Monthly Review : May 2020

Monthly Review : May 2020


United States

The number of new jobless claims since the start of the pandemic passed 40 million in the last week of May, although continuing claims, which represents the current number of Americans receiving unemployment benefits, fell to 21 million, a sign that workers are returning as some businesses reopen.  The Commerce Department reported that GDP fell at an annual rate of 5.0% in the first quarter, a modest revision lower than its first estimate, and a much more severe contraction is expected in the second quarter – the Atlanta Fed’s GDPNow model forecasts a 51.2% fall.

Euro area

European Commission President Ursula von der Leyen proposed a EUR 750 billion European Recovery Fund to tackle the “unprecedented crisis”.  The fund, which will provide EUR 500 billion in grants and EUR 250 billion of loans, needs the support of all 27 EU member states to go ahead..  The countries hardest hit by the pandemic, Italy and Spain, are pushing for grants to avoid adding more public debt.  Dubbed “Next Generation EU” by the commission, the plan will be negotiated alongside the proposed EUR 1.1 trillion budget for 2021-27   and thus need approval from Brussels.

United Kingdom

Retail sales in the UK fell by the most in record in April as non-essential stores remained closed throughout the month.  The 18.1% fall follows a 5.25% fall in March and includes online sales which increased to 30.7% of all spending.  The annual rate of consumer price inflation slowed to 0.8% in April, from 1.5% a month earlier.  The lowest rate in three years was driven by the sharp fall in energy prices and retailers offering discounts to encourage online purchases.  Brexit tensions flared up and UK negotiators continued to rule out an extension beyond 31 December’s deadline.


The lockdown is costing the Swiss economy CHF 11-17 billion each month according to the Swiss National Bank’s president.  Thomas Jordan warned public debt will jump sharply to fund unemployment insurance and subsidies to keep businesses afloat – around 2 million out of a population of 8.5 million drew some unemployment benefits in April.  The KOF Economic Institute Indicator fell a further 6.5 points to 53.2 in May, pointing to a deep contraction. The lowest reading since the barometer began in the 1970s predicts a harsher recession than in 2008/09.

Central banks:

Federal Reserve (next meeting: June 10th)

Federal Reserve officials have indicated they will hold off from providing any significant monetary measures or guidance at the June meeting to give them more time to assess the economic damage inflicted by the pandemic and the speed and breadth of the eventual recovery.  The Fed has not ruled out using any tools but most members of the FOMC appear sceptical about the effectiveness of negative interest rates.  Fed Chair Jerome Powell repeated his view that the evidence of success in using sub-zero rates elsewhere has been mixed and he is wary of “negative side effects”.

European Central Bank (next meeting: June 4th)

The European Central Bank published its annual financial stability review which included a forecast of Eurozone government budget deficits rising to an average 8 per cent of GDP this year due to the pandemic crisis.  It added aggregate public debt to GDP ratio across the region will surge to more than 100 per cent and warned a reassessment of sovereign risk could reignite pressures on highly indebted countries.  The ECB is expected to increase the size of its EUR 750 billion Pandemic Emergency Purchase Programme (PEPP) in June as the Eurozone heads for its deepest post war recession.

Bank of England (next meeting: June 18th)

The Bank of England revealed the coronavirus pandemic will push the UK economy into its deepest recession in three centuries.  In its monetary policy report it forecast output will fall almost 30 per cent in the first half of 2020 and warned banks that if they restrict lending, the situation will be even worse.  The central bank also porjects the unemployment rate will likely rise to 9 per cent next year, higher than in the 2008-09 financial crisis.  However, despite the very downbeat outlook, the Monetary Policy Committee held off from providing additional stimulus at the 7 May meeting.

Swiss National Bank (next meeting: June 18th)

Swiss National Bank President Thomas Jordan admitted at a virtual event in Zurich that the central bank is intervening more heavily in the foreign exchange market to curb the upwards pressure on the safe haven Franc amidst the coronavirus pandemic.  The SNB’s foreign currency holdings have swelled to CHF 800 billion as a result of the interventions, much larger than the outpiut of the entire Swiss economy.  He also added the bank will continue to consider cutting its deposit further from the current level of -0.75%, already the lowest in the world.

