14 ★ FT Weekend 4 April/5 April 20203 Wall Street ends week lower after the
release of grim job numbers
3 European bourses slide after data
underline huge cost of lockdowns
3 Oil rebound sends Brent crude above
$30 a barrelStocks sank at the end of a week that
revealed more signs of the huge
economic damage being inflicted by the
pandemic on economies across the globe.
Wall Street was on track to end the
week more than 2 per cent lower after
grim back-to-back jobs data shed light on
the toll Covid-19 was taking on domestic
business activity.
Non-farm payrolls data yesterday
revealed the US economy had shed
701,000 jobs in early March, pushing the
unemployment rate to 4.4 per cent, its
highest in more than two-and-a-half
years. Those numbers came a day after
US jobless claims jumped to 6.65m in the
week ending March 28, more than double
the previous week’s record.
Together, those figures were an “early
litmus test of more woeful jobs numbers
to come”, said Neil Williams, senior
economic adviser to the International
business of Federated Hermes.
The S&P 500 was down almost 2 per
cent at midday while both the tech-heavy
Nasdaq Composite and the Dow Jones
Industrial Average slid 1.5 per cent.
In a week where the number of
confirmed global coronavirus cases
passed 1m, European bourses were also
weaker after the release of bleak survey
data that underlined the enormous cost
of the lockdowns on the continent.
The IHS Markit eurozone purchasing
managers’ index for services plummetedto 26.4 in March, down from 52.6 in the
previous month and the lowest since
records began in 1998.
Italy, which has been hit hard by the
pandemic, was singled out by Chris
Williamson, chief business economist at
IHS Markit. “No countries are escaping
the severe downturn in business activity,
but the especially steep decline of Italy’s
service sector gives a taste of things to
come for other countries,” he said.
Milan’s FTSE MIB closed down 2.7 per
cent yesterday for a weekly fall of 2 per
cent, while the broader Stoxx Europe 600
index ended the day 1 per cent lower.
Energy groups rallied this week on
hopes of a ceasefire in the price warbetween Saudi Arabia and Russia. On
Thursday oil soared nearly 50 per cent
for its biggest ever one-day rally after
Donald Trump said Saudi Crown Prince
Mohammed bin Salman and Russian
President Vladimir Putin had begun talks
on curbing production. The oil rebound
continued yesterday with Brent crude,
the international benchmark, up almost 11
per cent at $33.28 a barrel. West Texas
Intermediate, the US marker, rose 6 per
cent to $26.90 a barrel.
Haven assets such as core government
debt and gold rallied. The yield on the US
Treasury fell 5 basis points to 0.57 per
cent while gold edged up 0.3 per cent to
hit $1,618 an ounce.Ray DouglasWhat you need to know
Oil rallies on hope of Opec agreeing deal to cut output
per barrelSource: Refinitiv Mar AprBrent crudeWest Texas intermediate The day in the markets
Markets update
US Eurozone Japan UK China Brazil
Stocks S&P 500 Eurofirst 300 Nikkei 225 FTSE100 Shanghai Comp Bovespa
Level 2488.57 1219.38 17820.19 5415.50 2763.99 68334.
% change on day -1.52 -0.96 0.01 -1.18 -0.60 -5.
Currency $ index (DXY) $ per € Yen per $ $ per £ Rmb per $ Real per $
Level 100.639 1.080 108.505 1.226 7.090 5.
% change on day 0.458 -0.552 0.491 -0.969 -0.108 0.
Govt. bonds 10-year Treasury 10-year Bund 10-year JGB 10-year Gilt 10-year bond 10-year bond
Yield 0.571 -0.443 -0.014 0.306 2.705 7.
Basis point change on day -3.110 -0.400 0.220 -2.200 4.800 25.
World index, Commods FTSE All-World Oil - Brent Oil - WTI Gold Silver Metals (LMEX)
Level 279.54 32.68 26.81 1616.80 14.18 2299.
% change on day -1.75 9.26 7.84 2.55 1.14 0.
Yesterday's close apart from: Currencies = 16:00 GMT; S&P, Bovespa, All World, Oil = 17:00 GMT; Gold, Silver = London pm fix. Bond data supplied by Tullett Prebon.Main equity markets
S&P 500 index Eurofirst 300 index FTSE 100 index||||||||||||||||| |||
Feb 2020 Apr1920256032003840|||| |||||||| ||||||||
Feb 2020 Apr960128016001920||||||| |||||||| |||||
Feb 2020 Apr3840512064007680Biggest movers
% US Eurozone UKUpsArconic 11.
