Stefano Sciacca

Fri, Apr 3

From Global Pandemic To Credit Crunch

Whilst the total number of positive COVID-19 cases exceeded the 1 million mark globally, the financial markets are stalling and waiting to understand whether the centralised global response will be impactful or not. The narrative is changing, we know the global pandemic has been the trigger for what seems to be an inevitable economic depression. However, this economic downturn is day-by-day shaping into a credit crunch. We have seen an unprecedented spike in both IG and HY spreads, meaning the overall default rate is increasing at high pace.



At the same time, according to Bloomberg, mortgage lenders are preparing for the biggest wave of delinquencies in history. Moody’s Analytics forecast as many as 30% of Americans with home loans, about 15 million people, could cease paying if the US economy remains in lockdown. The difference between our present situation and the 2008 crisis is that this is happening in a matter of weeks and months, whilst the financial crisis, took years to develop.


In the meantime, Wall Street is winning. Trading volume remains high, volatility does not seem to be declining any time soon and the FED is expanding its balance sheet at the highest pace ever recorder in history. Steven Mnuchin said that he would agree to double from 0.5% to 1% the interest rate charged to Small Businesses following the COVID-19 rescue package approved by the government. Basically, what is happening is that the same banks that got bailed out 12 years ago are now asking to charge higher interest rates to the same people that rescued them during the crisis. The same banks that sold $1.6 trillion in securities to the Fed to allow the Central Bank to further inject liquidity into the system, pumping up stock market and credit market. Let’s also not forget that these Small Business Administration loans are backed by the government and do not require collateral, meaning there is no form of intrinsic risk for banks (lenders) in issuing them. Most likely the loans will be forgiven if funds will be proved to be used for payroll costs, mortgage interest, rent or utility payments for two months if businesses retain and rehire labour force.



To conclude, I would like to mention the quite big rally that US10Y Treasuries have been experiencing over the last 2 weeks. The yield currently stands below 0.6% and is quickly approaching the all-time-low of around 0.4%, this being way lower the recent high at 1.27%. Having not registered much interest on this massive move, maybe because investors seem to be more focussed on the Oil dispute (25% rally yesterday following Trump-Saudis call) and on whether the stock market has already bottomed for now. One thing is certain, the month-end and the quarter-end upside pressures are over and the bond sell-off along with the stocks rebound maybe coming to an end. Investors and traders are waiting for a big catalyst/trigger in the upcoming weeks to understand where the market might move to next. The earning season, cut in guidance, estimates downwards revisions leading to multiple spikes, defaults and unemployment all seem potential catalyst candidates to cause sharp moves in the coming months.


Next week our macro spotlight will be on?



  • Factory Orders – DE
  • Construction PMI – DE, FR, IT, Eurozone, UK
  • Consumer Inflation Expectations - US



  • Interest Rate Decision – AUS
  • Industrial Production – DE
  • Halifax House Price Index – UK
  • Ivey PMI – CAN
  • Consumer Credit Change - US



  • Machinery Orders – JAP
  • MBA Mortgage Applications - US



  • Consumer Confidence – JAP
  • GDP Growth – UK
  • Industrial Production – UK
  • Jobless Claims – US
  • Michigan Consumer Sentiment - US



  • Inflation Rate – CHI
  • Inflation Rate – US


Chart of the week



Tweet of the week


“30% price inflation in 15 minutes on crude prices is great news for everyone…

…In the oil & gas industry…

Let's see what they will actually do. “


Fact of the week


The FED added $600bn to its Balance Sheet reaching the unprecedented total value of $5.77tn. The increase equates to an additional $1tn over the last 2 weeks and will likely continue at a $2tn month pace.