Europe

Highlights US Corporates: The Fed continues to expand the reach of its extraordinary monetary policies designed to combat the COVID-19 recession, now giving itself the ability to hold BB-rated US high-yield bonds within its corporate bond buying programs. Raise allocations to US BB-rated corporates to overweight, within a neutral overall strategic (6-12 months) allocation to US high-yield. Euro Area Corporates: European investment grade corporate debt has seen significant spread widening over the past month, but spreads have stabilized with the ECB introducing a new asset purchase program with fewer restrictions. Upgrade euro area investment grade corporates to neutral from underweight on both a tactical (0-6 months) and strategic (6-12 months) basis. Favor debt from beaten-up sectors that are already priced for severe economic weakness like Energy, Transportation and non-bank Financials. Central Banks Are A Corporate Bond Investor’s Best Friend Right Now Chart of the WeekThe Fed & ECB Are Supporting Bond Markets The actions of policymakers worldwide to help mitigate the severe economic shock from the COVID-19 recession have helped boost global risk assets over the past couple of weeks. This is particularly notable in US corporate bond markets, where credit spreads have tightened for both shorter-maturity investment grade bonds and Ba-rated high-yield (Chart of the Week). It is not a coincidence that those are the parts of the US corporate bond market that the Fed is now explicitly backstopping through its off-balance-sheet investment programs. Last week, the Fed unveiled yet another “bazooka” to help ease US financial conditions, broadening the scope of its previously investment grade-only corporate bond purchase programs to include Ba-rated high-yield corporate bonds and high-yield ETFs. In Europe, meanwhile, the European Central Bank (ECB) is also providing additional monetary support through increased asset purchases of both government and corporate debt. Those purchases are focused more on the weakest links in the euro area financial and economic chain like Italian sovereign bonds. This has helped to stabilize credit spreads for both Italian government bonds and euro area investment grade corporate debt. This support from policymakers is critical to prevent a further tightening of financial conditions during a severe global recession (Chart 2). The excess return (over government bonds) for the Bloomberg Barclays global high-yield bond index is now down 15% on a year-over-year basis. High-yield corporate bond spreads are well above the lows seen earlier this year on both sides of the Atlantic, across all credit quality tiers. In the US, spreads between credit quality tiers had widened to levels not seen in several years. Within the US investment grade universe, the gap between Baa-rated and Aa-rated spreads had widened from 20bps to 60bps (Chart 3), a level last seen in September 2011, but now sits at 39bps. Chart 2Junk Bonds Already Discount A Big Recession Chart 3The Fed Wants These Spreads To Tighten Looking in the other direction of the credit quality spectrum, the spread between Baa-rated and Ba-rated corporates – the line of demarcation between investment grade and high-yield bonds – had blown out from 132bps in February to 556bps, but is now at 360bps. This is the market pricing in the growing risk of fallen angels being downgraded from investment grade to junk. In our view, the Ba-Baa spread is the best indicator to follow to see if the Fed’s extension of its bond purchase program to high-yield is working to reduce borrowing costs for lower-rated US companies. Both in the US and Europe, we continue to recommend a credit investment strategy that favors the parts of the markets that the Fed and ECB are most directly involved in now. That means staying overweight US investment grade corporate bonds with maturities of less than five years (the Fed’s maturity limit for its bond buying program). It also means staying overweight Italian government debt versus core European equivalents. The Fed’s new extension into high-yield corporates within its buying programs means we need to upgrade our recommendation on US BB-rated high-yield to overweight within our recommended neutral strategic (6-12 months) allocation to US junk bonds. We are making that change on a tactical basis in our model bond portfolio, as well, as can be seen on pages 14-15. As the title of this Weekly Report suggests, buy what the central banks are buying. The Fed’s new extension into high-yield corporates within its buying programs means we need to upgrade our recommendation on US BB-rated high-yield to overweight within our recommended neutral strategic (6-12 months) allocation to US junk bonds. In Europe, there is now scope to also raise allocations to euro area corporate bonds, as well, as we discuss over the remainder of this report. Bottom Line: The Fed continues to expand the reach of its extraordinary monetary policies designed to combat the COVID-19 recession, now giving itself the ability to hold BB-rated US high-yield bonds within its corporate bond buying programs. Raise allocations to US BB-rated corporates to overweight within a neutral overall strategic (6-12 months) allocation to US high-yield. Looking For Value In Euro Area Investment Grade Bonds The outlook for euro area spread product does not have as clean-cut a story as is the case for US credit. The ECB is not explicitly supporting European corporate credit markets to the same degree as the Fed is with its open-ended off-balance sheet investment vehicles. While the ECB has introduced a new large €750bn asset purchase program, the Pandemic Emergency Purchase Program (PEPP), to help ease financial conditions in the euro area, no specific details have yet been provided specifying how much of the PEPP will go towards corporate debt versus sovereign bonds. The ECB has already loosened the country and issuer limit restrictions it has imposed on its existing Asset Purchase Program (APP), however, which means that the central bank will be very flexible with the PEPP purchases. That means helping reduce sovereign risk premiums in Peripheral Europe by buying greater amounts of Italian, Spanish and even Greek government debt. That also likely means buying more corporate debt in the most stressed sectors of the euro area economy, as needed. Greater ECB bond purchases would make euro area investment grade credit – which has seen some value restored after the recent bout of spread widening - more attractive over both tactical and strategic investment horizons. This is true even with much of the euro area now in a deep recession because of COVID-19 lockdowns, which has already been discounted in the poor investment performance of euro area corporates. Greater ECB bond purchases would make euro area investment grade credit – which has seen some value restored after the recent bout of spread widening - more attractive over both tactical and strategic investment horizons. Year-to-date, euro area corporate credit markets have been hit hard by the global credit selloff (Table 1). In total return terms denominated in euros, the Bloomberg Barclays euro area investment grade corporate bond index is down -5.0% so far in 2020. The numbers are slightly better relative to duration-matched euro area government bonds (the pure credit component), with the index excess return down -5.5% year-to-date. At the broad sector level, the laggards so far in 2020 have been the sectors most exposed to the sharp downturn in European (and global) economic growth. In excess return terms, the worst performing sectors year-to-date within the eleven major groupings shown in Table 1 have been Consumer Cyclicals (-8.5%), Transportation (-8.1%), Energy (-7.2%). The best performing sectors are those that would be categorized as less cyclical and more “defensive”, like Utilities (-4.3%), Technology (-4.3%) and Financials (-4.7%). In many ways, this is a mirror image of 2019, when Consumer Cyclicals and Transportation were among the top performers while Technology was the worst performer. Table 1Euro Area Investment Grade Corporate Bond Returns Chart 4Euro Area Corporate Spreads Are Relatively Subdued Vs. Past Credit Cycles When looking at the differences in spreads between credit tiers in the euro area, the gaps are not as wide as in the US (Chart 4). The index spread on Baa-rated euro area corporates is only 44bps above that of Aa-rated credit, far below the 100bps gap seen at the peak of the 2001 and 2011 spread widening episodes and well below the 200bps witnessed in 2008. Looking at the difference between Ba-rated and Baa-rated euro area spreads paints a similar picture, with the gap between the highest high-yield credit tier and lowest investment grade credit tier now sitting at 297bps after getting as wide as 431bps in late March – close to the 500bps peak seen in 2011 but far below the 1000bps levels seen in 2001 and 2007 The broad conclusion looking strictly at credit tiers is that euro area corporates have cheapened up a bit during the COVID-19 selloff, but on a more modest scale compared to previous euro area credit cycles. A similar conclusion is reached when looking at industry-level credit spreads. The broad conclusion looking strictly at credit tiers is that euro area corporates have cheapened up a bit during the COVID-19 selloff, but on a more modest scale compared to previous euro area credit cycles. A similar conclusion is reached when looking at industry-level credit spreads. In Charts 5 & 6, we show the history of option-adjusted spreads (OAS) for the major industrial sub-groupings of the Bloomberg Barclays euro area investment grade corporate indices. Unsurprisingly, spreads look relatively wide for the biggest underperforming sectors like Energy, Consumer Cyclicals and Transportation. The spread widening has been more contained in the better performing sectors like Technology. Chart 5A Mixed Performance For Euro Area Investment Grade Spreads By Industry … Chart 6…. With Spreads Well Below 2001 And 2008 Credit Cycle Peaks When looking at the individual country corporate bond indices within the euro area, the current levels of spreads do not look particularly wide in an historical context. In Chart 7, we show a bar chart of the range of index OAS for the six largest euro area countries (Germany, France, Italy, Spain, the Netherlands, Belgium and Austria). The current OAS is shown within that historical range. The chart shows that current spreads are in the middle of that range for most countries, suggesting some better value has been restored by the COVID-19 selloff but with spreads remaining relatively subdued compared to past euro area credit cycles.1 Chart 7Euro Area Investment Grade Corporate Spreads By Country On a relative basis, investment grade spreads are tightest in France (203bps), the Netherlands (202bps) and Belgium (226bps), and widest in Germany (255bps), Italy (255bps), Austria (251bps) and Spain (234bps). With the ECB already promising greater flexibility in the country allocations of its sovereign bond purchases within the PEPP, Italian corporates may offer the best value within the major euro area countries. With the ECB already promising greater flexibility in the country allocations of its sovereign bond purchases within the PEPP, Italian corporates may offer the best value within the major euro area countries. We can get a better sense of relative corporate bond spread valuation at the country level by looking at the 12-month breakeven spread percentile rankings of those spreads. This is one of the tools we use to assess value in global credit spreads, as measured by historical “spread cushions”. Specifically, we calculate how much spread widening is required over a one-year horizon to eliminate the yield advantage of owning corporate bonds versus duration-matched government debt. We then show those breakeven spreads as a percentile ranking versus its own history, to allow comparisons over periods with differing underlying spread volatility. In Charts 8 & 9, we show the 12-month breakeven spread percentile rankings for Germany, France, Italy, Spain, Belgium and Austria. On this basis, the current level of spreads looks most historically attractive in Germany, Italy and France, with the breakeven spread in the upper quartile versus its history dating back to the year 2000. Spreads in Spain, Belgium and Austria also look relatively wide versus their own history, but to a lesser extent than in Germany, France and Italy. Chart 8German, Italian & French Investment Grade Corporates Offer Better Value On A Breakeven Spread Basis …. Chart 9… Than Spanish, Belgian & Austrian Investment Grade Corporates Chart 10Euro Area Investment Grade Corporate Spreads Are Relatively Wide Across All Credit Tiers So while there are some modest differences in value to exploit within the euro area investment grade corporate bond universe at the country level, there is less to choose from across credit tiers. The 12-month breakeven spreads for Aaa-rated, Aa-rated, A-rated and Baa-rated euro area corporates are all within the upper quartiles of their own history (Chart 10). One other tool we can use to assess value across euro area investment grade corporates is our sector relative value framework. Borrowing from the methodology used by our colleagues at BCA Research US Bond Strategy to assess US investment grade corporates, the sector relative value framework determines “fair value” spreads for each of the major and minor industry level sub-indices of the overall euro area investment grade universe. The methodology takes each sector's individual OAS and regresses it in a cross-sectional regression with all other sectors. The independent variables in the model are each sector's duration, trailing 12-month spread volatility, and credit rating - the primary risk factors for any corporate bond. Using the common coefficients from that regression, a risk-adjusted "fair value" spread is calculated. The difference between the actual OAS and fair value OAS is our valuation metric used to inform our sector allocation ranking. The latest output from the euro area relative value spread model can be found in Table 2. We also show the duration-times-spread (DTS) for each sector in those tables, which we use as the primary way to measure the riskiness (volatility) of each sector. The scatterplot in Chart 11 shows the tradeoff between the valuation residual from our model and each sector's DTS. Table 2Euro Area Investment Grade Corporate Sector Valuation & Recommended Allocation We can then apply individual sector weights based on the model output and our desired level of overall spread risk to come up with a recommended credit portfolio. The weights are determined at our discretion and are not the output from any quantitative portfolio optimization process. The only constraints are that all sector weights must add to 100% (i.e. the portfolio is fully invested with no use of leverage) and the overall level of spread risk (DTS) must equal our desired target. The strongest overweight candidates (a DTS score