&P 500 -12.5%, Nasdaq -7.7%) while Asia outperformed (SHCOMP -4.5%; Topix -7.1%).Markets were likely driven by the followings:1) COVID-19 spread even faster and officially became a pandemic, with 872,000 numbers of cases and 43,200 numbers of death in 190 countries, forcing countries to implement lockdowns and social distancing measures for weeks which prompted the eighth recession of the past century, and the steepest global GDP slide since WWII. J.P Morgan economists strongly downgraded their eco forecasts, now looking for a 10.5% ar global GDP decline in 1H20: a considerably sharper contraction than the worst two quarters of the GFC, and a -2.6% in FY2020.2) Monetary & Fiscal Stimulus: Global CBs & govts quickly responded to the virus hit through impressive fiscal & monetary measures. Among them: a) In the US, the Fed slashed its benchmark rates to near zero, announced it will conduct QE in an unlimited fashion, brought back the Commercial Paper Funding Facility (CPFF), Primary Dealer Credit Facility (PDCF), Money Market Mutual Fund Liquidity Facility (MMLF), opened FX swap lines with most CBs, and announced some new lending facilities, including the Primary Market Corporate Credit Facility (PMCCF), the Secondary Market Corporate Credit Facility (SMCCF), and the Term Asset-Backed Securities Loan Facility (TALF) while the US govt reached a deal on a $2tn+ fiscal package (~10% of 2020 GDP); b) In Europe, the ECB launched a new €750bn QE fund (PEPP), released more LTROs and a new TLTRO. It also said it would grant banks flexibility in order to encourage more lending while Germany approved a stimulus package worth €750B, including a rescue fund worth €600B. c) In the UK, BoE cut rates by 15bp to 0.1% and boosted QE by £200bn to £645bn while govt unveiled a fiscal package close to 4-5% of GDP.3) Politics: Crude prices plummeted as much as 60%, suffering the worst losses since the Gulf War in 1991, after OPEC negotiations collapsed as Saudi Arabia engaged in a price war with Russia, slashing pricing for its crude by the most in more than 30 years – and ramping output.SECTOR & THEMESHealthcare -3.94%, Food & Beverages -8.02% and Retail -9.30% were the best performing sectors while Banks -29.52%, Travel & Leisure -29.13% and Autos -24.33% were the worsts. In Terms of themes, Value L/S (JPPEVAL Index -14.37%), Cyclicals vs Def (JP2CYDE Index -11.70%), Earnings Momentum L/S (JPPEMOE Index +2.97%), 12m Price Momentum L/S (JPPEMO Index +8.86%). Equities also behaved in a very traditional risk-off mode with investors piling up into Growth, Defensives and Momentum type of stocks while dropping cheap, high beta and commodity exposed companies. The reflation trade Winners/Losers (JP2BOND -21.64%) dropped the most as bond yields touched new lows. Airlines (-36.25%) were logically the worst group this month, falling as much as -60%. COVID [email protected] basket (JPEUCOVO -2.75%) was the best sector while COVID disruption basket (JPEUCOVU -25.05%) was among the worst. EZ Political Uncertainty basket (loser of wider peripheral spread) -30.66% particularly fell.RATES / CREDITU.S Treasury yield fell -47.9bps to 0.67%, US 2yr10yr +19.0bps to 42.0bps; US 10yr30yr +12.3bps to 64.7bps. Strong bull steepening dynamic after the Fed cut rates all the way to zero, launched an unlimited QE and after the US govt agreed on a  $2tn fiscal stimulus program. Economic data and inflation expectations logically dropped. UK Gilt yield fell -8.6bps to 0.36% as BoE cut rates by 15bp and increased its QE. Govt also stepped up with a robust fiscal package. German Bund yield rose +13.6bps to -0.47% Small bear steepening with German bonds underperforming Treasuries after the ECB kept rates unchanged and Germany approved a stimulus package worth €750B, including a rescue fund worth €600B, and despite lower inflation numbers and inflation expectations. Ger-It 10yr spread widened 28.47bps to 199.4bps, in the risk-off environment, spreads logically widened. The number of COVID cases also rose sharply in the country and weighed on Italian bonds. The move reversed in the second part of the month after ECB launched its massive PEPP (even including Greek bonds), a game changer for intra-EMU spread that will keep a lid on any potential widening that could impair monetary policy transmission. In credit, Main +31.37bps to 95.78bps while XO +268.50bps to 571.77bps. while Inflation expectations: EUR Infla Swap Forward 5Y5Y 16bps to 0.96FOREIGN EXCHANGEJPM Dollar index +4.17%. As global eco data deteriorated, the dollar exploded higher in March with JPM dollar index {JPMQUSD} jumping as much as 7.5% to all-time highs. Note that the dollar is an unusual safe-haven currency as it runs a current account deficit and is a net international debtor unlike CHF or JPY. What then underpins the undoubted excess demand/shortage of dollars that inevitably surfaces during periods of market stress up to and including global recessions and which enables the dollar to always thrive on global distress? Our explanation rests on the simple fact the world’s remains on a de facto dollar standard; in particular that three-quarters of cross-border, cross-currency funding is denominated in USD. That is a $12tn dollar short to be squeezed if the business cycle has ended (chart). Also see ‘ The dollar is not overshooting recession norms‘ from D. Hui.Chart: Foreign currency credit to non-bank borrowers, $tn equivalents. Sum of cross-border bank lending and FX-debt issuance.

