The surge in coronavirus cases in some states isn’t part of a ‘second wave’
(…) “We are seeing a notable uptick in identified cases in several states,” Raymond James analysts wrote in a June 15 note to investors. “We expected this uptick and anticipate other states will also see upticks as reopenings continue. This isn’t a second wave, this is another swell that is part of the ‘first wave’ of this virus.”
As states and local governments have eased stay-at-home restrictions over the last month, that may have led to the first significant wave of cases in regions that may not have already experienced large increases in case counts. “We’re now recognizing that we’re not going to see the summer break that we had hoped for,” Wen said. (…)
In May, when lockdown orders began to be lifted, the national daily infection rate was around 2.5%, J.P. Morgan analysts said. Most countries in Asia and Europe waited until daily infection rates were below 1.0%.
Daily infection rates are about 5.0% in Arizona and about 2.3% in Texas, “indicating that “state-specific issues may be in play rather than a generalized problem of community spread,” according to the analysts. (…) (MarketWatch)
R is at or above 1 in about a quarter of U.S. states
- Beijing Struggles to Stem Virus as Cases Spread Beyond Capital
- A warning from South Korea: the ‘fantasy’ of returning to normal life | Free to read
PANDENOMICS
Trump Team Weighs $1 Trillion for Infrastructure to Spur Economy
Empire State Manufacturing Exhibits Unexpected Improvement in June
Economic activity in New York is strengthening. The Empire State Manufacturing Index of General Business Conditions rose sharply to -0.2 during June from -48.5 in May. The rebound far outpaced expectations for an increase to -31.3 in the Action Economics Forecast Survey. The percentage of respondents reporting an increase in business conditions rose to 36.1% from 14.5% in May. The percentage reporting a decline fell to 36.3% from 63.1%. The overall measure is a diffusion index which follows the breadth of change across the state.
Haver Analytics calculates an ISM-Adjusted Index which mimics the construction of the overall purchasing managers’ index. The figure surged upward to 50.0 in June from 40.5 in May. It was the highest level since February.
The subindexes of the report demonstrated uniform improvement. The new orders index rose to -0.6 from -42.5. Thirty-five percent of respondents reported higher orders in June, up from 18% in May, while 36% reported a decline versus 60% last month. The shipments measure rose to 3.3, its highest level since May. The unfilled orders, delivery times and inventories measures rose moderately.
Employment indicators improved modestly and remained below the break-even level of 50. The number of employees index rose to -3.5 from -6.1, its best level in three months and far above April’s low. The percentage reporting improvement in employment rose 18% from 15% in May and the percentage reporting a decline was little changed at 22 %. The average workweek measure rose markedly to -12.0 this month from -21.6 in May.
The prices paid index surged m/m to 16.9 from 4.1, but remained well below earlier highs. Twenty-four percent of respondents reported higher prices while seven percent paid less. The prices received index rose to -0.6 from -7.4.
The Expected General Business Conditions index measure in the Empire State Survey surged to 56.5 from 29.1. It was the highest level in roughly ten years and occurred as expected new orders and shipments jumped. The gain reflected only moderate improvement in employment and a decline in the workweek. Expected prices also rose just slightly as did the capital spending figure.
What these diffusion indices are saying is that conditions are stabilizing at a low level.
US Restaurant Traffic Suddenly Craters Amid Second Wave Fears
After three months of slow but consistent improvement in restaurant dining data in the US and across the globe, in its latest update on “the state of the restaurant industry”, OpenTable today reported the biggest drop in seated restaurant diners (from online, phone and walk-in reservations) since the depth of the global shutdown in March. (…)
More charts from CalculatedRisk:
Cass Freight Index – Shipments
As a measure of economic activity, Cass Freight Index shipment volumes dropped 23.6% vs. year-ago levels (Chart 1), slightly worse than the -22.7% y/y change in April. But the absolute index reading nudged up 1.6% sequentially from 0.923 to 0.938.
May’s shipments index was barely higher than April and still at very poor levels
U.S. rail traffic shows steady week-to-week improvement into June
US CFOs look to rebuild revenue amid worries of a second wave of COVID-19 infections
PwC surveyed 330 US CFOs and finance leaders between June 8-11, 2020.