equal to or greater than that of the overall index with the highest positive valuation residual) are the following euro area investment grade sectors: Packaging, Tobacco, Other Industrials, Media Entertainment, Supermarkets, Integrated Energy, Consumer Cyclical Services and all non-bank Financials (Insurance, REITs, Brokerages and Finance Companies). Against the current backdrop of euro area corporate spreads offering relatively wide spreads on a breakeven spread basis, and with the ECB providing a highly accommodative monetary backdrop that includes more purchases of both government and corporate debt, we think targeting an overall portfolio DTS greater than that of the euro area investment grade corporate bond index is reasonable. On that basis, we are looking to go overweight sectors with relatively higher DTS and positive risk-adjusted spread residuals from our relative value model (and vice versa). Those overweight candidates would ideally be located in the upper right quadrant of Chart 11. Chart 11Euro Area Investment Grade Corporate Sectors: Valuation Versus Risk Based on the latest output from the relative value model, the strongest overweight candidates (a DTS score equal to or greater than that of the overall index with the highest positive valuation residual) are the following euro area investment grade sectors: Packaging, Tobacco, Other Industrials, Media Entertainment, Supermarkets, Integrated Energy, Consumer Cyclical Services and all non-bank Financials (Insurance, REITs, Brokerages and Finance Companies). The least attractive sectors within this framework (negative risk-adjusted valuations) are: Senior Bank Debt, Natural Gas, Other Utilities, Metals and Mining, Chemicals, Construction Machinery, Lodging, Cable and Satellite, Restaurants, Food/Beverage, Health Care, Oil Field Services, Building Materials and Aerospace/Defense. Bottom Line: European investment grade corporate debt has seen significant spread widening over the past month, but spreads should stabilize with the ECB introducing a new asset purchase program with fewer restrictions. Upgrade euro area investment grade corporates to neutral from underweight on both a tactical (0-6 months) and strategic (6-12 months) basis. Favor debt from beaten-up sectors that are already priced for severe economic weakness like Energy, Transportation and non-bank Financials.   Robert Robis, CFA Chief Fixed Income Strategist rrobis@bcaresearch.com Footnotes 1 For the Netherlands, there is a much shorter history of corporate bond index data available from Bloomberg Barclays than the other euro area countries shown in Chart 7. The OAS range only encompasses about seven years of data, while the other countries go back as far as the early 2000s. Recommendations The GFIS Recommended Portfolio Vs. The Custom Benchmark Index Duration Regional Allocation Spread Product Tactical Trades Yields & Returns Global Bond Yields Historical Returns

Highlights The near-term is fraught with risk for US equities and global risk assets. Investors concerned over uncertainty, a slow recovery, and economic aftershocks must also guard against geopolitics. COVID-19 is not a victory for dictatorship over democracies. Democracies face voters and will ultimately improve government effectiveness. President Trump is likely to lose the US election. As this becomes increasingly likely, his policy will turn more aggressive, increasing geopolitical risks – particularly in US-China relations. Stay short CNY-USD. Stay long defense stocks. Feature Chart 1Another Downdraft Is Likely US equity prices have risen 26% since their March 23 low point, but our review of systemic global crises suggests that a re-test of the bottom would not be surprising (Chart 1). A range of mitigating health policies – plus still-growing policy stimulus – will most likely prevent a depression. But a longer than expected economic trough, due to some persistent level of social distancing pre-vaccine, and negative second-order effects, such as emerging market crises, could trigger another wave of selling. Moreover we expect another shoe to drop: geopolitics. A Light At The End Of The Tunnel Governments are starting to get a handle on the COVID-19 pandemic. The number of daily new cases in the European Union, which is most clearly correlated with global equities, has subsided (Chart 2). Chart 2Any Setbacks Will Hit Equity Market Hard The US is also seeing new cases crest. To be safe one should count on a subsidiary spike that could easily set back US equities after a notable stock market rally (Chart 2, second panel). But Europe has shown that social distancing works, which US investors will recognize. Italy’s Prime Minister Giuseppe Conte is expected to begin the gradual loosening of social controls to restart the economy. Since Italy is the hardest hit of the western nations (second only to Spain), its leaders will not relax lockdown measures unless they are sure they can do so safely (Chart 2, bottom panel). Still, if governments loosen controls too soon, they may have to tighten them again. Uncertainty will therefore persist regarding the pace of economic normalization, which is bound to be slow due to the fact that discretionary spending will remain suppressed, as it is today in China, and the special precautions that at-risk populations like the elderly will have to take. Economic stimulus measures are still growing in size. Japan’s stimulus, which we count at 16% of GDP, is smaller than the headline 20% but still very large. We have long argued that Japan was on the forefront of the move toward debt monetization among developed markets, but COVID-19 has accelerated the paradigm shift. The United Kingdom has now explicitly stated that the Bank of England will directly finance government debt. The Spanish government is proposing Universal Basic Income (UBI), which it hopes to make permanent, rather than merely for the duration of the pandemic. The jury is still out on whether the weak Pedro Sanchez government will be able to pass it but the current is in favor of “whatever it takes.” Italy’s Five Star Movement has long advocated universal basic income and is part of a ruling coalition that has received a wave of popular support to combat the crisis. At present only a more limited “income of emergency” is being legislated, in keeping with the more centrist Democratic Party, a coalition partner. But Italy’s devastation creates the impetus for bolder moves, either by this government or a subsequent government in 2021 or after. The European institutions are backstopping these states, at least for now, so any deeper disagreements about climbing down from stimulus will have to wait until the coming years. The EU itself is likely to announce additional fiscal measures, via the European Stability Mechanism, whose austerity requirements will be waived, and the European Investment Bank. We can see a token agreement on “coronabonds” (joint debt issuance by the Euro Area), but investors should not fixate on the eurobond debate. These would require a new mechanism, which is inexpedient, whereas the existing mechanisms are already sufficient to bankroll the huge deficit spending plans that the member states are already rolling out. The United States is negotiating an additional “phase four” package that could range between $500 billion and $2 trillion, meaning anywhere from 2.5% to 10% of GDP in new measures (Chart 3). Our estimate would err on the high side because it will largely consist of the same key elements as the “phase three” $2.3 trillion package: unemployment benefits and cash to households, plus a larger dollop for local governments than in the last package. Chart 3Fiscal Tsunami Is Still Building Congress is scheduled to return to vote the week of April 20, but an early return is entirely possible if the pandemic worsens. If the infection curve is flattening, then Republican Senators may hold out longer in negotiations. Squabbling would cause temporary agitation in equity markets. The Democrats and the Republicans still have a mutual interest in spending profusely: the Republicans to try to salvage their seats through economic improvement by November; the Democrats to prove their election proposition that a larger role for government is necessary. Finally, China is preparing to announce more stimulus. So far Chinese measures amount to only 3% of GDP but this is insufficient given the weakness in China’s economic rebound thus far. The expansion in quasi-fiscal spending (government-controlled credit expansion) is an open question, but we would guesstimate a minimum of 3% of GDP. Dramatic measures should be expected because China is undergoing the first recessionary environment since the Cultural Revolution and President Xi Jinping risks a monumental economic destabilization if he hesitates to shore up aggregate demand, which would ultimately threaten single-party rule. We see little chance of him making this mistake. The problem is that animal spirits and external demand will remain weak regardless, an occasion for disappointments among bullish equity investors. Moreover US-China geopolitical risks are rising again, as discussed below. Our updated list of fiscal measures for 25 countries can be found in the Appendix. Bottom Line: The pandemic is peaking in the US and EU, while more stimulus is coming. This is positive for equity investors with a 12-month time frame but the near-term remains vulnerable to another selloff. Democracies Are Not Less Effective Than Dictatorships The pandemic has given rise to wildly misleading narratives in the financial community and mainstream media about the political ramifications for different nations. Getting these narratives right is important for one’s investment strategy. The most popular is that China “won” – is expanding its global influence – while the United States “lost” – is failing at global leadership. More broadly the authoritarian eastern model is said to be triumphing over the western democratic model. The real distinction among states is whether they were familiar with pandemics emanating from China, the unreliability of China’s transparency and communications, and the need to track and trace infections from the beginning. Thus South Korea, Taiwan, Singapore, Vietnam, and Japan have all had relatively benign experiences and all but Vietnam are democracies, with varying degrees of representation and contestation. Nor is COVID-19 an “eastern” versus “western” thing. Germany did an effective job testing, tracking, and tracing infections as well. Germans are relatively law-abiding and trust Chancellor Angela Merkel and the state governments to “do the right thing.” Canada, with its experience of SARS, has also reacted effectively. Denmark, Austria, and the Czech Republic are already tentatively reopening their economies. Yet the number of new confirmed cases per million people shows that Germany is not wildly different from the US and Italy (Chart 4). The truth is that Italy’s bad fortune alerted the US and G7 states to take the threat more seriously – the US has had good outcomes in Washington State but bad outcomes in highly populated New York. Nor is it true that the American health care system is uniquely terrible in treating patients, as is so widely claimed. US deaths per million are worse than Germany but better than Italy (Chart 5) – and Italy’s health system is also not to blame. Failure of ruling parties to spring into decisive action is the main differentiator. Chart 4US In Line With Italy In New Cases … Chart 5… But Better In Limiting Deaths Chart 6Dictatorships Good At Halting Freedoms Dictatorships have had fewer cases and deaths, if their statistics can be trusted – which is a big if.1 This does not suggest that their governance model is better, but rather that they are better at halting freedoms, such as free movement (Chart 6). North Korea has zero cases of COVID-19. People were already under lockdown. Variation within the dictatorships stems from their policy responses and experience fighting pandemics. China, the origin of several recent outbreaks, has extensive experience. It also has a functional health system, fiscal resources, and a heavily centralized power structure. Iran, however, has less experience and capability. The question now is Russia, which was slow to react and has a growing outbreak, yet has a heavily centralized power structure to flatten the curve. Incidentally domestic risk is an important reason for Russia to cooperate with OPEC on oil production cuts, as we have argued. These points can be demonstrated by comparing COVID-19 deaths per million to each nation’s health capabilities and underlying vulnerability to the disease. Note that our intention is to highlight the role of policy in outcomes, not to attempt a full explanation of an epidemiological phenomenon. In Chart 7A, we judge health capacity by health spending per head and life expectancy at the age of 60. Nations that spend a lot per person, and whose people live longer, have better health systems. Yet many of these states are seeing the highest number of deaths because they are European and Europe was the epicenter of the outbreak. Chart 7ARich, Healthy Countries Got Hit Hardest Because Unprepared The US ranks right along with Germany and Sweden.2 Policy responses – early testing, tracking, and tracing – explain why South Korea has far fewer deaths than Italy and Spain on a population-weighted basis. However, the underlying conditions still matter, as the US’s health system, travel bans, and distance from the crisis produced better outcomes than its other policy responses would have implied. These data will be more accurate once the infection curve has flattened across the world. The situation is changing rapidly. If the US rises up in deaths per capita, it will be because of its slow responses, or subsequent policies. The same goes for emerging market economies that are ranking low in deaths but either have not seen the full effect of the pandemic, or had more time to adjust policy due to the crisis in Europe. Emerging market economies have lower health capacity, but also younger and hence healthier populations. The older the society, and the higher proportion of severe illnesses like heart and lung disease, the more susceptible to COVID-19 deaths, as Chart 7B shows. But yet again, the policy response still proves decisive. China has more deaths than some countries that are more vulnerable, because it got hit first. If Brazil and Turkey rise higher and higher above China in deaths, as is likely, it is because of policy failure, not basic vulnerability. Chart 7BEurope And US: Vulnerable Populations, Governments Slow To React Russia stands out as especially vulnerable in this Chart 7B. Here is where authoritarian measures may pay off, as with China, but only in the short term – since Russia will still be left with an elderly population highly prone to severe illness and a creaking health system. As mentioned above, the risk to Russian stability is a factor pushing for geopolitical cooperation in oil market cartel behavior to push prices up and improve the