Month in Review: February

Snapshot of main macro-economic news and events in February 2020

–          Markets started out very strongly in February, shrugging off concerns about the coronavirus story and rising to new all-time highs…

–          …However, the increases in cases outside China led to a sharp selloff at the end of the month and to the worst week for financial markets since the Global Financial Crisis

–          Economic data actually improved globally in a very mixed picture, although many recent data showed a very strong deterioration related to the outbreak

–          Q4 earning season came out stronger than expected

–          In Brexit, tensions rose further as the UK and EU head into March negotiations


Stoxx50 -8.55%, Stoxx600 -8.54%, DAX -8.41%, CAC -8.55%, FTSEMIB -5.39%, IBEX -6.88%

FTSE100 -9.68%, OMX -6.42%, SMI -7.50%

S&P 500 -8.41%, Nasdaq -5.89%, Hang Seng -0.69%, Nikkei -8.89%, SHCOMP -3.23%

European Sectors

Best Performing: Utilities -2.96%, Technology -5.41%, Healthcare -6.74%, Telecoms -6.93%

Worst Performing: Oil & Gas -13.27%, Travel & Leisure -12.76%, Basic Resources -11.73%, Insurance -10.73%

European Themes

Best Performing: Italian Banks -1.37%, Clean Energy Transition -4.96%, JP Momentum Long -6.03%, Cyclicals -6.07%

Worst Performing: EU General Retail -12.60%, EM exposure -11.25%, Rising Oil Px Winners -10.33%, European M&A -11.96%

Eurostoxx 50 names

Best Performing: Iberdrola +4.56%, Deutsche Telekom +1.03%, Schneider Electric -0.02%, Intesa Sanpaolo -2.09%

Worst Performing: Safran SA -14.97%, Siemens -16.52%, Airbus -18.87%, ABI -25.86%


UST 2Y yield -40.02bps to 0.91%, UST 10Y yield -35.82bps to 1.15%

Bund 10Y yield -17.30bps to -0.61%, Gilt 10Y yield -8.20bps to 0.44%, Italian 10Y yield +16.70bps to 1.10%

Main +18.18bps to 64.41bps, XO +72.72bps to 303.27bps, EUR Infla Swap Forward 5Y5Y -0.14bps to 1.12

Foreign Exchange

TWI Euro +0.25%, Cable -2.90%, JPM Dollar index +1.21%

EURGBP +2.41%, EURCHF -0.40%, JPY +0.24%, JP EMFX index -2.59%


Brent -13.14%, WTI -13.19%, Gasoline -6.26%,

Aluminium -5.87%, Copper +1.15%, Iron Ore -6.37%, Gold -0.22%, Silver -7.63%

UK Focus

FTSE100 -9.68%, FTSE250 -8.57%, Gilt 10Y yield -8.20bps to 0.44%, Cable -2.90%, EURGBP +2.41%

Best Performing: Rentokil Initial PLC +3.64%, SSE PLC +1.36%, Mondi PLC +1.03%, Just Eat PLC +0.00%



Markets started out very strongly in Feb, shrugging off concerns about the coronavirus story and rising to new all-time highs. This was slightly supported by a better than expected earnings season, overall positive economic data and the expectation that negative effects of the outbreak would be temporary and localized. However, the increases in cases outside China led to a sharp selloff at the end of the month and to the worst week for financial markets since the Global Financial Crisis. Equity markets around the world dropped with MSCI world falling -8.60%US 10yr yields dropping -36bp and the VIX spiking to 40, but there were particular weakness in Europe (DAX -8.41%, Stoxx600 -8.54%, FTSE100 -9.68%), in the US (S&P 500 -8.41%, Nasdaq -5.89%) and in Japan (Topix -10.30%, Nikkei -8.89%) while Asian markets (Hang Seng -0.69%, Kospi -6.23%, SHCOMP -3.23%) actually outperformed paring some of Jan’s weakness as policy support began rolling out.

