Second wave

Global markets turn choppy as investors weigh the threat of a second wave

June 22, 2020

Good morning. Stocks have been trading sideways as virus concerns intensify. Central banks have taken the morning off. Investors, you’re on your own—for now.

Let’s check in on the action.

Markets update Asia • Asia starts the week in the red. The Hang Seng is down 0.8% in afternoon trade.• A new COVID-19 outbreak in Australia (yes, I’m including Oceania here in this part of the world) is prompting Victoria officials to extend lockdown measures there by an additional four weeks.• Sticking with coronavirus… Chinese authorities over the weekend suspended imports from one of Tyson Foods’ American processing plants where hundred of employees had tested positive for Covid. It puts a cloud over the on-again-off-again Phase 1 trade deal. Europe • The European bourses dropped at the open with Paris, London and Frankfurt all down at least 1%, before steadily recovering, and even creeping into positive territory by late-morning. • The E.U. and China convene a big summit today. On the agenda: new tariffs, the Hong Kong-focussed security law and an explicit warning to Chinese M&A investors to stay away from weakened European companies.• Germany’s Lufthansa is hitting more turbulence. The airline’s biggest investor doesn’t like the terms of the €9 billion state-funded bailout, and is vowing to block it. Shares were down more than 7% at the open, and its bonds sank.• Wirecard shares have fallen nearly 87% over the past three days. The fallen German fintech darling updated the markets this morning saying the $2.1 billion in missing revenues it reported last week probably doesn’t exist. U.S. • The Dow, S&P 500 and Nasdaq all notched gains last week despite choppy trade on Thursday and Friday. Here’s one of those “voodoo spirits” data points: in 26 of the past 30 years, the Dow has fallen by an average of 1.07% in the week after a June triple-witching event. Friday was a quadruple-witcher. Futures this morning points to gains.• American Airlines plans to raise an additional $3.5 billion, partly by selling shares and bonds, to give it a bit of financial cushion as air travel slowly rebounds.• What’s on the calendar this week? Sales of existing homes (today) and new homes (tomorrow): IMF’s updated 2020 growth projections (Wednesday); U.S. jobless claims (Thursday); Nike earnings call (Thursday). Elsewhere • Gold is up.• The dollar is down. Again.• Crude is flat this morning, with Brent trading above $42/barrel. One man’s junk… In late February I called a bond analyst here in Europe to check in. Stocks were just beginning to tank, but the red-flashing warning light was coming from the other side of the markets, from bonds. For a few days in February, there were few takers for corporate debt of any rating, and that was really freaking out traders—and others higher up.

On cue, the central banks stepped in with a series of dramatic moves to jumpstart bond markets around the world. In April came the capper when the Fed vowed to go all in and buy something even pension funds wouldn’t dare touch— corporate junk. Economists are going to be studying that move for ages. It’s had the effect of sending stocks and bonds into the stratosphere, as it’s become clear to investors that the Fed will now backstop a lot of fragile corporates.

Since April, “the high-yield market has evolved from a truly broken state, to opening for secured rescue financing packages, to allowing companies to refinance debt at opportunistic and unprecedented rates, aided by our helicopter parents at the Federal Reserve," Christian Hoffmann, a portfolio manager at Thornburg Investment Management, told Bloomberg.

That helicopter money is causing a run on junk bonds, which suddenly don’t seem so junky. In fact, the rally in junk bonds this month could approach record territory as investors seek high-yield payoffs. Why buy low-yield Treasurys backed by Uncle Sam when you can buy high-yield debt backed by Uncle Sam?

Bloomberg’s Lisa Abramowicz broke down the frenzy in the high-yield bond market in a Tweet over the weekend:

2020 started off great with big demand for corporate debt. The party crashed in late February and March, as the chart above shows. But that was a mere pause. The central bank intervention has goosed the bond markets to levels, by Bloomberg’s calculations, last seen in 2013.

To be clear, this run on junk won’t save all troubled companies. For starters, the Fed has drawn a line on the kinds of junk it will buy. That means the worst financed companies will fail to find takers for their debt, and be forced into bankruptcy or liquidation. That was the case in February. It’s still the case today.

Every week there are fresh predictions of the coming wave of bankruptcies. Those dire forecasts aren’t going away. But that also won’t stymie investors’ demand for high-yield debt. As long as the Fed is in the market, one company’s junk will be treasure for investors.

***

Postscript Apologies in advance for the length of this postscript.

On the day my twin girls were born I got a crash course in anatomy. The twins were really premature. And one—the smaller one—was born with a host of medical problems. It wasn't a surprise to us. But we didn't exactly know what she'd be facing until after her birth.

Her condition was so rare and complicated it went beyond the capabilities of the hospital where she was born. And so, about an hour after her birth, she took her first trip through Rome traffic—in an ambulance bound for the children's hospital for special surgery across town. I followed on my motorino. There, I met Dr. Pietro Bagolan, the head of neonatal surgery. He explained the situation.

His words were literally Greek and Latin to me. Atresia = a missing connection (Greek). Esophagus, Trachea. I knew those two. Fistula = a passage (Latin). Teodora, my daughter, was born with atresia of the esophagus (the food pipe dead-ends before reaching the stomach) with the added bonus—a tracheal fistula (the air tube takes a mischievous detour, connecting to that truncated esophagus instead of the bronchi). He explained the whole thing slowly in Italian, and how he would surgically repair the organs. I comprehended tutto. But what hit me like a gut punch were the pronouns. This was my daughter he was talking about. Our ordeal. Her operation.

