Apr 6, 2020

Axios Markets

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Situational awareness: JPMorgan CEO Jamie Dimon released his annual shareholder letter warning of “a bad recession ... combined with some kind of financial stress similar to the global financial crisis of 2008." (Letter)

🎙"The world must be made safe for democracy. Its peace must be planted upon the tested foundations of political liberty. We have no selfish ends to serve. We desire no conquest, no dominion." - See who said it and why it matters at the bottom.

1 big thing: Backed by the Fed, bond investors get bullish

Illustration: Sarah Grillo/Axios

The Fed's massive injections of liquidity have reopened much of the bond market, and after back-to-back weeks in which more than $100 billion flowed out of bond funds, investors have regained their bearings and now see opportunity.

  • But after the hemorrhaging outflows relented last week, bulls may now be sticking their heads out a bit too far.

What's happening: Junk bond funds took in more than $7 billion for the week ended April 1, according to Refinitiv Lipper, setting a new weekly record.

  • Junk bond companies have largely been locked out of issuing new debt, but firms with investment grade ratings have flooded the market with a record $220 billion of new issuance in the last two weeks as the firms desperately seek cash.

Why it's happening: "The Fed came in with its massive bazooka, addressed the liquidity concerns and it’s gone from a buyer’s market to seller’s market," Mike Collins, senior portfolio manager at Prudential's PGIM Fixed Income, tells Axios.

  • "You couldn’t sell a bond before, today you can’t buy a bond."

Yes, but: "While the Fed can have a very direct impact on liquidity… the ability of the Fed to have a major impact on the real economy is very much in question," Mike Swell, co-head of fixed income global portfolio management at Goldman Sachs Asset Management, tells Axios.

  • If the slowdown for businesses lasts just a few months, "you are going to have mid-teens type returns in credit markets ... and it’s a slam dunk," Swell adds.
  • "But if we have global commerce and production stop for nine months to a year, that’s going to be really, really serious for companies that are leveraged."

Flashback: Investors pulled out of bond funds at a record pace during March, data from the Investment Company Institute show.

  • Bond mutual funds and ETFs saw more than $215 billion of outflows during the two weeks ended March 25, surpassing previous record highs by a country mile.

The bottom line: While the Fed has taken unprecedented action, there are significant portions of the bond market where the central bank may not be willing or able to provide funding.

  • "There is a point where investors need to make a decision and have consequences on making risky investments," Tom Simons, money market economist at Jefferies, tells Axios.
  • "If that means defaults on bonds that were already low-rated before [the COVID-19 outbreak] happened, the Fed is likely going to let that happen."
Bonus chart: The Fed's balance sheet keeps rising
Data: Federal Reserve; Chart: Axios Visuals

In just the last three weeks, the Fed’s balance sheet has mushroomed by roughly $1.5 trillion and is now close to $1.3 trillion above its previous record high.

  • With its promise of unlimited quantitative easing, investors are expecting the balance sheet to rise much further.

Watch this space: Credit ratings agencies are beginning to take action and sound the alarm. Moody’s cut its outlook for corporate debt to negative last week, warning of "defaults rising in the coming quarters" and saying there was "no clear turning point yet."

  • S&P Global said it expects a "surge in the corporate speculative-grade default rate to above 10% in the U.S."
  • The last two weeks set a record for the fastest pace of downgrades, Bank of America Global Research pointed out, with net downgrades totaling $560 billion in March.
2. Catch up quick

Wells Fargo announced it had exhausted its $10 billion capacity for lending under the SBA’s Paycheck Protection Program (PPP) after only two days of operation. (Twitter)

Many businesses reported they were unable to access funding from the $350 billion PPP. (Axios)

Nearly 1 million retail workers were furloughed last week. (The Washington Post)

The shock from COVID-19 could push the global economy into deflation territory for the first time in decades. (Bloomberg)

3. Oil traders doubt Russia-Saudi deal, but prices keep bouncing
Data: FactSet; Chart: Axios Visuals

Oil prices have seesawed over the last few days after President Trump inserted himself into a spat between Saudi Arabia and Russia that, in concert with the demand shock from COVID-19, helped torpedo the price of crude in early March.

Driving the news: "Some progress was made toward an agreement on Sunday, according to diplomats, but the lack of participation from the U.S. — the world’s largest producer — could prove to be a stumbling block," Bloomberg reported Sunday.

  • "Despite originally calling for the deal, President Donald Trump on Saturday described OPEC as a cartel and threatened tariffs on foreign oil."

The big picture: Trump's assertion that he could broker an agreement for a production cut of 10 million barrels of oil per day, which would be about 10% of global production, sent prices soaring by as much as 40%.

  • While traders remain incredulous about the likelihood of a deal being made, continued meetings between Saudi and Russian leaders, as well as the broader OPEC+ coalition of the world's largest oil producers, have kept prices bouncing off lows.

Go deeper: Coronavirus crisis tests Trump’s love for cheap oil

4. What top CEOs fear telling America

Illustration: Eniola Odetunde/Axios

Top CEOs, in private conversations and pleas to Trump, are warning of economic catastrophe if America doesn't begin planning for a phased return to work as soon as May, corporate leaders tell Axios co-founders Jim VandeHei and Mike Allen.

  • Several of these leaders said they want to have a hard national conversation about tradeoffs involved in any widespread lockdowns beyond the middle of next month.

Why it matters: The CEOs said that a massive numbers of companies, big and small, could go under if business and government don't start urgent talks about ways groups of workers can return.

  • They know most wouldn't return until June or later, but fear a lack of urgency on many going back sooner.
  • They realize it sounds callous to talk about work when people are scared of death, but believe it's an urgent debate the nation needs. Several are debating going public with this concern, but fear the optics and timing look discordant.

A return to work might start by geography, demography or type of work.

  • The plan likely would include guidelines about use of gloves and masks.
  • It would also err on the side of people who had the virus and healed, as well as those who pass instant antibody tests.

Reality check: Large parts of the South and central U.S. may not hit their peak until May.

Gary Cohn, the first White House economic adviser under Trump, told Axios that startup founders and CEOs are pleading privately: "We just need a realistic timeframe, and we need to talk honestly about it so we can tell our employees."

  • "There are a lot of conversations going on: At what point does a business become unrecoverable?" Cohn said.
  • "Business owners are asking: 'At what point do I just lay my people off and shut down and give the landlord the key?'"
  • "Businesses worry that their employees will be forced to jump at the first job offer, so they can't count on them to come back."

Mark Cuban, owner of the Dallas Mavericks, agreed it's a hot topic of private chats.

Cohn, former president and COO of Goldman Sachs, said entrepreneurs and business titans also worry about depression and addiction issues that have accompanied past economic downturns.

  • "No one wants to talk about this, but can you even get workers back who aren't so addicted or depressed they can actually function?"

What's next: Look for business groups to begin to broach these topics publicly in the next few weeks.

  • "If this goes on too long, the fear builds more and more," a top executive of a global company told Axios. "We need to lay the groundwork for the fear to ebb."
  • As Bloomberg put it, some investors are "willing to risk some horrors to avoid others."

Go deeper: Economists call reopening vs. health a false choice.

Quote: "The world must be made safe for democracy. Its peace must be planted upon the tested foundations of political liberty. We have no selfish ends to serve. We desire no conquest, no dominion."

Why it matters: Spurred by the words above from President Woodrow Wilson, the U.S. officially entered World War I on April 6, 1917.