Markets were likely driven by the followings1) the Coronavirus spread further outside of China, killing more people in its first two months than died in nine months in SARS 03’, fueling concern about a pandemic and pushing global economists to sharply reduce their Chinese & Global growth expectations while Central banks stepped up. J.P. Morgan’s economists now expect a total 75bp Fed rate cut in March and April while J.P Morgan Strategists remains cautious on equities (APAC & Global).

2) Economic data actually improved globally in a very mixed picture with {JPEASIGL} rising further in Feb and with resilient economic data coming from many part of the world (Global surveys for Jan, Eurozone and UK flash PMIs for Feb, US NFPs for Jan, US business surveys for Feb etc.) but many recent data also showed a very strong deterioration following the coronavirus hit with China Caixin and NBS PMIs for Feb sharply dropping to all-time lows and with the US and Japan Markit PMIs for Feb also taking a large leg lower. Details from the European PMIs also started to show some of the virus impact with strong declines in export orders and a sudden lengthening of delivery times. PMIs for Feb also suggested that the impact could be more disruptive than suggested by the PMI headlines and that we may see the full impact in March.

3a) US Politics: US politics remained in the background with the democratic primary process entering a new phase as progressive candidate Sanders broke away in polling and probabilities at a decisive moment, winning both New Hampshire and Nevada caucuses ahead of Super Tuesday. Separately, Bloomberg qualified for his first debate of the primary season on and performed poorly, leading to a loss of polling momentum over the subsequent days. Joe Biden recaptured some momentum with a big win in the South Carolina primary. 3b) European politics: In Brexit, tensions rose further as the UK and EU head into March negotiations, especially after BoJo repeatedly sent the message that there is ‘no need’ for UK to follow EU rules and after the UK stated it will walk away from trade talks in June if there is no ‘broad outline’ of the deal – adding it ambitiously wants to complete a deal by Sept.


Brent -13.14%, WTI -13.19%, dropped further on concerns the coronavirus will dent crude demand while OPEC and EIA slashed forecasts for global oil demand and signaled the coalition could reach an agreement before meeting beginning of March. Gold declined -0.22%, Silver fell -7.63%, Palladium +14.37%, Aluminium -5.87%, Copper +1.15% and Iron Ore -6.37% & Steel -4.58%. All moves were broadly consistent with the risk-off environment but gold –after spiking to a seven year high- actually collapsed -5% on the last trading session of the month -the most in almost seven years as well- on no major explanation although Bloomberg reported that investors were selling to cover margin calls in other assets. A stronger dollar also likely didn’t help. Palladium, a key component in pollution-control devices for cars and trucks, continued to spike (+31.80% YTD).

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Review of the main news stories and events in February 2020


The outbreak that started in China was largely ignored by markets (continued to rally and reach highs) until the impact showed itself in a more substantial way with Apple lowering its earnings guidance and HSBC missing it profits and announcing job cuts. Then, a massive sell off was triggered as Virus spread outside of Asia very quickly. Outbreaks occurred in Italy, South Korea and Iran, but the alarming part was how quickly the virus spread in these areas and how quickly the death toll rose; Korea put the infectious- disease alert on the highest level after cases increased 20 times over in just 5 days, and the outbreak Italy caused the country to cancel public events and impose a shutdown near Milan, and several other European and Middle Eastern countries proceeded to announce first coronavirus cases. The US warned Americans to prepare for a potential coronavirus outbreak shortly before the number of cases started to rise. Within China the number of cases reported daily stabilised over the month and China started showing sign of recovery, as more companies globally reported nCov was disrupting business. China supported its economy through cash injections and a bail out of its airline industry, and PBOC lowered prime rate by 10bp. Other countries also announced stimulus packages to soften virus impact: Hong Kong, Singapore, Japan, Taiwan, Malaysia, Italy, (potentially) Germany, amongst others. The MOF said to remove the counter tariff on certain US imports, starting from Mar 2. G20 leaders warned of downside risks to the global economy, though the WHO did not declare the Virus as a pandemic. Along-side this there was ongoing hope of a virus cure, providing bursts of hope throughout.