Market Issues:

  • Global stock markets extended their rally through most of May, shrugging off stark economic data and company earnings.  Cyclical and financial stocks led the gains in late May as investors instead focused on economies gradually re-opening and the prospect of a recovery in the second half of the year.  Credit markets also performed strongly with USD investment grade and high yield returning 3% and 4% respectively.
  • The United Kingdom borrowed at negative rates in the gilt market for the first time after the Governor of the Bank of England declined to rule out sub-zero interest rates to a parliamentary committee.  The UK sold GBP 3.8 billion of 3-year Gilts at a yield of -0.003% which was more than twice covered at the auction.
  • It was another historic month for oil as West Texas Intermediate surged almost 80 per cent on the back of the deep supply and production cuts.  The number of active rigs in the US has fallen to 318, from almost 800 at the start of the year, and production has dropped to 2.3 million barrels a day, from a peak of 13.2 million in March.  The near-term demand outlook remains bleak but sentiment was also lifted by sharp rebound in Chinese industrial activity.
  • Argentina extended its deadline for talks to restructure USD 65 billion of foreign debt until 2 June but the both sides remain far apart.  The government is pushing for a standstill on all bond payments for three years and bondholders have countered with a proposal to limit it to one year.  However, the government has softened its original offer which included a 62 per cent haircut on all interest payments and one bondholder group said it was “hopeful that a mutually acceptable solution can be reached”.

Credit Markets:

  • Hertz became the latest high profile casualty of the coronavirus pandemic after its US and Canadian subsidiaries filed for Chapter 11 bankruptcy.  The car rental group, which has more than USD 24 billion of debt, blamed the “sudden and dramatic” collapse in travel demand which had hit its revenue and future bookings hard.  However, it was facing strong headwinds prior to the health crisis and made a loss of USD 58 million last year as ride-hailing companies like Uber disrupted the sector.  It was also more exposed than its global rivals as it owns its fleet of vehicles, rather than using buyback agreements with auto manufacturers, and its troubles were magnified as prices for used cars fell sharply.
  • Rolls-Royce (Baa3/BB) was downgraded to junk status by Standard & Poor’s.  The rating agency expects the iconic British engineering company will materially underperform its previous forecasts due to the collapse in global air passenger traffic.  Rolls-Royce had already revealed plans to cut 9,000 jobs, mainly from its civil aerospace division, as part of a restructuring plan to generate savings of GBP 1.3 billion but the shortfall in earnings will likely be much larger – it generates revenues based on the number of hours its engines are used by airlines.
  • Tencent (A1/A+) raised USD 6 billion in the biggest Asian bond sale so far this year.  The Chinese tech giant split the sale across four tranches ranging from 5 years to 40 years and attracted orders of more than USD 36 billion.  At a time of strained relations between China and the US, Tencent is just one of a number of Chinese issuers that have tapped offshore debt markets in recent weeks, perhaps reflected concerns that access may become more difficult.
  • Anheuser-Busch InBev (Baa1/BBB+) was downgraded one notch to BBB+ by Standard & Poor’s, reflecting concerns that the negative impact of Covid-19 on out-of-home beer consumption will hinder its efforts to deleverage – S&P forecasts revenue generated by the world’s largest brewer will decline more than 15% in 2020.  Prior to the downgrade, AB inBev warned of a “materially worse” second quarter after it sold almost one-third less drinks in April due to the widespread closure of bars and restaurants.  Two of its key markets, Mexico and South Africa, also restricted production of alcoholic drinks.
  • Starbucks (Baa1/BBB+) was downgraded BBB from BBB+ by Fitch ahead of its sale of USD 3 billion of bonds.  Higher debt and lower earnings will increase leverage and Fitch maintained its negative outlook.  It warned the pandemic will weigh on discretionary spending well into 2021 and costs have risen as the company is liable for ‘catastrophe pay’ for employees unable to work and ‘service pay’ to boost wages for those who continue to work.  The coffee chain has reopened almost all its stores in China, its second most important market after the US, but it expects same stores sales will be 15 to 25 per cent lower in this fiscal year.

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