Esophageal atresia is exceedingly rare, occurring in about one out of every 3,500 births globally. While rare, a baby in Rome is just as likely to be born with it as a baby in Rochester, Minn., or a baby in Rwanda. Most pediatric surgeons will go their entire career and never see a single case. But, it turns out, Bagolan had done hundreds. His name can be found all over the medical literature on esophageal atresia. I knew none of this. The guy is so unassuming. He never said a thing about his resumé. All he told me was, "don't worry. She's a girl. Girls make it."

He was right. He patched up Tea in an hourslong surgery on the first Monday morning of her life. Another doctor would tell me later it was like operating on a tiny bird. After surgery, EA survivors, as they’re called, can have all manner of complications—from gastric reflux to asthma to difficulty swallowing to developing more grave scenarios, including esophageal cancer. A successful first surgery means everything for the patient’s quality of life. Tea has had various unrelated complications, but her esophagus and trachea, thankfully, have been mostly problem-free. We have Bagolan and his team to thank for that.

The following spring, in May, 2010, Bagolan called my wife and I. He laid out his vision for a patients support group, which would help Italian families with children born to this disease navigate the experience we went through. "Great idea," we nodded. "Good," he said. "You're going to build it." I looked at my wife. She looked at me. Sleep-deprived, royally stressed about our new life with twins, we accepted the task. There was no way we could say no.

I would quickly learn what this would mean. We (mostly, my wife) get a fair amount of phone calls from expecting moms, numb fathers or anxious grandparents. The calls all start off the same way: their child was diagnosed with… (thankfully, the diagnoses are more of the prenatal variety these days, a huge benefit). Yep, we know, we jump in. And then she or I give them the same explanation we got all those years ago. There's the same Greek and Latin, plus a lot of supportive adjectives and adverbs. Bagolan has trained us well.

Over the years, the support group we've co-founded has grown in ways that have truly astounded me. We now have about 115 families as members, hailing from Sicily in the South to Turin in the North. This weekend we held our annual meeting. On Zoom, of course. We had over 50 families tune in, including an expecting mom and her mother who’d patched in from a hospital room in Bologna. Also on the call were about 20 surgeons and doctors of all disciplines. Together, we caught presentations on best-practice in surgery, post-surgical care. Afterwards, there was a lively discussion on where we should direct our funds for outreach and education. Our association is called FATE. It’s part of EAT, the international federation of member support groups (of which I'm on the board). EAT works directly with Europe's medical network specializing in rare diseases, plus with surgeons and medical specialists from Sydney to Cincinnati.

In Europe, funding for basic research into rare diseases increasingly won’t get the green-light unless patient support groups are involved. As a result, we work closely with Bagolan and his peers around Europe on pushing best-practice. We've become partners in treating this disease. The model works.

Back to this weekend…It was a real joy to see all those faces on Zoom. We've become really close over the years, in ways that really surprise me. Our annual meeting is a chance to reconnect with people who have become family.

Zoom call with members of FATE, the Italian patient support network for EA survivors. I had feared the virtual nature of the event would kill that vibe, but instead the opposite happened. The discussion forum was jumping with ideas on how to use Zoom to engage and involve more families, and more medical specialists. That’s been a problem for us over the years. Our network of doctors is in the bigger cities, but few know about us in the smaller provinces. By this morning, we had commitments from the neonatal unit in Genoa to host another event in September.

It will almost certainly be on Zoom. There will be plenty of Greek and Latin spoken.

***

Have a nice day, everyone. I’ll see you here tomorrow.

Bernhard Warner
@BernhardWarner
Bernhard.Warner@Fortune.com

A note from my Fortune colleagues on a timely new initiative:

Many companies are speaking out against racial injustices right now. But how do they fare in their own workplaces? Black employees in the corporate world, we want to hear from you: Please submit your anonymous thoughts and anecdotes here. https://bit.ly/WorkingWhileBlack

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Today's reads

Boeing bounce. The aircraft and defense giant's share price has been on a killer run over the past three months. Is the rally sustainable, or just bottom-feeders betting on a Boeing bounce? Fortune's Shawn Tully analyzes the company's financials and lays out six reasons for Boeing bulls to cheer.

Bonds rookie card. As Matthew Leising at Bloomberg notes, bond traders have historically been graded by whether or not they can make the client money. Chris White, founder of bond trading and analytics firm BondCliQ, for one, wants to answer the big question: is their success down to luck or legit trading skills? ...His idea? Put bond traders' stats on a card—akin to a baseball card—so the discerning observer can rank them.

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Market candy

$18,000

Workplaces can become unhygienic pits in the best of times. In the age of COVID, all manner of refits and deep-cleans are required to bring the office into virus-proof compliance . "Air-conditioning systems need to be outfitted with better filters and bring in more outside air. Lids might have to be added inside bathroom stalls to avoid the spread of coronavirus-carrying toilet plume. Covered trash cans should be placed at entrances and exits for employees to dispose of masks," writes Bloomberg's Jennifer Surane. For Wall Street bankers, that adds up to a cost of about $18,000 per head.