fiscal outlook to enable better domestic stability management. Bottom Line: Government policy, particularly preparedness and rapid action, have been the decisive factors in containing COVID-19, not dictatorial or democratic government types. The richest countries have the most freedoms and the most vulnerable elderly demographics. Within the rich countries, southern Europe reacted slowly and got hit hardest, with some exceptions. The US’s incompetence has been overrated, based on deaths, probably because of President Trump’s general unpopularity. These results are preliminary but they suggest that the US and EU will experience political change to address their lack of rapid action. Non-democracies will still have to deal with the recession and the consequences on social stability. Democracies Face Voter Blowback Democracies will face the wrath of voters once the immediate crisis dies down. The crisis has driven people to rally around the flag, creating polling bounces for national leaders and ruling parties. In some cases the trough-to-peak increase in popular support is remarkable – President Trump's approval reached 10 percentage points briefly, and he rose over 50% approval in some polls for the first time in his presidency (Chart 8A). Yet these initial bounces are already subsiding, as in Trump’s case (Chart 8B). Chart 8ADemocracies Are Accountable To Voters Chart 8BAnd Polling Bounces Are Fading By this measure, the US, Italy, France, and Spain all face serious political reckonings going forward. Trump is the first in the firing line. Our quantitative election model relies on state-level leading economic indicators that are lagging and show him still winning with 273 Electoral College votes (Chart 9A). However, if we introduce a 2008-magnitude economic shock to these indexes, the Democrats flip Michigan, Wisconsin, Pennsylvania, and New Hampshire, yielding 334 Electoral College votes for former Vice President Joe Biden (Chart 9B). This is assuming Trump’s approval rating stays the same, which, at 46%, is strong relative to the whole term in office. Chart 9AOur Quant Election Model Will Turn Against Trump When Data Catches Up Chart 9BA 2008-Style Shock To States Gives Democrats The White House Our qualitative judgement reinforces our election model. Historically, US elections are referendums on the ruling party. An incumbent president helps the party win reelection. But a recession is usually insurmountable. George Bush Sr lost in 1992 despite a shallow recession that ended the year before. While Joe Biden is a flawed candidate in numerous ways, the question voters face in November is whether they are better off than they were four years ago. With thousands of deaths and an unemployment rate at or above 20%, it is hard to see swing state voters answering “yes.” Not impossible, but we subjectively put the odds at 35%, and that could easily be revised downward if Trump’s polling falls back down to the 42% range. Trump will also be responsible for the handling of the pandemic itself. His administration obviously made several policy mistakes. A paper trail will highlight intelligence warnings as early as November, and warnings from his inner circle as early as January, that will hurt him.3 Objectively, the Republican Party’s greatest policy flaw, prior to COVID-19, was health care – and this will connect with COVID-19 even if the Affordable Care Act (Obamacare) has little to do with crisis response. Bottom Line: The first and most important political casualty of the pandemic will be Trump’s presidency. Not because the US is uniquely incompetent in the face of the pandemic – although it obviously could have done better, judging by several of the other democracies – but because this year happens to be an election year and democracies hold governments accountable. Major Risk Of Clash With China Chart 10China Likely To Depreciate The Renminbi There are two downside geopolitical risks that follow directly from the above. First, while the Democratic candidate Joe Biden is a “centrist,” his position will move to the left of the political spectrum. This is to energize the progressive faction of the party – which is already energized. The market will be taken aback if Biden produces major leftward shifts, in the direction of Senator Bernie Sanders, on taxes, regulation, health care, pharmaceuticals, banks, energy, or tech. This is not a problem when the market is down 36%, but as the market rallies, it becomes more relevant. While US taxes and regulation will go up, Biden will still have to win over the Midwestern Rust Belt voter through trade protectionism, a la Trump and Bernie. This will be exacerbated by the pandemic, which has supercharged American popular enmity toward China and fear of supply chain vulnerability toward China. When Biden reveals that he is protectionist too, US equities will react negatively. Second, more immediately, the clash with China may happen much sooner. As President Trump comes to realize he is losing his grip on power, he will have an incentive to retaliate against China for its mishandling of the pandemic, shift the blame, and achieve long-term strategic objectives as well. This makes Trump’s approval rating a critical indicator – not only of his reelection odds, but of whether he determines he has lost and therefore adopts more belligerent foreign or trade policy. We view the danger zone as anything less than 43%. If Trump becomes a lame duck, he could target China, or other countries, such as Venezuela. The advantage of the latter is that it could have the desired political effect without threatening the economic restart. A conflict with Iran would have bigger consequences – particularly negative for Europe. But in the COVID-19 context, Venezuela and Iran are not relevant to American voters. A conflict with North Korea, however, is part of the strategic conflict with China and would be hard to keep separate from broader tensions. This is only likely if Kim Jong Un stages a major provocation. At present, Washington and Beijing are keeping a lid on tensions. Presidents Trump and Xi are in communication. Beijing has rebuked the foreign minister who accused the US military of bringing COVID-19 to Wuhan. Trump has stopped using inflammatory rhetoric about the “Chinese virus.” China is not depreciating the renminbi, it is upholding other aspects of the trade deal, and it is sending face masks and ventilators to assist the US with the health crisis. But this could change. With its economy under extreme pressure, Beijing must take greater moves to stimulate. An obvious victim will be the renminbi, which is arguably stronger than it should be, especially if China cuts interest rates further, no doubt in great part because of the “phase one” trade deal with the United States (Chart 10). If and when Beijing decides that it must ease the downward pressure on exports and the economy, the renminbi will slide. This will provoke Trump. If he is convinced he cannot salvage the economy anyway, then he has an incentive to channel American anger toward China into new punitive measures over currency manipulation. Finally, the ingredients for our “Taiwan black swan” scenario are falling into place. Taiwan has long attempted to gain representation in the World Health Organization but has been blocked by Beijing’s assertion of the One China principle. However, Taiwan is now caught in an escalating tussle with the WHO leadership that involves both Washington and Beijing. Taipei warned the WHO as early as December that COVID-19 could be transmitted by humans and that the pandemic risk was high.4 Both China and the WHO leadership are simultaneously under pressure from the Trump administration for failing to share information and sound the alarm to prepare other nations. Bottom Line: If President Trump decides to prosecute China for its handling of the virus, and/or promote US-Taiwan relations in a way that aggravates China, then the trigger for a major geopolitical incident will have arrived. Investment Implications It is impossible to predict the precise catalyst or timing of such a crisis. We observe that the US and China are each experiencing historic economic dislocation, their strategic relationship has broken down over the past decade, and their populations are incensed at each other over grievances relating to the trade war, COVID-19, and various disinformation campaigns. Taiwan is at the epicenter of this conflict, due to its defense relationship with the United States and renewed political tensions with China under Xi Jinping. But the Chinese tech sector, North Korea, the South and East China Seas, Xinjiang, and Iran are also potential catalysts. Geopolitics is the other shoe to drop in the wake of COVID-19. Presidents Trump and Xi Jinping are the biggest sources of geopolitical risk, as we outlined in our 2020 forecast. They are cooperating in the immediate crisis, but in the aftermath there will be recriminations. A worsening domestic situation, a loss of prestige for either leader, or a foreign policy provocation could trigger punitive measures, saber rattling, or even military incidents. Risk assets are rallying on the light at the end of the tunnel. We are reaching and in some countries passing the peak intensity of the (first wave of the) pandemic. But the economic aftermath is extremely uncertain and the political fallout has hardly begun. In the US, the implication is clearly negative for Trump. But if that implication is realized, it points to much higher geopolitical risks within 2020 than are currently being considered as the world focuses on the virus. If President Trump chooses to wag the dog with Venezuela, that is obviously a much more positive outcome for global risk assets than if he attempts to achieve American strategic objectives of curbing China’s global assertiveness. Tactically, we remain defensive and recommend defensive US equity sectors and the Japanese yen. On a 12-month and beyond time frame we are more bullish on global growth and are long gold and oil. We remain strategically short CNY-USD and short Taiwanese equities relative to Korean.   Matt Gertken Vice President Geopolitical Strategist mattg@bcaresearch.com   Appendix Appendix TableThe Global Fiscal Stimulus Response To COVID-19 Footnotes 1 Given that one of Iran’s top health officials has criticized China for its questionable data and lack of transparency, one does not need to trust the US Intelligence Community’s assessment that China misled the world in the early days of the outbreak. See Matthew Petti, "Even Iran Doesn't Believe China's Coronavirus Stats," April 6, 2020. 2 Readers accustomed to the apocalyptic view of the US health system may wonder that the US comes out looking very well on health capacity. This is because we combine and standardize the scores for per capita spending and longevity. However our data also show that the US is inefficient on health: its life expectancy scores are slightly lower than those of the Europeans, yet it spends more per head. 3 See Josh Margolin and James Gordon Meek, "Intelligence report warned of coronavirus crisis as early as November: Sources," ABC News, April 8, 2020, and Maggie Haberman, "Trade Adviser Warned White House in January of Risks of a Pandemic," New York Times, April 6, 2020. 4 See "Taiwan says WHO failed to act on coronavirus transmission warning," Financial Times, March 19, 2020.

Highlights Oil prices are up strongly from their lows, but conditions for a durable bottom may not yet be in place. The main hiccup is that an air pocket will likely remain under global oil demand until most social-distancing measures are lifted. That said, most petrocurrencies offer a significant valuation cushion, making them attractive for longer-term investors. We will look to buy a basket of petrocurrencies on further weakness. The Asian economies that were closer to the epicenter of the epidemic are likely to recover faster than the West. Transport and electricity energy demand should pick up in these economies faster. AUD/CAD and AUD/EUR should benefit from this dynamic. CAD/USD is likely to weaken in the short term as Canadian crude remains trapped in Alberta, but then strengthen as the global economy recovers. Feature Chart I-1Massive Liquidation In Crude Oil Just over a decade ago, the price of crude oil was firmly above $100 per barrel. Fast forward to today and many blends are trading south of $20 (Chart I-1). The extraordinary drop has sent many petrocurrencies, including the Norwegian krone, Mexican peso, and Canadian dollar, into freefall. The oil industry has been hit by multiple tectonic shocks, including a sudden stop in economic activity, a fallout from the OPEC cartel, divestment from ESG funds, and falling oil intensity in many economies. Meanwhile, the trading of petrocurrencies is also complicated by a shifting production landscape among many oil producers. For investors, three key questions will determine whether petrocurrencies are a buy: Have we approached capitulation lows in oil prices? If so, what will be the velocity and magnitude of the demand recovery? Will the correlation between oil and petrocurrencies still hold once the dust settles? Have We Approached Capitulation Lows? In terms of magnitude and duration, yes. Over the last two decades, oil price drawdowns have tended to last between 8 and 20 months before a durable rally ensues. The oil price collapse from July 2008 to February 2009 lasted around 8 months. The decline from June 2014 to February 2016 was much longer, around 20 months. Given the October 2018 peak in oil prices, we should be very close to the bottom in terms of duration. Remarkably, in all episodes, the peak-to-trough decline in the West Texas Intermediate (WTI) blend has been around 75% (Chart I-2).   However, since the 1970s, oil has moved in a well-defined pattern of a 10-year bull market, followed by a 20-year bear market (Chart I-3). Assuming the bear market in oil began just after the global financial crisis, it does suggest that even if prices do recover, it will most likely be a bear-market rally. That said, history also suggests that these bear market rallies in oil can be quite powerful, with prices often doubling or trebling. As we go to press, oil prices are up a remarkable 18% from their lows Chart I-2Similar In Magnitude To Prior Oil Crashes Chart I-3Oil Prices Are Close To Capitulation Lows What is different this time? Aside from a breakdown in OPEC+, a few other factors are in play. This alters the timing and duration of an intermediate-term bottom: Any coordinated supply response will need to involve the US to be viable.1 The OPEC+ cartel, specifically the alliance between Russia and Saudi Arabia, is broken. Chart I-4 illustrates why. While being the stewards of global oil production discipline, there has been one sole benefactor – the US. In 2010, only about 6% of global crude output came from the US. Collectively, Canada, Norway and Mexico shared about 10% of the oil market. Meanwhile, OPEC’s market share sat just north of 40%. Fast forward to today and the US produces around 15% of global crude, having grabbed market share from many other countries. Chart I-4US Is The Big Winner From OPEC Cuts As we go to press, there are reports that Saudi Arabia and Russia have come to an agreement. However, the history of OPEC alliances suggests that it is fraught with broken promises.  