- Less than a quarter of leaders (24%) anticipate layoffs, down 7% from our last survey, while under a third (30%) expect to implement temporary furloughs—a drop of 6% since our last survey.
- Facilities and general capital expenditures remain targeted — 78% of CFOs whose companies are considering deferring or canceling investments plan cuts here. Planned spending cuts to other areas are slowing somewhat, however: 48% now expect cuts to workforce efforts, down from 62% in March, and half are considering cuts to operations, down from 54%.
- Nearly half (47%) of finance leaders expect revenue declines of more than 10% this year. In that grim forecast is a glimmer of optimism, however: Only 13% of US CFOs are now looking at declines of more than 25%, which is a drop from 20% expecting declines five weeks ago.
- One-third (32%) of US CFOs are very confident in their company’s ability to identify new revenue opportunities.
- 41% look to alter pricing, among other revenue strategies.
- 54% of CFOs plan to make remote work a permanent option, up from 43% in our last survey. Only 26% of leaders are concerned about losing productivity due to remote work now, a significant drop from the beginning of the pandemic (63% in our March survey) — while 49% are trying to improve the remote work experience for their people.
- As they reinvent their businesses, nearly one-third of CFOs (32%) look to tech-driven products and services.
- Half of US consumers tried new brands or products while home during the pandemic, and 5% used telehealth for the first time.
Business Travel Won’t Be Taking Off Soon Amid Coronavirus After months of doing their jobs from home, many executives and employees say all those hours in the sky and nights away from home may not be necessary going forward.
(…) A major decline in corporate travel spending would have vast implications for the nation’s airlines, hotels and rental-car companies. (…) After 9/11, it took the airline industry six years to recover. (…)
“At the end of the day, if the customer says they need to see us, we’re going to go,” she said. “But we’re finding operating this way is considerably more efficient.” (…)
Ad Spending Will Drop 13% This Year, Ad-Buying Giant Says U.S. advertising spending is expected to plunge by 13% this year, GroupM, the world’s largest ad buyer said, but won’t fall as much as what occurred in 2009 following the financial crisis.
(…) One silver lining comes from the coming presidential election, traditionally a boon for ad spending. GroupM estimates that factoring in the effect of political dollars, overall ad spending is expected to fall by 8%. (…) Digital ad spending is expected to fall just 3%, a far cry from GroupM’s December forecast that expected a 13% increase.
Businesses to Slash Overseas Investment Amid Pandemic Risks New overseas investments will fall by 40% this year and as much as 10% next year, according to new United Nations forecasts, as disruptions from the coronavirus push multinationals to bring production closer to home.
(…) Unctad said profits among the 5,000 largest companies that operate internationally are expected to decline by 40% on average. Some industries anticipate losses.
The Geneva-based research body said FDI would only start to recover in 2022, but would remain subdued through the coming decade as businesses adopt a more cautious attitude to globalization—the process in which production has been split up and spread across the world since the 1980s. (…)
On top of those immediate pressures, Unctad said the growing potential of automation, rising economic nationalism and differences in carbon-emissions standards may also play a part in damping foreign investment flows.
That could hurt growth prospects in developing countries, which have relied on attracting foreign investment and the new technology it brings to drive growth and raise living standards for a low-paid workforce.
“The first rungs on the development ladder could become much harder to climb,” said Unctad Secretary-General Mukhisa Kituyi. “This may call for major policy rethink.” (…)
The World Bank warned earlier this month that developing economies entered the coronavirus pandemic in a more vulnerable position compared with the global financial crisis a decade ago. They have more debt, aging populations, weaker demand for commodities and trade tensions that weakened the international flow of goods and services even before the pandemic started, the World Banks said.
Housing Market Around New York City Is Booming Real-estate agents say more home shoppers are looking to buy outside the city, often because they are concerned about a second wave of pandemic-related restrictions.
China is recovering but far too slowly
We are keeping our China GDP forecasts
unchanged at -3.1% YoY for the second
quarter of 2020 and -1.5% for the full year.