Eog Resources 5.
Marketaxess Holdings 5.
L Brands 4.
Gap (the) 3.Carrefour 6.
Carlsberg 4.
Coloplast 4.
Deutsche Boerse 4.
Iliad 4.London Stock Exchange 6.
Hikma Pharmaceuticals 4.
Sainsbury (j) 4.
Just Eat Takeaway.com N.v. 3.
Morrison (wm) Supermarkets 3.
%DownsLive Nation Entertainment -11.
Technipfmc -8.
Ralph Lauren -8.
Discover Fin Services -7.
Capital One Fin -7.
Prices taken at 17:00 GMTNatixis -18.
Cnp Assurances -9.
Aegon -8.
Safran -8.
Societe Generale -8.
Based on the constituents of the FTSE Eurofirst 300 EurozoneLegal & General -10.
Rolls-royce Holdings -9.
Pearson -8.
Whitbread -8.
Itv -8.
All data provided by Morningstar unless otherwise noted.Billy Nauman
On Wall Street
O
f all the se c tors that
escaped the 2008 financial
crisis relatively unscathed,
few caught more people by
surprise than the auto
lending industry. At the time, there
were widespread expectations that the
wave of defaults hitting the mortgage
market would wash over the auto sector
as well.
But cash-strapped borrowers contin-
ued to prioritise paying off their cars
over their homes and credit cards. The
logic seemed to be clear: you can sleep in
your car but you cannot drive your
house to work. Now, however, the $1.3tn
industry — about 60 per cent bigger
than it was back then — is facing an
entirely different set of threats.
Not only are millions of people being
put out of work but governments are
calling for everyone to stay at home to
limit the spread of coronavirus.
That raises questions over whether
borrowers will continue to put their cars
above all else when money gets tight.
Another big difference between 2008
and now — this crisis is hitting harder
for those on the lower ends of the credit
spectrum.
The great recession created a lot of
economic strife for wealthy people, but
today lower wage-earning “subprime”
borrowers are bearing the brunt, with
the restaurant, retail and service indus-
tries being decimated, said Rosemary
Kelley, head of asset-backed securities
at Kroll.
Given that the subprime car market
was showing signs of strain before the
crisis — with millions of people falling
behind on their payments last year —
the pandemic may create the perfect
storm that bearish investors have beenwaiting for. That means lenders and
investors in asset-backed securities
could be in danger.
ABS originators typically try to build
portfolios that can withstand “astro-
nomical” levels of default, said Joe
Cioffi, chair of the insolvency and credi-
tors’ rights practice at Davis & Gilbert, a
law firm. But this time, the problem is
not loose underwriting or a lack of extra
protections for the top-tier investors.
“No one has forecast this kind of shock
to the economy,” he said.
For subprime lenders, a market
dominated by non-bank institutions,
the biggest problem is liquidity, saidAmy Martin, senior director at S&P Glo-
bal Ratings. “Right now it is very diffi-
cult to access capital markets,” she said.
“ABS markets are pretty much closed.”
So far this year, nearly $26bn of auto
ABS securities have hit the market,
according to Finsight, a data provider.
But there has been no issuance at all for
more than three weeks.
This means it will be important to
keep an eye on issuers’ lines of credit,
which can be yanked if delinquency
rates, loss rates, payment extensions or
other metrics start to breach certain
triggers outlined in covenants.
Credit Acceptance Corp, one of the
largest of the non-bank lenders, has six
warehouse lines worth a total of $1.2bn,
for example, according to its mostrecent annual report. Since the end of
January, its share price has been cut in
half. But it is unlikely that it, or any
other lenders, are at immediate risk of
losing these lifelines, analysts said.
It may take a few weeks before prob-
lems start showing up on lenders’
reports to investors, said Giuliano
Bologna, an analyst at BTIG.
Most of the people laid off or out of
work since the outbreak are still likely
to receive pay cheques this month, so
the cycle of defaults has yet to really
begin,” he said.
The big variables now are how well
the US government’s stimulus package
works and how long the crisis lasts.