Oil still trades above cash costs for many producing countries, meaning the incentive to boost production in times of a demand shock is quite strong (Chart I-5). Ditto if oil prices are recovering. Oil futures are in a massive contango, with WTI trading close to $40 per barrel two years out. This incentivizes players with strong balance sheets to keep the taps open. The oil curve needs to shift significantly lower, probably pushing some blends into negative spot territory, in order to force production discipline on some players.   Chart I-5Oil Still Trading Above Cost Of Production The dollar has been strong, meaning the local-currency revenues of oil producers have been cushioning part of the downdraft in oil prices. This could sustain production longer than would otherwise be the case, especially in a liquidation phase. The New York Fed’s model suggests that most of the downdraft in oil prices since 2010 has been due to rising supply (Chart I-6). Chart I-6Oil Downdraft Driven By Supply Both Saudi Arabia and Russia have low public debt and ample foreign exchange reserves. This buys them time in terms of dealing with a prolonged period of low prices. We know there will be massive economic pain from the oil price collapse (Chart I-7). The good news is that with the economic slowdown already in place, it may well be the catalyst needed to enforce any agreement put into effect. Chart I-7The Coming Economic Pain For Oil Producers While the positive correlation between oil prices and petrocurrencies has weakened in recent years, it has been re-established during the current downturn. More importantly, should production cuts be led by US shale producers, this will redistribute market share to OPEC and other non-OPEC members, allowing their currencies to benefit. Should production cuts be led by US shale producers, this will redistribute market share to OPEC and other non-OPEC members, allowing their currencies to benefit.  In statistical terms, petrocurrencies had a near-perfect positive correlation with oil around the time US production was about to take off (Chart I-8). Since then, that correlation has fallen from around 0.9 to about 0.3. Chart I-8Falling Correlation Between Petrocurrencies And The US Dollar Take the Mexican peso as an example. Since 2013, Mexico has become a net importer of oil, as the US moves towards becoming a net exporter (Chart I-9). This explains why the positive correlation between the peso and oil prices has weakened significantly in recent years. Put another way, rising oil prices benefit the US industrial base much more than in the past, while the benefits for countries like Canada and Mexico are slowly fading. Chart I-9A Shifting Export Landscape That said, in the case of Canada and Norway, petroleum still represents over 20% and 50% of total exports. For Russia, Saudi Arabia, Iran or Venezuela, the number is much higher. Therefore, it is easy to see why a big fluctuation in the price of oil can have deep repercussions for their external balances. Historically, getting the price of oil right was usually the most important step in any petrocurrency forecast. Bottom Line: Both the CAD and NOK remain positively correlated with oil. So do the Russian ruble and the Colombian peso. This correlation should remain in place if oil prices put in a definitive bottom, and it should strengthen if production cuts are led by the US. When Will Oil Demand Recover? Oil demand tends to follow the ebb and flow of the business cycle, with demand having slowed sharply on the back of a sudden stop in economic activity. Transport constitutes the largest share of global petroleum demand. Ergo the economic lockdowns have brought a lot of freighters, bulk ships, large crude carriers and heavy trucks to a halt. Encouragingly, passenger traffic in China has started to pick up as the number of new Covid-19 cases flattens, and the country is gradually reopening for business. There has also been an improvement in the manufacturing data. All eyes will be watching if the relaxation of measures in China lead to a second wave of infections. Otherwise, should the Western economies follow the Chinese recovery path, then the world will be open for business by the end of the summer (Chart I-10). One way to play an early restart in Asia relative to the West is to go long the Australian dollar, relative to a basket of the Canadian dollar and the euro.  Part of the slowdown in global demand is being reflected through elevated oil inventories. However, part of the inventory building has also been a function of refinery maintenance (Chart I-11). Chinese oil imports continue to hold up well, and should easier financial conditions continue to put a floor under the manufacturing cycle, overall consumption will follow suit. Chart I-10Some Optimism For The West Chart I-11Watch For A Peak In Inventories One way to play an early restart in Asia relative to the West is to go long the Australian dollar, relative to a basket of the Canadian dollar and the euro. There are three key reasons which support this trade: Liquefied natural gas will become the most important component of Australia’s export mix in the next few years (Chart I-12). As Beijing restarts its economy and electricity production picks up, Aussie exports will benefit. Beijing has a clear environmental push to shift its economy away from coal electricity generation and towards natural gas. The massive drop in pollution resulting from the shutdown will all but assure that this push occurs sooner rather than later. Chart I-12LNG Will Be A Game-Changer For Australia There was already pent-up demand in the Australian economy going into the crisis, given the destruction of the capital stock from the fires. With an economy that was already running well below capacity, construction activity should see a V-shaped rebound once social distancing measures are relaxed. As the currency of the now largest oil producer in the world, the US dollar is becoming a petrocurrency itself. In this new paradigm, a better strategy for playing oil upside is to be long a basket of energy producers versus energy consumers. AUD/EUR benefits from this. Chart I-13 shows that a currency basket of oil producers versus consumers has both had a strong positive correlation with the oil price and has outperformed a traditional petrocurrency basket. Rising oil prices are a terms-of-trade boost for oil exporters but lead to demand destruction for oil importers. Chart I-13Buy Oil Producers Versus Oil Consumers Eventually, a pickup in manufacturing activity will be a global phenomenon rather than localized within Asia. When this happens, other petrocurrencies will begin to benefit. This will especially be the case for producers where production is more landlocked. Bottom Line: A recovery in global transport will help revive oil demand. This should be positive for oil prices in general and petrocurrencies in particular. One way to play the recovery in Asia relative to the West for now is to go long AUD/CAD and AUD/EUR. On CAD, NOK, MXN, RUB And COP Chart I-14NOK Will Outperform CAD While Canadian crude is likely to remain trapped in the oil sands, North Sea crude will face less transportation bottlenecks in the near term. This suggests the path of least resistance for CAD/NOK is down (Chart I-14). We were stopped out of our short CAD/NOK trade, but still recommend this position as a play on this dynamic. We are already long the Norwegian krone versus a basket of the euro and dollar. CAD/USD has been displaying a series of higher lows since the March 18 bottom, but the double-top formation in place since then suggests we could see some weakness in the near term. Should CAD/USD retest its recent lows, driven by a relapse in oil prices, we will be buyers.  Many petrocurrencies, including the Mexican and Colombian pesos, have become quite cheap and are attractive on a longer-term basis (Chart I-15). Given the uncertainty surrounding the nearer-term outlook, we a placing a limit buy on a broad basket of these currencies at -5%. Should oil prices retest the lows in the coming weeks/months, it will imply an 18% drop. Given the correlation between petrocurrencies and oil of 0.3, this suggests a 5.3% move lower.  Chart I-15ASome Petrocurrencies Are Very Cheap Chart I-15BSome Petrocurrencies Are Very Cheap Bottom Line: Place a limit buy on a petrocurrency basket at -5%.    Chester Ntonifor Foreign Exchange Strategist chestern@bcaresearch.com Footnotes 1 Please see Commodity & Energy Strategy Weekly Report, “The Birth Of WOPEC,” dated April 9, 2020, available at ces.bcaresearch.com Currencies U.S. Dollar Chart II-1USD Technicals 1 Chart II-2USD Technicals 2 Recent data in the US have been negative: The unemployment rate soared from 3.5% to 4.4% in March. Nonfarm payrolls recorded a total loss of 701K jobs, the first decline in payrolls since September 2010. The NFIB business optimism index plunged from 104.5 to 96.4 in March. Initial jobless claims surged by 6.6 million last week, higher than the expected 5.3 million. Michigan consumer sentiment declined to 71 from 89.1 in April. The DXY index fell by 0.7% this week. Risk assets have recovered, fueled by an extra USD $2.3 trillion stimulus from the Federal Reserve. The lesson we are learning is that the deeper the perceived slowdown, the more the Fed will do to assuage any economic damage. As for currencies, what matters is relative monetary policies. The key variable to stem the rise in the USD is that the liquidity crisis does not morph into a solvency one. Report Links: Capitulation? - April 3, 2020 The Dollar Funding Crisis - March 19, 2020 Are Competitive Devaluations Next? - March 6, 2020 The Euro Chart II-3EUR Technicals 1 Chart II-4EUR Technicals 2 Recent data in the euro area have been mostly negative: Markit services PMI fell further to 26.4 in March from 28.4 the previous month. The Sentix investor confidence dived to -42.9 from -17.1 in April. Moreover, the Sentix current situation index fell from -15 to -66 in April, while the outlook index moved up slightly from -20 to -15. EUR/USD appreciated by 0.5% this week. The euro zone members failed to reach an agreement on the joint EU debt issuance. On the other hand, the ECB adopted an unprecedented set of collateral measures to mitigate the negative impacts from COVID-19 across the euro area, including easing collateral conditions for credit claims, reduction of collateral valuation haircut, and waiver to accept Greek sovereign debt instruments as collateral.  Report Links: On The DXY Breakout, Euro, And Swiss Franc - February 21, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 On Money Velocity, EUR/USD And Silver - October 11, 2019 Japanese Yen Chart II-5JPY Technicals 1 Chart II-6JPY Technicals 2 Recent data in Japan have been negative: Consumer confidence fell to 30.9 from 38.4 in March. Labor cash earnings grew by 1% year-on-year in February, but slowed from 1.2% in January. The Eco Watchers Survey current index fell from 27.4 to 14.2 in March. The outlook index also declined from 24.6 to 18.8. The Japanese yen fell by 1% against the US dollar this week. On Wednesday, the BoJ announced that it would scale back some non-urgent operations such as long-term research and studies for academic papers, following the government’s decision to declare a state of emergency. The Reuters poll forecasted the Q1 GDP to shrink by 3.7% quarter-on-quarter and Q2 by 6.1%. Report Links: The Near-Term Bull Case For The Dollar - February 28, 2020 Building A Protector Currency Portfolio - February 7, 2020 Currency Market Signals From Gold, Equities And Flows - January 31, 2020 British Pound Chart II-7GBP Technicals 1 Chart II-8GBP Technicals 2 Recent data in the UK have been dismal: Markit construction PMI plunged to 39.3 from 52.6 in March. GfK consumer confidence crashed to -34 from -9 in March. Total trade balance (including EU) shifted to a deficit of £2.8 billion from a surplus of £2.4 billion in February. The goods trade deficit widened from £5.8 billion to £11.5 billion. GBP/USD rose by 0.6% this week. After being told to cut dividends last week, the UK banks are now pressuring the BoE on fresh capital relief to help fight the COVID-19. The BoE has also agreed to temporarily lend the government money, funded through money printing. The details suggest the operations are temporary, but the BoE might be the first central bank to formally step closer to MMT. Report Links: Updating Our Balance Of Payments Monitor - November 29, 2019 A Few Trade Ideas - Sept. 27, 2019 United Kingdom: Cyclical Slowdown Or Structural Malaise? - Sept. 20, 2019 Australian Dollar Chart II-9AUD Technicals 1 Chart II-10AUD Technicals 2 Recent data in Australia have been negative: The AiG services performance index fell from 47 to 38.7 in March. Imports and exports both slumped 4% and 5% month-on-month respectively in February. The trade surplus narrowed from A$5.2 billion to A$4.4 billion.  