Latest figures show that most sectors are still
in deep contraction territory, not least
manufacturing. ING’s Iris Pang says the
Chinese government appears to be wary of
spending more money to help the economy
for fear of racking up even more debt.
Fed Will Amass Corporate Bond Portfolio Using Index Approach The central bank announced a buying scheme to complement existing purchases in exchange-traded funds.
(…) The central bank has deployed a $250 billion lending program to buy outstanding corporate bonds. The central bank said Monday it plans to begin making those purchases on Tuesday by creating a portfolio based on a broad, diversified market index of corporate bonds.
The index will be made up of all the bonds in the $9.6 trillion corporate debt market from companies that satisfy the program’s criteria, including that companies were investment-grade-rated as of March 22 and that securities can be no more than five years in duration.
The Fed began purchasing debt through the program on May 12 by buying exchange-traded funds that invest in corporate debt. It has been buying those assets at a pace of around $300 million a day. (…)
Analysts at Bank of America estimated in April that the Fed could buy up to $419 billion of individual corporate bonds under the criteria it had established, many times more than it could buy by only purchasing exchange-traded funds.
Separately, the Fed announced Monday that a $600 billion effort to lend directly to small and midsize businesses had opened for business. Under that program, banks can sell up to 95% of loans that meet the Fed’s standards to an investment entity established by the Boston Fed. (…)
(via Grant’s)
Investors Are Sitting on the Biggest Pile of Cash Ever Grappling with the most economic uncertainty in decades and a head-spinning stretch of volatility in the U.S. stock market, many investors have rushed into money-market funds.
(…) Assets in the funds recently swelled to about $4.6 trillion, the highest level on record, according to data from Refinitiv Lipper going back to 1992. (…) Other measures, like bank deposits, are also at a high.
(…) overall stock positioning among investors remains among the lowest levels of the past decade, according to data from Deutsche Bank. (…)
Other positioning data shows traders have been pessimistic about the recent rally. As stocks rebounded, leveraged funds like hedge funds have accumulated the most bearish position on S&P 500 futures since 2016, according to Commodity Futures Trading Commission data.
CLOs Are Not CDOs, Not Even During a Pandemic The structured products have their problems but are hardly about to topple the banking system.
(…) I don’t want to spend an entire column on a rebuttal (others already have), so suffice it to say I was skeptical when the big reveal was that Wells Fargo & Co.’s exposure to high-rated CLOs was described this way: “The total is $29.7 billion. It is a massive number. And it is inside the bank.” Never trust absolute dollar figures, no matter how large they may seem. As a percentage of total assets, that’s a mere 1.5%. And, remember, triple-A rated CLOs have famously never defaulted.
The crucial question, then, is whether something is different this time. CLOs at their core are simply bundles of speculative-grade loans, sliced into different tranches, with the lower-rated portions suffering the first losses to protect payments to those invested in the top layer. One of the crucial assumptions behind CLOs is that because the debt is backed by companies of varying size and across disparate industries, the likelihood that all the securities would default at once is highly unlikely. That differentiates them from the CDOs of the past, which, in addition to being more complicated in structure, were exposed entirely to individual borrowers and just one part of the economy: the housing market. (…)
Make no mistake, CLOs are under pressure. Moody’s has placed 77.3% of all U.S. CLO tranches rated B or lower on review for downgrade, along with about 60% of those rated Baa or Ba. A handful of those with the most significant deterioration in their underlying loans could even see their Aa rated portions downgraded. To some, that might seem too close to the triple-A tranche for comfort, even if it’s just 0.8% of the notional amount of the Aa debt.
Still, a downgrade doesn’t equal a default. The fact that not a single top-rated slice is even at risk of a rating cut speaks volumes, considering they collectively make up more than 75% of the notional amount outstanding and are the portions sitting on banks’ balance sheets, both in the U.S. and elsewhere.
Moody’s also casts doubt on whether it will get worse in the coming months. “In recent weeks, the pace of negative corporate rating actions has slowed as our reassessment of ratings based on the shock of the coronavirus and low oil prices has progressed,” analysts led by Peter McNally wrote on June 11. “After the current credit shock materialized in March 2020, the number of global negative rating actions peaked in late March and early April. More recently, these have declined steadily.”
