• Matheus Zani

🌎 Worst economic downturn since 1940's | Vegan Investing | Currency crushes corporate earnings

Updated: Nov 24


July 31st, 2020


Happy Friday!


Humankind's fascination with space continued this week as Nasa launched the Perseverance rover in order to search for signs of life on Mars. They aren’t expecting little green men, but will be looking for fossilized signs of former life and microorganisms.



Did You Know...


Of all the planets in our solar system, Mars is the most likely to be hospitable to life.


Can you name the 4 countries/regions that have successfully landed probes on Mars?



(Answer below)


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USD


3 Months Of Hell: U.S. Economy Drops 32.9% In Worst GDP Report Ever



In Q2 the coronavirus triggered the sharpest economic contraction since records began in 1947. Gross domestic product shrank at an annualized rate of 32.9% in Q2. It's fair to say that we have hit a rough patch, but how does it compare?


In absolute terms, the overall economy in the second quarter was 9.5% smaller than in Q2 2019. This is three times as sharp as the previous record — 10% in 1958 — and nearly four times the worst quarter during the Great Recession… pretty bleak reading huh.


The GDP estimate showed massive drops in both personal consumption, down 34.6 percent, and private domestic investment, down 49 percent. Either the reason or the result, consumer confidence plunged to 92.6 this month from June's 98.3 (still off the pandemic low of 85.7). Initial jobless claims jumped back up to 1.4 million last week, the first increase in nearly four months. Claims jumped higher still on Thursday to 1.43m, suggesting a softening in the pace of labor market recovery.

Consumption represents about 70% of U.S. economic activity. The unprecedented drop in spending drove businesses to slash investment and production. Particularly hard hit were energy producers impacted by a huge drop in oil prices as drivers stayed off the road and airline traffic crumbled. Investment in structures such as drilling rigs and heavy machinery shrank about 40%.


Inventories also saw a large drawdown as manufacturers and other companies scaled back production, which also contributed to the GDP collapse.


As far as a recovery? “I cannot imagine a V-shaped recovery in the offing any time soon,” said Beth Ann Bovino, chief U.S. economist at Standard & Poor’s Ratings Services. “Aside from the fact that Covid-19 doesn’t seem to be under control, this is a $22 trillion economy. You can’t turn it off and on like a light bulb.”


This just in - EU area posted even worse numbers, down 15% over Q2 2019 in absolute terms.


|FX

The USD index has plunged from a high of 102 in March to 93 today, a nearly 9% collapse in just four months. The US Dollar Index reached its low after the FED’s policymakers decided to keep unchanged the rate at 0,25%. From a macro trend standpoint, it expects more declines in the long-term. Simultaneously, in the near-term, we could expect a short recovery that could find resistance at the 95.50 zone.



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USD BRL


Vegan Investing.. Investors drop Brazil meat giant JBS



The investment arm of northern Europe’s largest financial services group has dropped JBS, the world’s biggest meat processor, from its portfolio. The Brazilian company is now excluded from assets sold by Nordea Asset Management, which controls a €230bn (£210bn) fund.


The decision was made last month over a laundry list of egregious acts: the meat giant’s links to farms involved in Amazon deforestation, its response to the Covid-19 outbreak, past corruption scandals, and frustrations over engagement with the company on such issues. “The exclusion of JBS is quite dramatic for us because it is from all of our funds, not just the ones labelled ESG,” Pedersen said.


Five recent exposés by the Guardian, the Bureau of Investigative Journalism, the Brazilian agency Réporter Brasil, Greenpeace and Amnesty International, have linked JBS to cattle supplied by Amazon farms involved in deforestation.


Moreover, in 2017, Joesley and Wesley Batista, who are the JBS’ owners, were charged with insider trading by Brazilian prosecutors. At the time, the brothers manipulated the stock market by selling JBS shares in Brazilian real and buying U.S dollars days before their “explosive-plea bargain” - which reached the highest level of national politics - was made public. By doing this, the brothers allegedly knew the value of JBS shares would fall, thus using insider knowledge to profit on the change in currency value, earning more than US$31 million.



The Environmental, Social, Governance (ESG) investing approach is becoming more and more relevant and is already coming off a banner year, and its reach continues to expand. U.S.-listed sustainable funds are seeing record inflows. These funds are attracting record levels of cash because they’re proving that they can offer comparable, if not market-beating, returns.

|FX

USDBRL continues to lead the volatility parade, at 15.5%/annum. Hedging costs are high, but a small fraction of the VaR at about 1% (favoring selling USD). The Brazilian real showed gains against the US dollar over this week, resuming the upside, but the external market context could bring more pressure to the Real. Domestically, Brazil remained the country reporting the second-largest amount of infections (2,613K until Thursday) and fatalities (91,377 Thursday), being second in the globe, in both cases, only to the US.



EUR USD BRL


How did EU and US companies lose over $12 Billion in one quarter?



Currency. Every quarter, FiREapps (now a Kyriba company) releases data on how corporate earnings have been impacted by FX. The latest data they’ve just released is a little dated - Q1 2020; and we know Q2 has been much worse. At any rate, for Q1 North American and European companies reported a combined $12.21 billion in quantified negative currency impacts, of which US companies accounted for the lion’s share (90%), with $10.77B in negative impact.


Seeing the total number isn't very helpful - out of how much? One needs to look at its relative impact. One of the metrics by which corporations measure their ability to control FX impacts is by measuring its EPS effects. One benchmark promulgated by many practitioners is EPS. FX risk management should keep the effects < $0.01 EPS @ Risk. The latest report shows that was hardly met, with an average of $0.04 EPS @ risk.


After three years of the EUR being responsible for losses, the trend is finally reversed, with EUR gaining 10% in just the last three months (left chart). Now, the culprit is the Brazilian Real (right chart), which impacted 34% of North American companies (according to earnings calls). Easy to see why - BRL has lost more than 25% of its value since the beginning of 2020.

Expect Q2 results to be even worse.


In Other News


Currency Heat Map

This chart shows the relative volatility between currencies. The redder the color, the higher the volatility.



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Quiz of the week


Answers


It depends on what your definition of “successful” is but the following countries were able to land what they wanted on Mars. However, a number of the projects ultimately failed due to malfunctioning solar panels, data transmission issues. That being said here are your answers:


USA

USSR or what used to be.

EU and Russia (Joint project)

--

The USA still has two projects in operation right now. Curiosity and InSight Lander.


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