The coronavirus become a notable supply shock due to prolonged factory shutdown in China. Most Chinese provinces shutdown factories in Feb for a few weeks. Most of large state-owned enterprises have reopened. However there was a slower-than-expected normalization among small and medium-sized enterprises.


*      China: We revised down our GDP growth forecast to -3.9%q/q in 1Q (or 3.3%oya), followed by a 15%q/q (Prev 9.3%q/q) or 5.4%oya rebound in 2Q. Meanwhile, we expect policy support will focus on rescue measures for virus-affected sectors and old-fashioned demand side stimulus will remain calibrated and targeted. H. Zhu here

*      Italy: Italy is now set to contract around 2%q/q in 1Q20 (or a bit more) and then bounce in 2Q20. M. Protopapa here

*      Euro Area: We now assume that Euro area GDP will grow only 0.25%q/q in 1Q20 and then rise 2.5%q/q in 2Q20. G. Fuzesi here

*      Japan: We revised down significantly the 1Q real GDP growth of Japan from 0.8%q/q, saar to -0.7%, a second consecutive quarter of negative growth. This will also be a technical recession by the definition used in the US. The effects of the combined efforts of the Japanese gov are causing a larger demand shock for the Japanese economy than a delay in China’s rise in its capacity utilization rate. We expect the rebound of growth thereafter; that is, an upward revision of 2Q real GDP from 2.2% to 2.7% and 3Q from 1.8% to 2.1%. As a result, 4Q20 is expected to be 1.2%oya, 0.2%-pts down from our original projection. H. Ugai here

*      US: The Q2 forecast has been reduced by 0.25%, lowering it from 1.75% to 1.50%. The subsequent rebound of global growth should contribute positively to US growth, though after rounding we leave our estimates from 3Q20 onward unchanged. We estimate most of the drag to come through reduced exports. M. Feroli here

Western EuropeUK and Scandinavia: We downgrade annualized growth in each economy by 0.5%-pt in 1Q while lifting growth in 2Q by an equal amount. This is the same magnitude of revision that we have made to the Euro area, excluding Italy. A. Monks here


*      ECB: We do not expect this to trigger an ECB response as this will be seen as a transitory shock that is not well addressed by monetary policy, and we assume that the virus outbreaks will eventually pass as the flu season ends. The ECB will expect fiscal authorities to take the lead in tackling virus-related hits to growth. A rate cut (for example) would be a blunt tool for dealing with disruptions that are still likely to be localized and company-specific. Fiscal support is much more effective in this situation. G. Fuzesihere

*      Fed: The Fed is now prepared to reduce interest rates this month even though it recognizes monetary policy cannot completely shelter a US economy increasingly threatened by the coronavirus. Powell opened the door to a rate-cut at the Fed’s March 17-18 meeting by issuing a rare statement pledging to “act as appropriate” to support the economy.

*      BOE: nCov implications for UK are potentially more significant as the BoE already had a clear easing bias to begin with. But JPMorgan economists think a cut at the March meeting would only occur if at that point there had been a more significant outbreak in the UK which was triggering travel restrictions and sharp declines in confidence. There is a greater risk of an easing in May when the BoE will be updating its forecasts. A. Monks here

*      BOJ: As long as the BoJ continues to believe that this downturn is temporary, we do not expect further monetary easing. If this shock continues longer and changes the prospect for the recovery from 2Q, the BoJ may ease. H. Ugai here


Earnings delivery was stronger than what was expected by consensus at the start of the quarter. Both the US and Europe saw positive earnings surprises, to the tune of 5% and 2% respectively. Encouragingly, blended EPS growth for S&P500 inflected higher and has moved into positive territory. Positive revisions in earnings have historically been a support for the market. Reassuringly, topline growth has stayed elevated, at +4% in the US. In addition, the proportion of US companies beating sales estimates has risen sharply this quarter. Sales growth in Europe is also positive, but lower than the US, at +2%y/y. Commodity sectors continued to be a significant drag on overall earnings. Ex-energy, earnings growth was stronger in both the US and Europe, at +5%y/y and +6%y/y respectively, which was the best showing since Q4 ’18 – see Fig 2. Earnings growth for Materials and Energy contracted by over 20% in both Europe and the US. On the other hand, Tech, Financials and Defensives fared betterOverall earnings delivery for Cyclicals has lagged Defensives by 7% in the US and by 11% in Europe, consistent with the weaker PMIs in Q4. On the more cautious side, corporate guidances were relatively downbeat this time around. The ongoing Covid-19 outbreak remains a source of concern and was flagged as a key risk by a number of corporates. M. Matejka here


