Monthly Review : April 2020

Monthly Review : April 2020


United States

Jobless claims increased by another 3.8 million in the week ending 25 April, bringing the total to more than 30 million since the start of the lockdown.  The staggering number more than eclipses the 22.4 million jobs created since the financial crisis more than a decade ago.  The unemployment rate is expected to climb to more than 10% in April, up from 4.4% in March.  It was revealed that the US economy contracted at an annualised rate of 4.8% in the first quarter, the steepest decline since it shrank 8.4% in the fourth quarter of 2008.  The lockdown has forced households and businesses to cancel, delay or redirect their spending.

Euro area

The Eurozone economy shrank 3.8 per cent in the first quarter, the largest drop on record.  France (-5.8%) and Italy (-4.7%) entered into recession and output in Spain declined 5.2%.  The three nations have led calls for the EU to issue “coronabonds” to tackle the economic fallout from the health crisis but continue to meet strong resistance from other members including Germany and the Netherlands.  French President Emmanuel Macron warned the EU is at risk of collapse as a political project unless it embraces financial solidarity and sets up a joint recovery funds to support the worst affected economies.

United Kingdom

Business closures and social distancing caused manufacturing and services activity to decrease at the fastest rate on record in April as the composite PMI fell to 12.9 from 36 in March – a reading below 50 points to contraction.  The government’s focus on the pandemic has pulled resources from Brexit negotiations and EU chief negotiator Michel Barnier warned talks are heading for failure without significant compromise on fishing rights, state aid and labour market standards.  UK government officials insist the year-end deadline will not be extended.


The Swiss government’s support for small businesses has won widespread praise due to its efficiency.  While similar schemes in the UK, France and Germany have been hampered by overloaded systems and bureaucracy, Switzerland’s CHF 40 billion of emergency loans have been disbursed to small businesses rapidly by the country’s banks.  Companies are eligible for immediate interest free loans worth up to 10 per cent of annual revenue, capped at CHF 500,000, and additional low interest loans, 85 per cent guaranteed by the government.

Central banks:

Federal Reserve (next meeting: June 10th)

The Federal Reserve ramped up its emergency action to support the US economy by adding high yield bonds, via ETFs, to the list of assets it will buy.  The announcement triggered record inflows into lower rated bonds, set to be swelled by fallen angels from the auto, energy and retail sectors.  However, it was also criticised for supporting businesses owned by private equity that specialise in loading companies up with debt.  The FOMC held off from signaling any new policy measures at is meeting on 29 April, although the tone was downbeat as Chairman Jay Powell warned of a lasting medium-term economic fallout.

European Central Bank (next meeting: June 4th)

The European Central Bank left interest rates unchanged at its 30 April meeting but said it is ready to provide more coronavirus stimulus.  ECB President Christine Lagarde warned that “the euro area is facing an economic contraction of a magnitude and speed that are unprecedented in peacetime” and the governing council asserted it is fully prepared to increase the recently launched EUR 750 billion Pandemic Emergency Purchase Programme in size and duration.  The ECB also announced it will expand its emergency long-term loans (PELTROs) to banks at ultra-low rates.

Bank of England (next meeting: May 7th)

Bank of England Governnor Andrew Bailey agreed with the OBR’s forecast suggesting output in the UK economy had contracted 35 per cent since the lockdown began and there is likely to be long-term scarring.  He pulled back from earlier predictions of a “V-shaped” recovery due to the anticpated high levels of unemployment and business failures.  Bailey also voiced concern at the operational delays at banks responsible for disbursing loans to small businesses and persuaded the chancellor to increase the state guarantees from 80 to 100 per cent to ease the logjam.

Swiss National Bank (next meeting: June 18th)

The Swiss National Bank suffered record losses of CHF 38.2 billion from the value of its reserves in the first quarter.  The writedown suggests it intervened heavily to curb the appreciation of the safe haven franc which continued to appreciate amidst the market rout.  However, some of the losses on its foreign currency investments were pared by gains on its gold holdings.  Interventions continued in April as sight deposits parked overnight at the SNB climbed to CHF 650 billion in the week ending 27 April, the biggest weekly increase since January 2015.