The Australian dollar surged by 3.8% against the US dollar, making it the best performing G10 currency this week. The RBA held interest rate steady at 0.25% on Tuesday, while warning the country is in for a “very large” economic contraction. Lowe also suggested that the economy will “much depend on the success of the efforts to contain the virus and how long the social distancing measures need to remain in place”. Report Links: On AUD And CNY - January 17, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 A Contrarian View On The Australian Dollar - May 24, 2019 New Zealand Dollar Chart II-11NZD Technicals 1 Chart II-12NZD Technicals 2 Recent data in New Zealand have been dismal: NZIER business confidence survey reported that a net 70% of firms expect general business conditions to deteriorate in Q1, compared to 21% in the previous quarter. Electronic card retail sales contracted by 1.8% year-on-year in March, down from 8.6% growth the previous month. The New Zealand dollar recovered by 1.7% against the US dollar this week. In addition to the NZ$30 billion purchases of central government bonds, the RBNZ is stepping up the QE program by offering to buy up to NZ$3 billion of local government bonds to support liquidity. Report Links: Updating Our Balance Of Payments Monitor - November 29, 2019 Place A Limit Sell On DXY At 100 - November 15, 2019 USD/CNY And Market Turbulence - August 9, 2019 Canadian Dollar Chart II-13CAD Technicals 1 Chart II-14CAD Technicals 2 Recent data in Canada have been dismal: Bloomberg Nanos confidence fell further from 46.9 to 42.7 the week ended April 3. Housing starts increased by 195K year-on-year in March, down from 211K in February. Building permits contracted by 7.3% month-on-month in February. On the labor market front, the pandemic has caused the unemployment rate to rise sharply from 5.6% to 7.8% in March, higher than the expected 7.2%. Employment fell by more than one million (-1,011,000 or -5.3%). The Canadian dollar rose by 1.2% against the US dollar this week, supported by the tentative rebound in oil prices. The BoC spring Business Outlook Survey shows that business sentiment had softened even before COVID-19 concerns intensified in Canada. The overall survey indicator fell below 0 to -0.68 in Q1. Businesses tied to the energy sector were hit the most due to falling oil prices. Report Links: The Loonie: Upside Versus The Dollar, But Downside At The Crosses Updating Our Balance Of Payments Monitor - November 29, 2019 Making Money With Petrocurrencies - November 8, 2019 Swiss Franc Chart II-15CHF Technicals 1 Chart II-16CHF Technicals 2 Recent data in Switzerland have been negative: Total sight deposits were little changed at CHF 627 billion for the week ended April 3. The unemployment rate jumped from 2.5% to 2.9% in March, above expectations of 2.8%. The number of total unemployed increased by 15%, now reaching 136K. The Swiss franc appreciated by 0.6% against the US dollar this week. The Swiss government forecasted the output to slump 10% this year under the worst-case scenario, given the incoming data proved worse than expected. On the positive side, the government said it would gradually relax restriction measures later this month should the current situation improve. Report Links: On The DXY Breakout, Euro, And Swiss Franc - February 21, 2020 Currency Market Signals From Gold, Equities And Flows - January 31, 2020 Portfolio Tweaks Before The Chinese New Year - January 24, 2020 Norwegian Krone Chart II-17NOK Technicals 1 Chart II-18NOK Technicals 2 Recent data in Norway have been negative: The unemployment rate surged to 10.7% in March from 2.3%. Manufacturing output fell by 0.5% month-on-month in February. Headline inflation fell from 0.9% to 0.7% year-on-year in March, while core inflation remained unchanged at 2.1%.  The Norwegian krone rose by 2.8% against the US dollar this week, up 18% from its recent low three weeks ago. Norway will likely relax some restrictions later this month while the ban on public gatherings will still remain in place. The loosening of COVID-19 measures, together with oil prices recovering and cheap valuations all underpin the Norwegian krone in the long run. Please refer to our front section this week for more detailed analysis. Report Links: Building A Protector Currency Portfolio - February 7, 2020 On Oil, Growth And The Dollar - January 10, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 Swedish Krona Chart II-19SEK Technicals 1   Chart II-20SEK Technicals 2   Recent data in Sweden have been mixed: Industrial production fell by 0.2% year-on-year in February. Manufacturing new orders increased by 6% year-on-year in February. Household consumption increased by 2.3% year-on-year in February, up from 1.6% the previous month. The Swedish krona increased by 1% against the US dollar this week. The recent efforts in buying up bonds by the Riksbank to increase liquidity amid COVID-19 is likely to increase the debt burden in Sweden. The stock of Swedish Treasury bills held by the Riksbank is estimated to be SEK 300 billion by the end of this year, compared to only 55 billion in February. Report Links: Updating Our Balance Of Payments Monitor - November 29, 2019 Where To Next For The US Dollar? - June 7, 2019 Balance Of Payments Across The G10 - February 15, 2019 Trades & Forecasts Forecast Summary Core Portfolio Tactical Trades Limit Orders Closed Trades

Highlights Europe’s dirty little secret: Euro area debt is already mutualised. Investment implication: Overweight Italian BTPs, underweight German bunds, and overweight the euro on a structural (2-year plus) horizon. ESM plus ECB plus OMT equals a compromise solution to fund stimulus at a mutualised euro area interest rate. Investment implication: Overweight Italian BTPs, underweight German bunds on a cyclical (6-12 month) horizon. Spain’s high early peak in morbidity means that it has taken its pain upfront, at least compared to other countries.  Investment implication: upgrade Spain’s IBEX to a tactical overweight – and remove it from the cyclical underweight basket. Feature Chart of the WeekThe Underperformances Of China, Italy And Spain Were A Mirror-Image Of Their Covid-19 Morbidity Curves More About Morbidity Curves Most analyses of the pandemic tend to focus on the grim daily mortality statistics. Yet the key to the pandemic’s evolution is not its mortality rate, but rather its morbidity (severe illness) rate. This is because, without a vaccine, the total area underneath the morbidity curve is fixed. The cumulative number of people who will fall severely ill is pre-determined at the outset (Figures 1-3). Figure I-1The Area Under The Morbidity Curve Is Fixed, A High First Peak Means A Low Second Peak Figure I-2A Low First Peak Means An Extended First Peak…   Figure I-3…Or A High Second Peak Very optimistically assuming a Covid-19 morbidity rate of 1 percent, and that 65 percent of the population must get infected to exhaust the pandemic, we know that Covid-19 will ultimately make 0.65 percent of the population severely ill. Absent a vaccine, this number is set in stone. But the number of deaths is not set in stone. It depends on the availability of emergency medical treatment for those that are severely ill. For Covid-19 this means access to ventilation in an intensive care unit (ICU). Yet even the best equipped countries only have ICUs for 0.03 percent of the population. Therefore, the emergency treatment must be rationed either by supply or by demand. Without a Covid-19 vaccine, we cannot change the cumulative number of people who will become severely ill. Rationing by supply means that we must deny emergency treatment to the severely ill – not just Covid-19 patients but victims of, say, heart attacks or car crashes. Accept more deaths. Rationing by demand means that we must flatten the demand (morbidity) curve so that demand is always satisfied by the limited ICU supply. During the pandemics of 1918-19 and 1957, countries could ration emergency medical treatment by supply. Not in 2020. In an era of universal healthcare, everybody is entitled to, and expects to get, emergency medical care. Which means we must ration emergency medical treatment by demand. As such, we must analyse the 2020 response differently to the responses in 1918-19 and 1957. To repeat, without a vaccine, we cannot change the area under the morbidity curve. There is no way of escaping this truth. A low first peak requires a very elongated peak or a high second peak (Chart I-2). Conversely, countries that have suffered a high first peak will need a shorter peak and small (or no) second peak. Chart I-2Japan's Early Stabilisation Was A False Dawn Turning to an equity market implication, the underperformances of highly cyclical and domestically exposed Spain and Italy have closely tracked their morbidity curves (Chart I-1). Given that both countries have suffered very high first peaks in morbidity, the strong implication is that they have taken their pain upfront – at least compared to other countries. In the case of Spain, the market is also technically oversold (see Fractal Trading System). Investment implication: upgrade Spain’s IBEX to a tactical overweight – and remove it from the cyclical underweight basket. How Europe Could Unite Europe is dithering on its fiscal response to the pandemic. Specifically, Germany and the Netherlands are pushing back against the concept of mutualised euro area debt in the form of ‘corona-bonds’. But a pandemic is an act of nature, an indiscriminate exogenous shock. What is the point of the economic and monetary union if Italy must fund its response to an act of nature at the Italian 10-year yield of 1.5 percent rather than the euro area 10-year yield of 0 percent? (Chart I-3 and Chart I-4) Chart I-3To Fight An Act Of Nature Why Should Italy Borrow At A Higher Rate... Chart I-4...When It Could Borrow At A Lower Mutualised Rate? The good news is there is a compromise solution to fund stimulus at a mutualised interest rate. It uses the euro area’s €500 billion bailout fund, the European Stability Mechanism (ESM). But the compromise solution carries two problems which need mitigation. First, ESM credit lines come with conditionality. Italy would rightly balk if it were shackled like Greece, Portugal, and Ireland were after the euro debt crisis. Luckily, the ESM is likely to regard the current ‘act of nature’ crisis very differently to the debt crisis and impose only minimum and appropriate conditionality – for example, that credit lines should be used for healthcare and social welfare spending. Second, ESM credit lines come with a stigma. Taking fright that Italy is tapping the ESM, the bond market might drive up the yields on Italian BTPs. If this pushed up Italy’s overall funding rate, it would defeat the purpose of using the ESM in the first place. ESM plus ECB plus OMT equals a compromise solution to borrow at a mutualised interest rate. The hope is that the bond market, realising that Italy is using the bailout facility to counter an act of nature, would not drive up BTP yields. But if it did, the ECB could counter this by buying BTPs. One option would be to use its Outright Monetary Transactions (OMT) facility. Set up during the euro debt crisis, the OMT’s specific function is to counter bond market attacks when they are not justified by the economic fundamentals. In other words, to prevent a liquidity crisis escalating into a solvency crisis. Thereby, ESM plus ECB plus OMT equals a compromise solution to fund stimulus at a mutualised euro area interest rate. Investment implication: Overweight Italian BTPs, underweight German bunds on a cyclical (6-12 month) horizon. Europe’s Dirty Little Secret Outwardly, Germany and the Netherlands are reluctant to go down the slippery slope to mutualised euro area debt. But here’s the dirty little secret they don’t want you to know. Euro area debt is already mutualised. The stealth mutualisation has happened via the Target2 banking imbalance which now stands at €1.5 trillion. This imbalance is an accounting identity showing that Italy is owed ‘German euros’ via its large quantity of bank deposits in German banks while Germany is symmetrically owed ‘Italian euros’ via its large effective holding of Italian government bonds. The imbalance is irrelevant if a German euro equals an Italian euro. But if Italy defaulted on its bonds – by repaying them in a reinstated and devalued lira – then Target2 means that Germany must pick up the bill (Chart I-5). Chart I-5Target2 Means That If Italy Defaults, Germany Picks Up The Bill The Target2 imbalance is the result of the ECB’s QE program, in which the central bank has bought hundreds of billions of Italian bonds. If Italy repaid those bonds in a devalued lira, then the ECB would become insolvent, and the central bank’s remaining shareholders would have to plug the hole. The biggest shareholder would be Germany. Could Germany force Italy to repay its bonds in euros? No. According to a legal principle called ‘lex monetae’ Italy can repay its debt in its sovereign currency, whatever that is. Meanwhile, because of the fragility of the Italian banking system, the Italians who sold the bonds to the ECB deposited the cash in German banks. Legally, these depositors must be paid back in whatever is the German currency. Euro area debt is already mutualised. If euro area debt is already mutualised, why do policymakers continue to pretend that it isn’t? There are three reasons. First no policymaker would want to publicise that Germany is now on the hook if Italy left the euro. Second, no policymaker would want to publicise that the ECB has put Germany in this position (Chart I-6). Chart I-6ECB QE Has Created The Target2 Imbalance Third, and most important, policymakers would point out that the mutualisation of debt only happens if the euro breaks up. They would argue that because the euro is irreversible, the debt is not mutualised. In fact, their argument is completely back to front. The truth is: Because euro area debt is now mutualised, the euro has become irreversible. Investment implication: Overweight Italian BTPs, underweight German bunds, and overweight the euro on a structural (2-year plus) horizon. Fractal Trading System* As already discussed, this week’s recommended trade is long Spain’s IBEX 35 versus the Euro Stoxx 600. The profit target is 3 percent with a symmetrical stop-loss. Meanwhile our other trade, long Australia versus New Zealand has moved into a 2 percent profit. The rolling 12-month win ratio now stands at 66 percent. Chart I-7IBEX 35 Vs. EUROSTOXX 600 When the fractal dimension approaches the lower limit after an investment has been in an established trend it is a potential trigger for a liquidity-triggered trend reversal. Therefore, open a countertrend position. The profit target is a one-third reversal of the preceding 13-week move. Apply a symmetrical stop-loss. Close the position at the profit target or stop-loss. Otherwise close the position after 13 weeks. * For more details please see the European Investment Strategy Special Report “Fractals, Liquidity & A Trading Model,” dated  December 11, 2014, available at eis.bcaresearch.com.   Dhaval Joshi Chief European Investment Strategist dhaval@bcaresearch.com   Fractal Trading System   Cyclical Recommendations Structural Recommendations Closed Fractal Trades Trades Closed Trades Asset Performance Currency & Bond Equity Sector Country Equity Indicators Bond Yields Chart II-1Indicators To Watch - Bond Yields Chart II-2Indicators To Watch - Bond Yields Chart II-3Indicators To Watch - Bond Yields Chart II-4Indicators To Watch - Bond Yields   Interest Rate Chart II-5Indicators To Watch - Interest Rate Expectations Chart II-6Indicators To Watch - Interest Rate Expectations Chart II-7Indicators To Watch - Interest Rate Expectations Chart II-8Indicators To Watch - Interest Rate Expectations  