We estimated that the global all-industry PMI would decline 3.5 points in Feb to 48.7, with a 3.2-pts drop in the services component and 4.2-pts in Mfg (by taking the flash G4+ PMI readings). At the global level, the drop in the all-industry PMI to 48.7 is consistent with GDP growth at a 1.2%ar pace, roughly in line with our forecast for 1Q. J. Lupton here

Global flash PMIs for Feb came out extremely resilient in Europe with France, Germany, Peripherals (implied by the Eurozone number) and UK flash PMIs for Feb all beating expectations while the US PMI came out very weak with Composite sharply dropping to 49.6 (vs 53.3) its lowest since 2013. Disappointments came from Japan and Australian numbers were PMIs dropped to multi-years lows – although the moves were partly expected. China’s NBS mfg PMI dropped 14.3pt to a record low of 35.7 in Feb, with a broad-based decline across the major components, reflecting the impact of COVID-19 and factory closure on near-term mfg activity. Non-mfg PMI fell even more significantly, down 24.5pt to a record low of 29.6 in Feb. Caixin China mfg PMI 40.3 vs 46.0 est.

In the US, mfg surveys rose further with Philly Fed and Empire State surveys both jumped while in the URetail sales for Jan jumped, highlighting the ongoing post-elections pickup of the economy.  In Europe, German IFO improved modestly in Feb. The Business Climate came out slightly higher at 96.1, beating expectations and rising from Jan (exp: 95.3, prev: 95.9). Whilst the expectations survey had a big beat and rose to 93.4 (exp: 92.1, prev: 92.9). Current assessment came in a touch higher, but still lower than the Jan fig. at 98.9 (exp: 98.6, prev: 99.1). In terms of GDP, the IFO and PMI were sending somewhat different messages through to Feb; PMI had picked up to a level consistent with GDP growth at a 0.9% pace, while the IFO was still lower at 0.4%. The gap is mainly due to services, where we prefer the PMI’s measure.


The relationship between the UK and EU deteriorated over the month. Johnson government has repeatedly sent the message that there is ‘no need’ for UK to follow EU rules and threatened to revert to WTO terms if EU chiefs refuse to sign off on a Canada-style FTA, with David Frost (UK’s chief Brexit negotiator) emphasising the UK’s independence and dismissing Brussels’ proposal that Britain should abide by EU rules as part of any trade deal. EC’s Ursula von der Leyen said negotiations would be “hard and fair and fast” but that the closer the UK wants to be to the EU, the more of its common rules it would have to abide by. Meanwhile, EU’s chief Brexit negotiator Michel Barnier, handed Johnson an ultimatum warning there will be no trade deal unless the UK agrees to the bloc’s demands on fair competition and fishing and in a response to the EU’s negotiating mandate; Johnson’s office said it will seek to prioritize Britain’s legal freedom from the bloc. The UK then set out their own red line in their negotiation mandate, stating that the it will walk away from trade talks in June if there is no ‘broad outline’ of the deal, and ambitiously wants to complete a deal by Sept. The UK will rely on WTO on rules under an arrangement with the EU similar to Australia’s if progress on a comprehensive deal cannot be made. It is clear that they are going to clash as the two head into negotiations.

M. Barr’s last scenarios here


The oil price fell 20% and tumbled into bearish markets triggered by the Coronavirus. OPEC+ set up an emergency meeting to debate how to effectively respond. Despite their differences, Russian President Putin and Saudi’s Salman bin Abdulaziz both confirmed “readiness to continue cooperation within OPEC+”. The meeting was extended from its 2 day schedule as the group struggled to come up with a solution. Saudi Arabia pushed for a deep short-term cut until June whilst Russia opposed. No decision on oil cuts was made, but the group are set to meet again in Vienna for the OPEC/OPEC + meetings.


The Democratic primary and overall US 2020 election process entered a new phase as progressive candidate Sanders broke away in polling and probabilities at a decisive moment; Sanders won both the New Hampshire Primary and decisively won the Nevada caucuses. Separately, Bloomberg qualified for his first debate of the primary season on and performed poorly, leading to a loss of polling momentum over the subsequent days. Joe Biden recaptured some momentum with a big win in the South Carolina primary. 