With companies such as Ally
Financial and Santander Consumer
USA offering forbearance to borrowers,
it could buy enough time to stave off
widespread defaults if the economy gets
back on track quickly.
However, such measures may just be
kicking the can down the road.
Once forbearance expires, credit per-
formance for these companies could
“deteriorate rapidly, particularly if dis-
placed workers are unable to secure
employment and businesses cannot
resume operations once the economy
reopens”, Fitch analysts said in a
research note this week.
Unless the government gives people
enough money to keep up their pay-
ments for the entire crisis, losses are
bound to start piling up, said Mr Cioffi.
“Within two months you will see the
‘sky is falling’ talk that no one wanted to
do before,” he said. “Subprime auto was
sick. Now it is likely going to be in
triage.”[email protected]Car loan investors face
bigger pile-up than
last financial crisis
‘Right now it is very
difficult to access capital
markets. ABS marketsare pretty much closed’
Fashion labelRalph Laurendeclined after
a downgrade to “sector perform” from
RBC Capital Markets. Covid-19 has thrown
plans to raise brand perception into
chaos, with “inevitable” stockpiles of
spring/summer inventory forcing
markdowns and a quarter of sales coming
from North American wholesale channels
such as department stores.
Ralph Lauren’s investment in digital
could be too late for the rush online, and
its “more mature customer base” might
be reluctant to go back to the mall even
after social distancing rules are lifted, it
said.
RBC also turned cautious on Calvin
Klein ownerPVH, citing its exposure to
North American wholesale and tourist
sales channels.
Under Armourretreated after
withdrawing the 2020 guidance it had
given in February. The sportswear maker
also warned of a charge of up to $525m to
cover costs including staff lay-offs and
lease terminations.
Concert promoterLive Nationheaded
the S&P 500 fallers. “We cannot yet see
how deep the 2020 hole will be,” Morgan
Stanley told clients.
It estimated that if Live Nation has to
refund $1bn of its first-quarter revenue to
ticket buyers, the company will have to
seek debt covenant waivers.Bryce ElderWall Street Eurozone London
AMSwas under pressure after the
chipmaker’s rights issue flopped, leaving
underwriting banks holding more than
21 per cent of its shares.
The Austrian group raised $1.8bn to
part-finance its acquisition of Osram, the
German light-maker, but shareholder
take-up was just 62 per cent.
With Osram trading well below the
rights issue price, its eight syndicate
banks were unable to place most of the
stock into the market, leaving a sizeable
overhang. Buying Osram had already left
AMS highly levered and facing slowing
demand from key customers such as
Apple and carmakers, said Credit Suisse.
The group was also unable to cut costs
aggressively as regulators required
guarantees around staff lay-offs and dual
headquarters to approve the deal.
Natixisslipped back to its lowest in
three weeks. Demand from income
investors had led the French bank’s
shares to double in March, only for those
gains to be erased entirely this week after
regulatory pressure forced the
cancellation of its 2019 dividend.
Adidasslipped on a report that the
sportswear maker would seek €1bn in
German state aid because of Covid-
uncertainties, while sector peerPuma
faded after proposing to suspend its 2019
dividend.Bryce ElderPearsondropped after Morgan Stanley
warned that the textbook publisher was
not as geared up for online learning and
rising unemployment as its recent market
outperformance would imply.
Global Assessment was Pearson’s
biggest earner in 2019, contributing 36
per cent of operating earnings, and would
be the most affected by Covid-19 as test
centres close, Morgan Stanley said.
Cutting profit forecast by as much as
38 per cent, the broker also worried about
disruption to US higher education
enrolment and lower incomes affecting
discretionary purchases of textbooks.
Hammersonhit a record low following
reports that an anchor tenant was on the
brink of administration and after Numis
Securities downgraded the shopping
centre owner to sell. With Hammerson
owning few of its properties outright it
was not obvious which assets could be
disposed, and “strategic mis-steps” by
management had eroded confidence in
“its ability to navigate successfully
through the current storm”, Numis said.
Legal & General led insurers sharply
lower after the European industry
association called for temporary dividend
suspensions to protect capital reserves,
sparking a row between domestic
regulators on the right approach to the
issue.Bryce ElderCOMPANIES & MARKETS
APRIL 4 2020 Section:Markets Time: 3/4/2020 - 18: 58 User: stephen.smith Page Name: MARKETS2, Part,Page,Edition: ASI, 14, 1