Highlights Bond Yield Differentials: The deepening global recession has prompted aggressive monetary easing measures by virtually every developed economy central bank. With policy rates now near zero everywhere, government bond yield differentials between countries have been reduced substantially. Currency Hedged vs Unhedged Yields: Opportunities still exist in some countries to create synthetically “higher” yields relative to low local rates by hedging the currency exposure of foreign bonds. Country Allocation: Italy and Spain government bonds offer the most attractive yields, hedged into any of the major currencies (USD, EUR, GBP, JPY). Among the lower yielders, Canadian, Australian, French and Japanese government bonds offer the most attractive yield pickups, on a currency-hedged basis, versus yields in the US, Germany, and the UK. Feature Chart 1A Synchronized Collapse The COVID-19 economic downturn is already shaping up to be one of the deepest global recessions in history. While there have been worldwide industrial slowdowns and manufacturing recessions in the past, what is happening now is different in that all countries are suffering sharp contractions in activity in the much larger services sectors that employ far more workers. The result will be massive increases in unemployment, as is already happening in the US where a staggering 10 million workers have filed for jobless benefits over just the past two weeks. Central bankers have responded to the shock to growth by following essentially the same playbook: cutting interest rates to zero as rapidly as possible, followed up with quantitative easing and other programs to support financial markets. With a synchronized economic collapse leading to policy convergence, government bond yields have plunged worldwide, but yield differentials between countries have also fallen sharply as a result (Chart of the Week). In this report, we will present the case for using currency hedging more actively than usual to create more attractive global bond yields. What can a global government bond investor do in this environment of tiny-but-highly-correlated bond yields to squeeze out some incremental additional return? In this report, we will present the case for using currency hedging more actively than usual to create more attractive global bond yields. A Fundamentally Driven Yield Convergence Chart 2Yields Are Low Everywhere As a simple starting point, just looking at the level of government bond yields in the developed economies is a good indication of how little there is to choose from between countries right now. For example, a 10-year government bond in the US was yielding 0.67% yesterday, compared to a 10-year yield in Australia, Canada and the UK of 0.82%, 0.75%, and 0.33% respectively (Chart 2). Not only are those low absolute yields, but those spreads versus US Treasuries are very narrow in an historical context. Another way to see how similar interest rate structures have become within the major developed markets is by looking at market expectations of future policy rates. Our proxy for the market’s pricing of the terminal nominal policy rate – the 5-year overnight index swap (OIS) rate, 5-years forward – shows that interest rate markets are expecting policy rates to stay very low over the next few years. The fall in the terminal rate estimate has been the largest in the US and Canada, where the markets were still pricing in a “peak” policy rate level around 2% as late as December – the figure is now 0.6% in the US and 1.1% in Canada (Chart 3). Chart 3Global Policy Rate Convergence So if the bond markets now believe that the current levels of bond yields will be sustained for longer, is that a realistic belief? There is already a considerable amount of both monetary and fiscal stimulus that has been introduced by policymakers. At some point, this stimulus should begin to stabilize and boost economic growth, but only after the immediate public health crisis of the COVID-19 outbreak has begun to subside. That will eventually help put a floor under developed market government bond yields. Chart 4The Backdrop Remains Conducive To Global Bond Yields Staying Low As we discussed in a recent weekly report, three elements must all happen before a true and lasting bottom for both risk assets and bond yields can begin to take place (Chart 4):1   The net number of new COVID-19 cases must begin to slow in critical countries like the US and Italy, a first step before the lockdown restrictions can start to be lifted; The US dollar (USD) must peak out and begin to roll over, taking stress off non-US borrowers of USD-denominated debt; The VIX must sustainably fall back from the levels above 40 that imply very volatile markets and continued investor nervousness about the future. Global government bond yields are likely to remain relatively range bound over the next month or two, at least.  Out of this list, the slowing in the number of new cases of the virus in Italy is a positive sign, as is the VIX falling back to the mid-40s. The sticky USD is still a major issue, however, particularly for borrowers with major dollar debts in the emerging world. There is not yet an “all clear” from this checklist, suggesting that global government bond yields are likely to remain relatively range bound over the next month or two, at least. This means bond investors need to consider alternative strategies to boost the yield of their government bond portfolios. Bottom Line: The deepening global recession has prompted similar monetary easing measures by virtually every developed economy central bank. With policy rates near zero everywhere, government bond yield differentials between countries have been largely eliminated. Searching For More Attractive Yields - With Currency Hedging When discussing our country allocation strategy, we have always looked at the yields and relative returns of government bonds in each country in hedged currency terms rather than in local currency terms. This is to remove the significant return volatility coming from currency exposure, while also making an appropriate “apples-to-apples” comparison of the yields on offer in each country. We have chosen the USD as the “base currency” for all these comparisons. In Chart 5, we show a static snapshot of the government bond yield curves, in local currency terms, for the US, Germany, France, Italy, the UK, Japan, Canada and Australia. The US, Canada and Australia remain the relative high-yielders within the major developed markets, although the “riskier” credits of Italy and Spain offer the highest outright yields. Unhedged German yields look particularly unattractive here, with the entire yield curve offering yields below 0%. Chart 5Currency-Unhedged Global Government Bond Yield Curves Chart 6USD-Hedged Global Government Bond Yield Curves In Chart 6, we show those same yield curves, but with the non-US yields all shown on a USD-hedged basis. The yields include the net gain/cost of hedging foreign currency back into US dollars using 3-month currency forwards. Shown this way, the non-US yield curves can be more directly compared to the “base” US Treasury curve. Looking at those yields shows that there is a much tighter convergence of yields with the US for most countries, but in a relative narrower range between 0.5% and 1.25% across the full maturity spectrum. The Fed’s rapid easing cycle, which started with the 75bps of rate cuts in the summer of 2019 and continued with the rapid move to a near-zero funds rate during the COVID-19 crisis, has dramatically altered the calculus for both global bond country allocation and currency hedging. Chart 7Fed Rate Cuts Have Reduced The Yield Advantage of USTs Chart 8Fed Rate Cuts Have Taken The Carry Out Of The USD First, the Fed’s easing cycle triggered a major decline in US Treasury yields that was not matched in other countries, eliminating much of the unhedged yield advantage of Treasuries over non-US peers (Chart 7). At the same time, the Fed’s rate cuts eliminated much of the interest rate “carry” of owning US dollars versus other currencies. The amount of that reduction was significant, with the gain of hedging a euro or yen currency exposure into dollars reduced from nearly around 250bps in the spring of 2019 to just over 100bps today (Chart 8). That dramatically alters the attractiveness of even negative-yielding German and Japanese government bonds, whose yields could once have been transformed into a relatively high USD-based yield via currency hedging. The Fed’s easing cycle triggered a major decline in US Treasury yields that was not matched in other countries, eliminating much of the unhedged yield advantage of Treasuries over non-US peers.  At the same time, the Fed’s rate cuts eliminated much of the interest rate “carry” of owning US dollars versus other currencies. Country Allocation Strategy Implications For dedicated global government bond investors, the only way to earn meaningfully higher yields in the current environment is to consider selective currency hedging of bond exposures. In Tables 1-4, we show 2-year, 5-year, 10-year and 30-year government bond yields for the major developed economy bond markets. The yields are hedged into USD, EUR, GBP and JPY, to allow comparisons of foreign yields for investors with those four base currencies. Table 1Currency-Hedged 2-Year Government Bond Yields Table 2Currency-Hedged 5-Year Government Bond Yields Table 3Currency-Hedged 10-Year Government Bond Yields Table 4Currency-Hedged 30-Year Government Bond Yields For USD-based investors, there are still some interesting opportunities available to find a USD-hedged foreign yield that can exceed that of US Treasuries. The higher-yielding European markets like Italy and Spain are the obvious places to find yield, and we continue to recommend those bonds with the ECB now buying more of the riskier euro area government bonds as part of its new Pandemic Emergency Purchase Program. However, Canadian, Australian and French bonds – hedged into USD – all offer intriguing yield pickups over US Treasuries. Even the negative yields available in Japan and Switzerland look interesting when expressed in USD terms, although that is not the case for negative yielding German bonds. Canadian, Australian and French bonds – hedged into USD – all offer intriguing yield pickups over US Treasuries. Even the negative yields available in Japan and Switzerland look interesting when expressed in USD terms, although that is not the case for negative yielding German bonds. In Tables 5-8, the currency-hedged yields for each country are shown as a spread to the relevant “base” bond yield for each currency. For example, under the “EUR” column in Table 6, the cells show the yield spread between 5-year government bonds hedged into euros and 5-year German bonds. Here, we can see that there are far fewer opportunities for euro-based bond investors to find non-European yields that offer adequate yield pickups versus German yields. The pickings are even less slim for Japanese investors, with many non-Japanese yields trading below Japanese yields on a JPY-hedged basis. Table 5Currency-Hedged 2-Year Govt. Bond Yield Spreads Versus The Table 6Currency-Hedged 5-Year Govt. Bond Yield Spreads Versus The Table 7Currency-Hedged 10-Year Govt. Bond Yield Spreads Versus The Table 8Currency-Hedged 30-Year Govt. Bond Yield Spreads Versus The In sum, looking across all eight tables shown, the most consistently attractive yields, across all currencies and maturities, can be found in Australia, Canada, France, Italy and Spain. Bottom Line: Opportunities still exist in some countries to create synthetically “higher” yields relative to low local rates by hedging the currency exposure of foreign bonds. Italy and Spain government bonds offer the most attractive yields, hedged into any of the major currencies (USD, EUR, GBP, JPY). Among the lower yielders, Canadian, Australian, French and Japanese government bonds offer the most attractive yield pickups, on a currency-hedged basis, versus yields in the US, Germany, and the UK.   Robert Robis, CFA Chief Fixed Income Strategist rrobis@bcaresearch.com Footnotes 1 Please see BCA Global Fixed Income Strategy Weekly Report, "Central Banks To Markets: Redefining "Whatever It Takes"", dated March 24, 2020, available at gfis.bcaresearch.com. Recommendations The GFIS Recommended Portfolio Vs. The Custom Benchmark Index Duration Regional Allocation Spread Product Tactical Trades Yields & Returns Global Bond Yields Historical Returns

Highlights The Federal Reserve’s temporary FIMA repo facility will go a long way in helping ease dollar-funding stress outside the US. However, with the duration of the lockdown highly uncertain, a liquidity crisis could rapidly evolve into a solvency one. If the containment measures prove successful by summer, then the global economy will be awash with much stimulus, which will be fertile ground for pro-cyclical currencies. However, in the event that we receive indications of a more malignant outcome, we could retest and break above the recent highs in the DXY. We assign a one-third probability to this outcome. For now, a barbell strategy is warranted. Hold a basket of the cheapest currencies, along with some safe-havens. Crude oil has approached capitulation lows, but conditions are not yet in place for a durable bottom. Stand aside on petrocurrencies for now. Feature Chart I-1The Fed's Liquidity Injections Are Working The DXY index has once again broken above the psychological 100 level. This has occurred alongside the backdrop of very generous swap lines offered by the Federal Reserve to foreign central banks, as well as a temporary repo facility for foreign and international monetary authorities (FIMA). In fact, the euro-dollar cross-currency basis swap is now in positive territory, suggesting that a key funnel for offshore dollar liquidity has now significantly widened (Chart I-1). Why then has the dollar continued to strengthen, despite a concerted effort by the Fed to flood the global system with dollars? We offer and explore three reasons: The Fed’s actions are still insufficient. The dollar crisis is evolving from a liquidity one to a solvency one. The liquidity-to-growth transmission mechanism needs time. The Fed’s Actions Are Still Insufficient The Fed’s actions so far to ease the offshore dollar funding stress have been to: Offer unlimited funding through swap lines to five major central banks at the overnight index swap + 25 basis points.1  This was effective the week of March 16. Extend the swap lines to nine more central banks, with a cap of US$60 billion and a maturity of 84 days.2 This was announced March 19. Allow FIMA account holders to temporarily exchange their Treasury securities held with the Fed for US dollars. This was announced on Tuesday. Have these actions been sufficient? For most developed market currencies, yes. Chart I-2 shows that the currencies that have been most hit in the first quarter were of the countries initially excluded from the swap agreement such as Australia, Norway and New Zealand. Since the March 19 agreement, these currencies have staged significant rallies. Chart I-2Very Few Winners In Q1 However, there are three reasons why the Fed’s actions are still insufficient. First, they are limited to only 14 central banks, and need to be expanded further. While currencies such as the Brazilian real and Mexican peso have stabilized, others like the Turkish lira or South African rand continue their freefall. In short, many emerging market central banks do not have swap agreements with the US. These are countries with huge dollar liabilities that could continue to see their currencies fall, pushing up the  aggregate dollar index. Developed market commodity currencies tend to be highly correlated to emerging market currencies (Chart I-3). There is a huge pool within the financial architecture unable to access funding through central bank swap lines.  