 While Sanders as the Democratic nominee-apparent is an early but reasonable baseline now, the perceived probability of a Democratic progressive becoming US president in 2021 arguably has not materially risen. This may be because 1) the fractious nature of the Democratic primary thus far suggests a lower ability to mount a successful campaign versus Trump once the Democratic nominee is confirmed, and also 2) a general wisdom that a less moderate candidate will struggle more to win the national vote—this is what rising betting market odds of Trump’s re-election seem to reflect. There may also be an assumption that the most extreme of Sanders’ policy proposals (from a fiscal-impact perspective) are not practically viable. And so, this is likely why there has yet to be a visible pricing in of a US political discount in the dollar despite Sanders’ surge in the polls and betting markets (among other obvious reasons in the broader global macro backdrop at present). 

Next important catalyst will be Super Tuesday. February primaries only account for about 150 delegates (3.8%) in the nomination process, compared to Super Tuesday’s 1,350 (34%) (with just under 2,000 required to earn a majority and win the nomination). So Super Tuesday will begin to separate candidates not only on perceived momentum but in terms of actual progress toward the delegate majority and will therefore provide the greatest clarity yet on nominee viability. US Elections & FX Monitor here


Italy:  The sense of Stability in Italy that was established after PD won key Emilia-Romagna regional elections was soon shaken by Renzi and later by nCov. Ongoing conflict about legal reform between the populist M5S and the reformist IV escalated as the party opposed the M5S campaign to abolish time limits for criminal trials after an initial verdict. This posed a threat to the coalition as Renzi, the leader of the small IV party, openly challenged PM Conte to pull the plug on the coalition by kicking out IV. Renzi also insisted that a failure to find a solution agreeable to IV over the next two months would eventually lead to a no confidence motion against the M5S minister of justice. The situation still remains heightened, but focus was then shifted to the Virus following an outbreak in Northern Italy. The outbreak has already caused strain on the already fragile government as PM Conte calls for national unity.

With regards to the virus, the location of the virus outbreak is of particular concern because the North is the industrial backbone of Italy, in particular Lombardy, Veneto, Emilia-Romagna and Piedmont. While the small area fully quarantined accounts for only 0.1% of total GDP, Lombardy alone accounts for 20.7% of GDPwhile these four regions combined account for 45.2% of GDPIn terms of policy support, the government has already announced the usual measures activated in the case of natural catastrophes (earthquakes, etc.). The toolkit includes supports for the affected population in the forms of suspension of utilities bills and mortgage payments and for affected firms in the form of work subsidy schemes during the duration of the shock. M. Protopapa here

GermanyElections in the German state of Thuringia sent shockwaves were sent through German politics on a national level after a failed attempt to form a new government post the inconclusive state election in Oct 2019. The left-wing Left Party and the far-right AfD had won more than half of the votes, but no party is willing to work with the AfD and the centre-right CDU and FDP are also unwilling to work with the Left Party. This made it almost impossible to form any kind of government. The situation came worsened when Thomas Kemmerich from the FDP, who only barely made it into the Thuringia parliament with 5% of the votes, was elected to lead the state with the support from the CDU and AfD. While this did not require the CDU and FDP to enter into a formal coalition with the AfD, the fact that they cooperated to elect Kemmerich was enough to cause a crisis. In particular, the CDU parliamentary group in Thuringia defied the direction given by Kramp-Karrenbauer (CDU’s leader and candidate to succeed Merkel in next election) to not work with the AfD. Her authority was further undermined, when a statement made by Merkel on a state visit to South Africa had more impact than Kramp-Karrenbauer’s efforts to manage the fallout.

Subsequently, Annegret Kramp-Karrenbauer surprisingly announced her resignation. The CDU will now elect a new leader (who would also lead the party into the next election) in April. The new leader will replace Kramp-Karrenbauer, who had seen her support fade even before the debacle in Thuringia prompted her to announce her resignation. The new party leader would be the candidate to succeed Merkel after the next election. The key question was whether the earlier-than-expected election of a new CDU leader implied an earlier exit by Merkel as Chancellor which in our view, this is far from certain. G. Fuzesi here  & here


Trump was cleared in his impeachment trial, ending a congressional bid to oust him from office that bitterly divided the US. The Senate, run by the president’s fellow Republicans, voted to acquit him 52-48 on charges of abuse of power and 53-47 on obstruction of Congress. Mitt Romney of Utah was the only Republican senator to cross the aisle and convict Trump, on the first charge of abuse of power. Despite Democratic hopes, two other moderate Republicans, Susan Collins of Maine and Lisa Murkowski of Alaska, did not join Mr Romney in voting to convict the president. (BBC)