Exposure rates of the Dorval Asset Management Range – 24th April 2020

World stock-markets have staged a clear rebound since March 23, so confirmation of an upbeat scenario now not only requires a gradual resumption in work, but will also need an extension in support and stimulus measures.

There must be no doubt that authorities will do “whatever it takes”, and in this respect, the US oil crisis and divisions in Europe will act as a fresh test.


The plunge in oil prices into briefly negative territory in the United States – due to the overload for available storage facilities among other factors – did not leave the markets in the lurch for long. Barely a few hours after this unusual event, the White House pledged to step in with support measures for the oil sector, swiftly putting paid to the surge in risk premiums on energy sector junk bonds (cf. chart 1). Meanwhile, US Congress has just approved a $500bn aid package, mainly for small businesses. So concerns of a chain of successive bankruptcies now seem to have been brought under control, but it is vital to continue these efforts at any cost to ensure that doubt does not take root.


Shock from negative WTI prices did not have much-feared impact on credit spreads

WTI June 2020 contract
WTI May 2020 contract
Credit spreads for US energy sector high yield bonds



The European Central Bank has followed in the Fed’s footsteps and decided to accept junk bonds as collateral if the issuer still had a BBB- rating at least at April 7, 2020. This comes as good news, but the main battle in Europe is primarily playing out in the imbalance between the stronger countries on the one hand and weaker ones on the other. After the videoconference summit of EU heads of state on April 23, the plan for a Europe-wide recovery program is beginning to take shape, involving an increase in the European Union budget from 2021, with a leverage mechanism. The magnitude of this leverage now remains to be seen, along with the relative portion of spending to be allocated to direct transfers as compared with loans to states. The European Commission is expected to present an initial outline of the plan on May 8.


Direct transfers within the euro area are forbidden in theory and are still political anathema in Germany, so the decision was taken to use the European Union budget as a whole to launch a coordinated pan-European recovery plan. In light of public opinion in central and northern European countries, it is undeniably easier to stand united in a program that incorporates the eastern countries and no longer just the countries of the south alone. The EU budget only comes to €150bn (1% of EU GDP), but it is set to be increased, while a joint debt mechanism – which still remains to be defined – will provide for leverage. Germany has mentioned a figure of €500bn, but France and Spain are keen to double or treble this amount. Discussions will also particularly focus on the type of aid provided, with the better-off countries in favor credit lines, which would admittedly mean shared interest rates, but this type of support would also further add to the debt burden for periphery countries and risk pushing their sovereign debt ratings into junk bond category. So France and Spain are in favor of grants and transfers that do not raise countries’ debt.


The ECB will have to do even more in light of soaring deficits

Thousands of billions of euros
Likely 2020 budget deficit for euro area countries
ECB public sector asset purchases (flows over 52 weeks)
ECB’s current program

Annual public deficit for euro area countries


The policy response currently under discussion will round out the €540bn in safety nets that include the use of the ESM, support from the EIB and the Support to mitigate Unemployment Risks in an Emergency (SURE) instrument, which will be rolled out on June 1. Meanwhile, the ECB will also have to ramp up its support for states in the euro area. The current asset purchase program equates to 7% of GDP, while states’ debt could increase by 15-20% of GDP in 2020 alone (cf. chart 2). The central bank will hold its next meeting on April 30 – and it must not falter.


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