The second reason is that the pool of Treasury securities available to swap for US dollars has shrunk significantly. This has been on the back of slowing global trade, which sapped the current account surpluses of many countries, dampening their foreign exchange reserves. Thus, while the Fed’s latest actions may prevent an international dumping of US Treasurys, it may be insufficient to completely assuage funding stresses (Chart I-4). Chart I-3Commodity Currencies Still At Risk Chart I-4A Smaller Pool Of Treasurys To Sell Finally, a recent report by the Bank of International Settlements3 showed that of the US$86 trillion in outstanding foreign exchange swaps/forwards, about 60% is among non-bank financial and other institutions. This suggests there is a huge pool within the financial architecture unable to access funding through central bank swap lines. Given that hedge funds are included in this group, this category entails a lot more credit risk than any central bank will be willing to bear (Chart I-5). Chart I-5Can The Fed Bail Out Non-Banks? Bottom Line: While the Fed’s injection of dollar liquidity has been massive and significant, access to these funds may be limited to entities that have significant credit risk. There is not much the Fed can do about this. But at the same time, it also suggests the Fed’s actions have been insufficient to quench the global thirst for dollar liquidity. From A Liquidity To A Solvency Crisis If the containment measures prove successful by summer, then the global economy will be awash with much stimulus, which will be fertile ground for pro-cyclical currencies. As a counter-cyclical currency, the dollar will buckle, lighting a fire under our favorites such as the Norwegian krone and the Swedish krona. The euro will be the most liquid beneficiary of this move. However, the DXY index has effortlessly broken above the psychological 100 level, suggesting we could catapult to new highs. When massive amounts of stimulus are injected into markets but prices keep falling (and the dollar keeps rallying), this portends a liquidity crisis morphing into a solvency one. What ensues is a liquidation phase where the only guiding signposts are technical indicators and valuation extremes. There are a few indications we could be stepping into this phase: During recessions, the dollar rally has tended to occur in two phases. The first phase prompts the US authorities to act, usually by dropping interest rates, which dampens the rally. The next phase epitomizes indiscriminate liquidation by financial markets (Chart I-6). Enter 2008. The US first introduced swap lines with a few central banks in December 2007. But from March to October 2008, the dollar soared by about 25%. This prompted the Fed to expand its swap lines to include even some emerging markets. Despite the knee-jerk fall in the dollar of 11%, we eventually made new highs by rallying 15%. While the Fed’s injection of dollar liquidity has been massive and significant, access to these funds may be limited. As the dollar rises, it takes time for economies to implode due to strong monetary and fiscal frameworks. The implosion of the euro area economy only surfaced well after the 2008 crisis. Specifically, there has been an epic rise in global nonfinancial corporate debt. As a result, credit default swaps across many countries are surging (Chart I-7). High-yield spreads are blowing out. Our bond strategists believe that even though there is value in investment-grade debt, high-yield paper remains at risk.4  Historically, whenever the default rate has breached 4% (as is the case now), a self-reinforcing feedback loop of higher refinancing rates and defaults ensues (Chart I-8). With a recovery rate that is going to be much lower than historical standards due to bloated balance sheets, this is worrisome. Chart I-6The Dollar Rally Occurs In Two Phases Chart I-7CDS Spreads Are Widening Significantly Chart I-8Large Defaults Are Ahead It is difficult to pinpoint where the epicenter of the potential default wave will be. The energy sector looks like a prime candidate, putting many commodity currencies at risk. Bottom Line: There is a non-negligible risk that the liquidity crisis evolves into a solvency one. Though this is not our base case, we assign a one-third probability to this outcome. Liquidity To Growth Transmission Channel Monetary stimulus only affects the economy with a lag, and fiscal stimulus is so far unlikely to completely plug the hole from economic disruption. This leaves currency technicals and valuation as among the only few guiding signposts towards a peak in the DXY. There is usually a significant lag between easing in offshore dollar funding costs and a respective bottom in the domestic currency (Chart I-1). The AUD/JPY cross has broken below the key support zone of 70-72. This defensive line held notably during the European debt crisis, China’s industrial recession and, more recently, the global trade war. This pins the next level of support in the 55-57 zone, on par with the recessions of 2001 and 2008. The USD/JPY is weakening again and will likely hit 100. A rising yen is usually accompanied by a dollar rally against other procyclical currencies. Outside of the Fukushima crisis, this has been a key indicator that the investment environment is becoming precarious (Chart I-9). Chart I-9The Yen Could Touch 100 Some high-beta currencies such as the USD/TRY, USD/ZAR, and USD/IDR are still in freefall. These currencies are usually good at sniffing out a change in the investment landscape, specifically one becoming perilous for carry trades. Similarly, the USD/CNY has tested and has failed to break above 7.12. This will be a key level to watch since a break above will send Asian currencies into the abyss. “Doctor” copper has failed to stage a meaningful rebound. In fact, the copper-to-gold and oil-to-gold ratios continue to head lower from oversold levels.  Whenever cyclical sectors are underperforming defensives at the same time as non-US markets underperforming US ones, this has signaled that the marginal dollar is rotating towards the US. This is usually dollar bullish (Chart I-10A and Chart I-10B). “Doctor” copper has failed to stage a meaningful rebound. In fact, the copper-to-gold and oil-to-gold ratios continue to head lower from oversold levels. This signifies impairment in the liquidity-to-growth transmission mechanism (Chart I-11). Earnings revisions continue to head lower across all markets. Chart I-10ACyclical Markets Are Not Confirming A Dollar Top Chart I-10BCyclical Markets Are Not Confirming A Dollar Top   Chart I-11Dr Copper Is Sick Bottom Line: Historically, signs of capitulation can usually be observed by paying close attention to market internals and currency technicals. While we have had some marginal improvement, we are not out of the woods yet. Portfolio Strategy Chart I-12Go Short CAD/NOK We recommend maintaining a barbell strategy – a basket of the cheapest currencies, along with some safe-havens such as the yen and Swiss franc. Overall, investors should maintain a small upward bias in the dollar in the near term. Meanwhile, short USD/JPY positions make sense. Oil plays are becoming attractive, but conditions for a durable bottom are not yet in place. The strong rebound in the NOK/SEK cross is just an unwinding of the flash crash. If the dollar and oil have been at the epicenter of these moves, then the cross is still at risk of relapsing in the near term. We were stopped out of a long position in this cross, and will discuss oil and petrocurrencies next week. That said, a short CAD/NOK position is a much safer way to express a longer-term bearish view on the dollar (Chart I-12). We are going short this cross today with a stop-loss at 7.5. Finally, the pound remains extremely cheap versus the dollar, but the rally in recent days has eroded the potential for tactical upside. We will await better opportunities to own sterling.   Chester Ntonifor Foreign Exchange Strategist chestern@bcaresearch.com Footnotes 1 These include the Bank Of Canada, Bank Of Japan, Bank Of England, European Central Bank, and the Swiss National Bank. 2 These include the Reserve Bank of Australia, the Banco Central do Brasil, the Danmarks Nationalbank (Denmark), the Bank of Korea, the Banco de Mexico, the Norges Bank, the Reserve Bank of New Zealand, the Monetary Authority of Singapore, and the Sveriges Riksbank. 3  Stefan Avdjiev, Egemen Eren and Patrick McGuire, “Dollar Funding Costs during the Covid-19 Crisis through the Lens of the FX Swap Market,” BIS Bulletin, dated April 1, 2020. 4 Please see US Bond Strategy and Global Fixed Income Strategy Joint Special Report, “Trading The US Corporate Bond Market In A Time Of Crisis,” dated March 31, 2020, available at usbs.bcaresearch.com Currencies U.S. Dollar Chart II-1USD Technicals 1 Chart II-2USD Technicals 2 Recent data in the US have been negative: The University of Michigan's consumer sentiment index plunged to 89.1 in March from 101 the previous month, the fourth largest monthly decline over the past half a century. ADP employment recorded a loss of 27K jobs in total nonfarm private sector, including a 90K decrease in small businesses payroll which was offset by the 48K increase in healthcare. Initial jobless claims surged to 6.6 million for the week ended March 27. The ISM manufacturing index came in at a relatively benign 49.1, but this was boosted by supplier deliveries. The DXY index appreciated by 1.1% this week amid growing concerns over COVID-19 and disappointing data releases. Shortly after the $2 trillion coronavirus rescue package last week, President Trump is now calling for another "very big and bold" $2 trillion "Phase 4" package on infrastructure spending. Report Links: The Dollar Funding Crisis - March 19, 2020 Are Competitive Devaluations Next? - March 6, 2020 The Near-Term Bull Case For The Dollar - February 28, 2020 The Euro Chart II-3EUR Technicals 1 Chart II-4EUR Technicals 2 Recent data in the euro area have been negative: The business climate indicator dropped to -0.28 from -0.06 in March, as the COVID-19 crisis deepens. The March consumer price inflation fell across the euro area: headline inflation fell from 1.2% to 0.7% year-on-year and core inflation decreased from 1.2% to 1%.  EUR/USD depreciated by 1.1% this week. Euro zone countries have until April 9 to design another stimulus package to support the economy which might consist of financial loans and a short-term work scheme. The biggest challenge being faced is that while some member countries (including France, Italy and Spain) are calling for joint debt issuance, others (including Germany and Austria) are fiercely against it. Report Links: On The DXY Breakout, Euro, And Swiss Franc - February 21, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 On Money Velocity, EUR/USD And Silver - October 11, 2019 Japanese Yen Chart II-5JPY Technicals 1 Chart II-6JPY Technicals 2 Recent data in Japan have been negative: The jobs-to-applicants ratio dropped from 1.49 to 1.45 in February. Industrial production contracted by 4.7% year-on-year in February, down from -2.3% the previous month. Housing starts fell by 12.3% year-on-year in February.  The Japanese yen appreciated by 1.6% against the US dollar this week, supported by growing concerns over COVID-19 and a global recession. The quarterly Tankan Survey shows that the sentiment index fell to a 7-year low of -8 in Q1 among large manufacturers, and dived to 8 from 20 among non-manufacturers. Besides, the survey points to a further deterioration of confidence over the next three months. Report Links: The Near-Term Bull Case For The Dollar - February 28, 2020 Building A Protector Currency Portfolio - February 7, 2020 Currency Market Signals From Gold, Equities And Flows - January 31, 2020 British Pound Chart II-7GBP Technicals 1 Chart II-8GBP Technicals 2 Recent data in the UK have been negative, despite some positive releases for Q4: Consumer confidence dropped from -7 to -9 in March. Markit manufacturing PMI slipped from 48 to 47.8 in March. The current account deficit narrowed from £15.9 billion to £5.6 billion in Q4. Annualized GDP growth was unchanged at 1.1% year-on-year in Q4. The British pound soared by 2% against the US dollar this week. To preserve cash during the pandemic, the BoE's Prudential Regulation Authority (PRA) suggested commercial banks to suspend dividends and buybacks until the end of this year in addition to cancelling outstanding 2019 dividends. Moreover, the PRA also expects banks not to pay any cash bonuses to senior staff. Report Links: Updating Our Balance Of Payments Monitor - November 29, 2019 A Few Trade Ideas - Sept. 27, 2019 United Kingdom: Cyclical Slowdown Or Structural Malaise? - Sept. 20, 2019 Australian Dollar Chart II-9AUD Technicals 1 Chart II-10AUD Technicals 2 Recent data in Australia have been mixed: Consumer confidence dropped from 72.2 to 65.3 in March. Manufacturing PMI slipped from 50.1 to 49.7 in March. New home sales increased by 6.2% month-on-month in February, up from 5.7% the previous month. Building permits grew by 20% month-on-month in February. However, we expect housing activities to slow down in March. The Australian dollar fell further by 0.4% against the US dollar this week. In the minutes released this Wednesday, the RBA warned that a "very material contraction" in economic activity was ahead. While the RBA said it was not possible to provide an update of the macro forecast given the "fluidity of the situation", it also expressed concerns that the contraction might linger beyond the June quarter. Report Links: On AUD And CNY - January 17, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 A Contrarian View On The Australian Dollar - May 24, 2019 New Zealand Dollar Chart II-11NZD Technicals 1 Chart II-12NZD Technicals 2 Recent data in New Zealand have been negative: Building permits grew by 4.7% month-on-month in February. However, business confidence plunged from -19.4 to -63.5 in March. The activity outlook index also dived from 12 to -26.7 in March. The New Zealand dollar fell by 0.8% against the US dollar this week. Similar to the BoE, the RBNZ is now restricting all locally-incorporated banks from paying dividends on ordinary shares until the economy has sufficiently recovered in order to preserve cash and support the stability of the financial system. The RBNZ is also taking measures to help support banks to lend to businesses. Report Links: Updating Our Balance Of Payments Monitor - November 29, 2019 Place A Limit Sell On DXY At 100 - November 15, 2019 USD/CNY And Market Turbulence - August 9, 2019 Canadian Dollar Chart II-13CAD Technicals 1 Chart II-14CAD Technicals 2 Recent data in Canada have been negative: Bloomberg Nanos confidence dropped from 51.3 to 46.9 for the week ended March 27. Markit manufacturing PMI fell below 50 for the first time since last September to 46.1 in March. The Canadian dollar fell by 1.2% against the US dollar this week, weighed down by the sharp decline in oil prices. The BoC lowered the overnight target rate by another 50 bps in an emergency meeting last Friday. It also joined the QE club by launching the Commercial Paper Purchase Program (CPPP) which aims to ease short-term funding stress. Report Links: The Loonie: Upside Versus The Dollar, But Downside At The Crosses Updating Our Balance Of Payments Monitor - November 29, 2019 