The worst-case scenario, as spelled out by Moody’s, isn’t as dire as it seems. The global 12-month trailing speculative-grade default rate will probably hit 9.5% by March 2021, up from 4.7% last month, and in its pessimistic forecast it’ll reach 16%, higher than at any point in the last 20 years. Drilling down deeper, Moody’s estimates the one-year default rate in the four industries most vulnerable to the coronavirus pandemic with the highest concentrations (on average 1% to 5%) in U.S. CLOs: hotel gaming and leisure, 17.5%; retail, 10.8%; automotive, 15.1%; and durable consumer goods, 15.1%.
Obviously, the next 12 months will be painful for individual holders of those leveraged loans. Moody’s has long predicted that recoveries in a downturn will be lower than the historical average, with first-lien loans recouping closer to 61%, compared with the long-term rate of 77%, and second-lien debt will get just 14% compared with 43%. And, as I wrote last month, funds investing in the riskiest portions of CLOs have suffered a wipeout and haven’t benefited from the rebound in risky assets over the past two months.
Whether speculators face losses is not the question at hand, however. It’s about financial giants like JPMorgan Chase & Co. and Citigroup Inc., two banks flagged as owning $35 billion and $20 billion of CLOs as of March 31, respectively. Setting aside that these are once again absolute numbers, even if Moody’s double-digit default rates over the next year come to pass, investment-grade tranches seem destined to come out unscathed. According to the credit-rating company’s analysis, the cumulative collateral default rate would have to reach 70% to 80% before double-A CLOs take losses, assuming a 60% recovery rate. DoubleLine Capital Chief Investment Officer Jeffrey Gundlach, for one, said on a webcast last week that middle-of-the-capital-structure CLOs were among his picks for most attractive assets, given that he sees a “significant march towards par in their future.”
Certainly, every loan and CLO has its own quirks. Barclays Plc strategists flagged the bankruptcy plans of Acosta Inc. and J.C. Penney Co., which gave CLOs a recovery rate 20 to 30 points lower than other first-lien holders. The problem, they found, was that an aggressive approach from a small group of distressed investors can put CLOs at a disadvantage, in part because many quickly bail on the loans when they’re downgraded, and also because stated investment criteria largely ban purchases of defaulted assets or bridge loans. If this relative lack of flexibility takes a bite out of recovery rates time and again, Moody’s and others may have to reconsider their loss scenarios.
Even still, it’s almost impossible given the evidence to extrapolate widespread losses to the biggest U.S. banks. The Atlantic’s hypothetical stipulates that “later this summer, leveraged-loan defaults will increase significantly,” which goes against the current outlook from Moody’s, and that “holders of leveraged loans will thus be fortunate to get pennies on the dollar as companies default.”
Yes, the equity portions and speculative-grade tranches will face losses. They might even be wiped out entirely. That may seem like a novel concept when the Federal Reserve has taken to backstopping just about all forms of debt, but as S&P Global Ratings has said, that’s just CLOs “working as intended during periods of economic stress.”
There are any number of reasons to fret about America’s recovery from the coronavirus crisis. A repeat financial collapse at the hands of a structured product with a similar sounding acronym isn’t one of them.
PANDEMONIUM
- Australia Blasts China for Creating ‘Disinformation’ in Pandemic
- ‘There are issues we face together’: EU calls for China talks with US
- The European Union plans to set up a bilateral dialogue with the US to deal with China’s “growing assertiveness”, the bloc’s foreign policy chief said after a call with US Secretary of State Mike Pompeo on Monday. (…)
- Germany Slams Trump Troop Withdrawal in New Transatlantic Low
- Chinese Forces Kill 3 Indian Troops During First Deadly Border Clash In Nearly 50 Years
Following days of escalating tensions between the two nuclear-armed neighbors, Indian Army officials confirmed that three troops – an officer and two soldiers, to be more precise – had been gunned down by Chinese forces during a “violent faceoff” in Galwan Valley in the Ladakh region, which rests along the country’s border with China on Monday night. (…)