Market Issues:

  • US stock markets posted their biggest monthly gains since January 1987 on hopes that economies will reopen soon and pharmaceutical companies are making progress developing coronavirus treatments.  The Dow, S&P 500 and Nasdaq rose 11.1%, 12.7% and 15.4% respectively.
  • West Texas Intermediate oil futures crashed into negative territory for the first time in history as the coronavirus pandemic crushed demand and storage facilities in Cushing, Oklahoma filled to capacity.  Future contracts expiring in May fell to minus USD 40.32 a barrel at one point on 20 April, more than USD 58 lower than the previous trading day’s close.  The spot price for WTI at the end of April was USD 16 a barrel, a 44 per cent drop from a month earlier.
  • Argentina failed to pay make a USD 503 million on interest payments due on 22 April which will trigger a default after a 30-day grace period expires.  The government launched an offer to restructure USD 83 billion of foreign debt earlier in the month but its creditors are unimpressed.  The offer proposes to suspend all debt payments for the next three year and a 62 per cent reduction, or “haircut”, on all interest payments.   Creditors argue the proposal comes without a credible plan for repayment of debt in the future and fear a lengthy and acrimonious restructuring lies ahead.
  • Lebanon’s bondholders face up to losing 70 per cent off the face value of their holdings after the country defaulted on USD 30 billion of foreign currency bonds in February.  Debt restructuring advisors appointed by the government have been tasked with putting together a credible plan to reduce its debt-to-GDP ratio from 175 to 90 per cent by 2027 and to bring in external financial support from the International Monetary Fund.

Credit Markets:

  • US companies sold more than USD 30 billion of sub-investment grade bonds in April, the highest amount in three years, after the Federal announced it will buy high yield Exchange Traded Funds.  Ford, Levi Strauss, Netflix and The Gap were among the group to sell new issues.  US Dollar high yield bonds returned almost 4 per cent in April, the best monthly performance since January 2019.
  • Carnival Corporation (Baa3/BBB-), the world’s largest cruise operator, sold USD 4 billion of bonds, using its fleet of ships as collateral.  The three-year bonds, which will pay an 11.5 per cent coupon, attracted USD 17 billion of orders and will provide the company with desperately needed liquidity whilst it burns around USD 1 billion of cash during the shutdown.  The new bonds will structurally subordinate its existing senior unsecured bonds.
  • Diamond Offshore Drilling (WR/D), with more than USD 2.6 billion of debts, filed for bankruptcy protection, the fifth publically traded oil company to do so in the space of just 30 days.  The offshore drilling company which works with Hess, Occidental, Petróleo Brasileiro and BP blamed the unprecedented impact of the oil price war and the coronavirus pandemic.  Diamond Offshore is 53 per cent owned by Loews Corporation (A3/A).
  • Petróleos Mexicanos (Ba2/BBB) was downgraded two notches by Moody’s from Baa3 to Ba2, the second rating agency to cut Mexico’s state-owned oil company to high yield.  Pemex, with more than USD 105 billion of debt, is the world’s most indebted oil company and fallen angel.  Moody’s criticised the government’s responses to its continued financial and operating problems as insufficient, having previously criticised President Lopez Obrador’s plans to build a USD 8 billion refinery and remove incentives for private companies to participate in the energy sector.  Pemex has USD 6.7 billion of debt repayments due this year.
  • Italy (Baa3/BBB) was downgraded by Fitch to BBB-, the lowest investment grade ratings.  The rating agency said it expects the country’s debt-to-GDP ratio to rise around 20 percentage points to 156 per cent this year as a result of the surge in government to tackle the coronavirus and the forecast 8 per cent contraction of the economy.  Finance Minister Roberto Gaultieri rejected Fitch’s assessment and asserted “the fundamentals of Italy’s economy and public finances are solid”.  The Spread between Italian and German 10-year government bonds widened out from 200 to 235 basis points during the month.
  • Boeing (Baa2/BBB-) was downgraded from BBB to BBB- by Standard & Poor’s on concerns that its earnings and cash flow over the next few years will be much lower than previously expected due to the impact of the coronavirus on aircraft demand.  S&P forecasts negative free cash flow of around USD 20 billion in 2020 despite Boeing suspending its USD 4.6 billion annual dividend and terminating its planned joint venture with Embraer which required a USD 4.2 billion investment.  However, the downgrade didn’t deter Boeing from launching a USD 25 billion bond sale to avert the need for government assistance.  The bond sale comprised of seven tranches with maturities ranging from 3 to 40 years.  The 10-year bond will pay interest of 5.15%.  Last year Boeing paid 2.96% to issue a 10-year bond.

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