Making Money With Petrocurrencies - November 8, 2019 Swiss Franc Chart II-15CHF Technicals 1 Chart II-16CHF Technicals 2 Recent data in Switzerland have been negative: KOF leading indicator dropped from 100.9 to 92.9 in March. Total sight deposits increased from CHF 609 billion to CHF 621 billion for the week ended March 27. The manufacturing PMI plunged from 49.5 to 43.7 in March. Headline consumer prices fell by 0.5% year-on-year in March, further down from the 0.1% decline in February. The Swiss franc fell by 1.5% against the US dollar this week. The SNB is not only battling a weaker economic backdrop, but also strong demand for safe-haven currencies. While the SNB has less room to further lower interest rates, it is taking part in easing funding stress from the pandemic. Report Links: On The DXY Breakout, Euro, And Swiss Franc - February 21, 2020 Currency Market Signals From Gold, Equities And Flows - January 31, 2020 Portfolio Tweaks Before The Chinese New Year - January 24, 2020 Norwegian Krone Chart II-17NOK Technicals 1 Chart II-18NOK Technicals 2 Recent data in Norway have been negative: Retail sales increased by 2% month-on-month in February, up from 0.5% the previous month. Manufacturing PMI fell to 41.9 from 51.6 in March, the lowest since the Great Financial Crisis. The new orders, production and employment components all plunged below 40, while suppliers' delivery index soared to 74. The Norwegian krone rebounded by 2% against the US dollar this week, following the brutal selloff in recent weeks weighed by the sharp decline in oil prices. The Norges Bank is stepping up in currency intervention to reduce volatility including buying the krone in exchange for the US dollar. We believe there is now tremendous value in the krone once oil prices stabilize. Report Links: Building A Protector Currency Portfolio - February 7, 2020 On Oil, Growth And The Dollar - January 10, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 Swedish Krona Chart II-19SEK Technicals 1 Chart II-20SEK Technicals 2 Recent data in Sweden have been negative: Retail sales grew by 2.8% year-on-year in February. Manufacturing PMI crashed to 43.2 in March from 52.7. The Swedish krona fell by 0.5% against the US dollar this week. In the Swedish Economy Report released on Wednesday, the NIER (Swedish National Institute of Economic Research) estimates that Sweden's GDP will fall by just over 6% in the second quarter. While the NIER believes that the current central bank measures are appropriate in supporting the economy in a wave of bankruptcies and mass unemployment, Sweden has more room to act with relatively lower government debt to its advantage. Report Links: Updating Our Balance Of Payments Monitor - November 29, 2019 Where To Next For The US Dollar? - June 7, 2019 Balance Of Payments Across The G10 - February 15, 2019 Trades & Forecasts Forecast Summary Core Portfolio Tactical Trades Limit Orders Closed Trades

Highlights The economic shutdown needed to exhaust the coronavirus pandemic must last much longer than is anticipated. For example, in Italy it must last 24 weeks. If the economy is reopened too soon, the pandemic will reignite in a second wave later this year, just as in 1918. Take the 12 percent profit in the tactical overweight to equities versus bonds and go neutral. Stay underweight European equities and euro area banks given their high sensitivity to the economy. Stay overweight US T-bonds versus German bunds and Swiss bonds. All high-quality bond yields will eventually reach the lower bound of -1 percent, making US T-bonds the most attractive in class. The euro is a structural overweight but a tactical neutral – because in equity market corrections the repatriation of foreign investments into domestic cash boosts the demand for dollars relative to the euro. Fractal trades: Go long Australia versus New Zealand. Short palladium versus nickel was closed at 32 percent profit. Feature “You’ve got to understand that you don’t make the timeline, the virus makes the timeline” – Dr. Anthony Fauci, Director of the National Institute of Allergy and Infectious Diseases It’s A Biological Crisis The coronavirus crisis is first and foremost a biological crisis. This makes it fundamentally different to the 2008 global financial crisis, the 2000 dot com bust, the 1990 Japanese crash, and the 1930s Great Depression – all of which were financial crises needing financial and economic cures. As such, the current crisis needs to be analysed very differently. Crucially, the financial and economic policy responses to the coronavirus crisis are only a palliative, not a cure. The cure is to exhaust the coronavirus pandemic. But to exhaust the pandemic without overburdening stretched healthcare systems will require shutting the economy for months. If the economy is reopened too soon, then the pandemic will reignite in a second and a possible third wave just as in 1918-19 (Chart of the Week). Chart I-1If The Economy Is Reopened Too Soon The Pandemic Will Reignite, Just As In 1918-19 The US fiscal stimulus package amounts to 10 percent of annual GDP. But if exhausting the pandemic requires a third of the economy to be shut for a third of the year, then the economy would lose one ninth, or 11 percent, of its annual output. Hence, despite the biggest fiscal boost of all time, the economy would end up shrinking (Chart I-2). Chart I-2Fiscal Stimulus Is Massive, But Might Not Be Enough Meanwhile, Germany’s willingness to remove the ‘debt brake’ that limits its structural federal deficit to 0.35 percent of GDP, the willingness to issue euro ‘corona-bonds’, and the ECB’s willingness to increase the size and breath of its asset-purchase program are minor details in a much bigger story. Rather like rearranging the deckchairs on the Titanic. Ignore the minor details and concentrate on the bigger story. How long must the economy stay shut to exhaust the pandemic? The Crucial Metric Is Not Mortality, It Is Morbidity Some people counter that in shutting the economy, “the cure is worse than the disease”. They argue that most coronavirus victims suffer mild or no illness. Moreover, the mortality rate is low and might not be much higher than that of the flu. Even if this turns out to be true, the argument misses the point. Death requires very little medical intervention and resource, whereas severe illness requires massive medical intervention and resource. Moreover, when the severe illness is a respiratory illness, it leaves the sufferer struggling to breathe and needing ventilation in an intensive care unit (ICU). No civilized society can deny an ICU to somebody who is struggling to breathe. Therefore, the most important metric for the coronavirus crisis is not its mortality rate, but rather its morbidity (severe illness) rate. Or more specifically, the morbidity rate versus the economy’s ICU capacity. How long must the economy stay shut to exhaust the pandemic? Enter the Diamond Princess. The cruise ship turned into a laboratory for the coronavirus because all 3700 passengers and crew were quarantined and tested for the infection. Of the 700 people who tested positive, 11 have subsequently died. But the more important point is that 45 people needed ICU treatment, meaning the coronavirus morbidity rate was four times its mortality rate (Table I-1). Table I-1On The Diamond Princess, The COVID-19 Morbidity Rate Was Four Times Its Mortality Rate A separate study by the Intensive Care National Audit & Research Centre in the UK corroborates this, suggesting that the coronavirus morbidity rate is around three times the mortality rate and that the average time in an ICU for a coronavirus patient is half a week.1 Let’s be optimistic and assume that the coronavirus mortality rate is around 0.3 percent and that its morbidity rate is around three times higher at 1 percent. This means that if a hundred thousand people get infected, one thousand will need ICU treatment. But even advanced economies have only a dozen or so ICU beds per hundred thousand people. For example, Italy has 12.5 (Chart I-3). Chart I-3Advanced Economies Have Only A Dozen Or So ICU Beds Per Hundred Thousand People If each severely ill coronavirus patient averages half a week in an ICU, this means that only 2500 Italians out of hundred thousand, or 2.5 percent of the population, can get infected every week before the ICU capacity is breached. Northern Italy, specifically Lombardy, went into crisis because it allowed its coronavirus infection rate to breach its ICU capacity. Yet ‘flattening the curve’ of infections comes at a cost. Keeping the weekly infection rate below ICU capacity means that the infection rate must be suppressed for longer to achieve the holy grail of ‘herd immunity’. This is the point when around 60 percent of the population have caught the disease. To achieve herd immunity without breaching its ICU capacity, Italy would have to shut its economy for 24 weeks. Other economies might need less or more time depending on their own morbidity rates versus ICU capacity, but it would still be a minimum of many months. Meaning that the draconian measures that flatten the infection curve – quarantining, social distancing, and essentially shutting the economy – must also stay in place for many months after infection rates have stopped rising. Therein lies the big problem.2 If The Economy Reopens Too Soon The Pandemic Will Reignite A pandemic is a classic complex adaptive system. Its evolution depends on the sum of many millions of individual actions which themselves depend on the evolving pandemic data.  When mortality, morbidity and infection rates are surging the public will sense an emergency, and so accept the loss of liberty and livelihood that comes from quarantining and shutting the economy. The result is that ‘R-nought’ – the number of people that each infected person infects – drops, which suppresses the pandemic. If the economy reopens too soon, the pandemic will reignite in a second wave. But once infection rates level off or reverse, the public’s sense of emergency dissipates. People push back against the continued loss of liberty and livelihood. As do policymakers, especially those seeking imminent re-election. The result is that R-nought reaccelerates. In fact, the emergency has not dissipated. Once R-nought reaccelerates, the large proportion of the population who have not been infected are sitting ducks for the virus. Therefore, if the economy reopens too soon, the pandemic will reignite in a second wave (Chart I-4). Chart I-4When A Large Proportion Of The Population Is Uninfected, ‘R-Nought’ Must Stay Low History provides a salutary warning. During the 1918-19 pandemic, no US city experienced a second wave while its main battery of social distancing policies remained in place. Second waves only occurred after the city economies were reopened too soon.3 Implications For The Financial Markets The key message is that the economic shutdown must last longer than is anticipated. And that if the economy is reopened too soon, the pandemic will reignite in a second wave later this year. Therefore: 1. Move to neutral equities tactically: Our March 12 tactical recommendation to overweight equities versus bonds (long S&P500 versus German 30-year bund) achieved its 12 percent profit target and is now closed (Chart I-5). Chart I-5The Technical Rebound Has Happened As Predicted 2. Overweight equities on a long-term horizon: Investors with a 2 year or longer horizon beyond the pandemic should overweight equities versus bonds – because the prospective annualised return from equities, 6 percent, is much more attractive than that from bonds, 1 percent (Chart I-6 and Chart I-7). Chart I-6The Prospective Annual Return From Equities At 6 Percent… Chart I-7...Is Much More Attractive Than 1 Percent From Bonds 3. Underweight European equities: Our 2020 recommendation to underweight the euro area relative to the US and Japan is providing rich rewards as the S&P 500 has outperformed by 8 percent, and the Nikkei 225 has outperformed by 10 percent. Given the economic sensitivity of the Eurostoxx 50, stay underweight. 4. Underweight euro area banks: Likewise, euro area banks have underperformed the market by almost 25 percent this year. But it is too soon to remove this underweight. 5. Overweight US T-bonds versus German bunds and Swiss bonds: The US 30-year T-bond has outperformed the German 30-year bund by 18 percent this year. Stick with this position. Ultimately, all high-quality bond yields are going to hit the lower bound of -1 percent, making US T-bonds the most attractive in class. 6. The euro is a structural overweight but a tactical neutral: The structural pecking order for currencies is the reverse of bonds. However, during equity market corrections the repatriation of foreign investments into domestic cash boosts the demand for dollars relative to other currencies. This warrants a tactically neutral stance to the euro. Fractal Trading System* The fractal trading system has performed very well during the recent crisis. Long S&P 500 versus the German 30-year bund delivered its 12 percent profit target. And short palladium versus nickel delivered its 32 percent profit target. This week’s recommended trade is to go long Australia versus New Zealand expressed through their MSCI (US$) indexes. The profit target is 12 percent with a symmetrical stop-loss. The rolling 12-month win ratio now stands at 64 percent. Chart I-8Australia Vs. New Zealand When the fractal dimension approaches the lower limit after an investment has been in an established trend it is a potential trigger for a liquidity-triggered trend reversal. Therefore, open a countertrend position. The profit target is a one-third reversal of the preceding 13-week move. Apply a symmetrical stop-loss. Close the position at the profit target or stop-loss. Otherwise close the position after 13 weeks. * For more details please see the European Investment Strategy Special Report “Fractals, Liquidity & A Trading Model,” dated  December 11, 2014, available at eis.bcaresearch.com.   Dhaval Joshi Chief European Investment Strategist dhaval@bcaresearch.com Footnotes 1 Source: ICNARC report on COVID-19 in critical care, 27 March 2020 2 If 60 percent are infected, then 0.6 percent would require an ICU. This equates to 600 people out of a hundred thousand for whom there are 12.5 ICUs. If the average stay in the ICU is half a week, this would require 600/12.5 half weeks, or 0.5*600/12.5 full weeks = 24 weeks. 3 Source: Public health interventions and epidemic intensity during the 1918 influenza pandemic; Hatchett, Mecher, and Lipsitch Fractal Trading System Cyclical Recommendations Structural Recommendations Closed Trades Asset Performance Currency & Bond Equity Sector Country Equity Indicators Bond Yields Indicators To Watch - Bond Yields Indicators To Watch - Bond Yields Indicators To Watch - Bond Yields Indicators To Watch - Bond Yields Interest Rate Indicators To Watch - Interest Rate Expectations Indicators To Watch - Interest Rate Expectations Indicators To Watch - Interest Rate Expectations Indicators To Watch - Interest Rate Expectations