The pitfalls back of market growth

Financial markets continue their unstoppable growth. After the impressive recovery of April, also May disappointed the expectations of many short sellers[1] who were betting on a downward correction in the market. After a prolonged period of lockdown, the opening in all countries have generated a great euphoria on the financial markets, making the run-up to pre-coronavirus levels continue.

For a long time, we have relied on earnings as the main value driver in the stock market. Wasn’t the price / earnings (P/E)[2] ratio one of the main multiples for valuing stocks? So far, although most companies have reported earnings well below the levels provided by both guidance and analyst forecasts (except those in the technology sector, communications and stay-at home stocks[3]), the market is slowly returning to its pre-crisis level. The Nasdaq composite has returned to very few percentage points from the historical highs.

The numerous negative macroeconomic data amplify the paradox of this overview, almost one-way upwards. The International Monetary Fund estimates[4] predict negative GDP projections in almost all countries of the world, with rare exceptions such as China and India (respectively + 1.2% and + 1.9% in 2020) which in turn are far from the standard growth rate. In 2020, a 7.5% drop is expected in the Euro area with a 4.7% rebound in 2021. We wonder  how long it will take to return to the levels of GDP before the coronavirus.

United States-5.94.7
United Kingdom-6.54.0
United States-5.94.7
United Kingdom-6.54.0
Source: IMF. Pil outlook in percent change.

Additionally, the estimates on unemployment  in the United States reached 14.7% in April, more than triple from 4.4% in March[5]. We must keep in mind that about 70% of the consumption in the United States is due to the US families themselves. Who will consume in the USA considering that unemployment increases?

Together with the macroeconomic assessments there is  the total uncertainty concerning the vaccine too. Although some (few) trials have been successful, an effective vaccine seems to be far from being achieved. Nowadays, the most promising vaccines are being tested. However, it seems that investors have recently forgotten the main uncertainties that this health and economic crisis has caused: there are no effective treatments, we do not know if, and possibly when, profits will return to pre-covid 19 levels, we do not know the consequences of the reopening or if the autumn period could lead to a new wave. And I could continue with many other uncertainties.

So, where does all this optimism come from? The real question is to wonder if perhaps ‘there is no alternative’ market. In fact, alongside all these uncertainties, we have unquestionable certainties: the central banks continue and will continue to print money unceasingly, guaranteeing unlimited stimuli (two examples are the Federal Reserve and the Bank of Japan). The decisions of the main central banks to provide disproportionate liquidity on the market have probably favored a recovery in the short term, but its sustainability will have to be assessed. Inevitably, all these interventions have brought the returns on cash and bonds to such low levels as to generate an implicit investors’ willingness to expose themselves more on the stock market, in order to obtain a more satisfactory risk-return. Added to this is the so-called ‘fear of missing out’ (FOMO) by investors, or the fear of missing the opportunity at the time of the bullish trend to take advantage of the rally[6], which in turn feeds further rises. The problem remains, however, the macroeconomic context, which could lead to an upward trend only in the short term.

Another factor of extreme importance is the possible cold war between the United States and China which could further fuel uncertainty on the markets. The immediate reaction was naturally negative. Such contexts increase the risk-premium and endanger global development. Obviously, an increase in the risk-premium[7] leads, in most cases, to a decrease in the share price. Bear in mind that we are talking about the two major powers in terms of global GDP, and serious repercussions could, with a chain effect, involve all markets.

As for the European market and in particular the Eurozone, the main news concerns the Recovery Fund proposed by the European Commission which should guarantee 750 billion with an issue of thirty-year securities guaranteed by all countries, with a mix of loans and grants. Very complicated negotiations will open in the following months. We are finally approaching a debt mutualization at the European level (eurobond). The problem is that the funds will be accessible no earlier than 2021. Consequently, the instruments available in European countries will be, at least until the end of 2020, the Sure, the Esm and the purchases of government securities by the European Central Bank. These initiatives were taken with great euphoria on the markets, above all that of government bonds which saw a narrowing of spreads[8].

We cannot predict whether the stock rally will last much longer since we are in a truly anomalous market. In this context, investor sentiment seems to count far more than macroeconomic and microeconomic fundamentals. However, there is a crucial principle of the economy: in order to be sustainable in the long term, growth must be based on solid structures  and these, nowadays, seem to be very fragile. In the extreme case, there is the risk of creating a bubble which, if it explodes, would cause further negative consequences on the market.

Gianlorenzo Zeccolella


[2] Price over earnings is one of the most important multiples, used to assess the equity value of a company. When P/E = 15x, the stock price is 15 times its earnings per share.

[3]  Typical examples for stay-at-home stocks are Netflix or Zoom.



[6] In finance, a rally is a period of sustained increase in the price of an asset.


[8] The spread is the differential between the returns of two securities with the same maturity (typically 10 years). One of the securities compared is considered as a benchmark.

What is the meaning of negative oil prices?

Investors should get used to distortions in the market every time we face a crisis. Going back in time, until the financial crisis in 2008, we learnt that interest rates could not be negative. Why should I lend money if in the future I will receive a smaller amount? The tremendous crisis suffered during that time has altered one of the fundamental laws of economics and, from then on, investors accustomed to the idea of interest rate below zero. The oil crisis has changed another cardinal concept of economics: price must be positive. Who is willing to sell a product paying customers? On the 20th of April, we observed another historical change: the WTI (West Texas Intermediate) futures price[1] of contracts expiring in May turn negative in the evening, touching the level of $-40.32 per barrel of oil. However, the problem principally stemmed from a very technical issue concerning the dynamics of the derivative contracts[2] (we will explain it later). Before going into technicalities, it is necessary to briefly outline the oil price context and pinpoint the macroeconomic background.

Until the outbreak of the coronavirus, in 2019 the daily production of barrels of oil amounted at around 80.6 mln bbl/day (read barrels per day). The United States was the top producer with around 15 mln bbl/day, followed by Saudi Arabia and Russia[3].

With the OPEC+ agreement, extended to other countries, it was decided to cut the oil production of 9.7 mln bbl/day. Still, it was probably not enough to handle the global shock in the demand deriving from flights drop of around 90%, reduction of car traffic, slower production of chemicals products and so on. Indeed, the most essential commodity has been rapidly losing value since the persistent oversupply overcomes the world’s crude tanks, pipelines, and supertankers. The consequence was that the US oil price crashed and for the first time we saw a price below zero. For producer it is more convenient to pay someone to get rid of the barrels of oil rather than either shutting down the production or finding a location where to temporarily store the excessive supply. Most of them are concerned about closing down wells because the inactivity can create some damages, making the business unprofitable for the future. Another crucial detail is that oil is traded with futures contracts with physical delivery[4]. The buyer must take the delivery of the underlying asset in a specific location at expiration (for example, for the WTI, the location is Cushing, Oklahoma). However, in the futures market, there are traders who buy contracts just to speculate on price swings, but they have absolutely no willingness to take physical delivery. In extreme cases of a deep reduction of price, they may decide to look for a place where to store the barrels.

The problem was that the pandemic has created an excessive oversupply which made storage capacity very limited and expensive. Thus, most traders decided to sell at a loss. This is basically the reason why for the first time we saw a negative price on the financial market. It must be pointed out that it was related to the futures contracts expiring in May and that the ones expiring in June did not have the same behavior. We do not have to be very surprised if in the upcoming future we will encounter again in a similar situation. Despite that, the behavior has impacted also June contracts, which lost part of their value, and other types of oils such as Brent. However, being the Brent a seaborne crude, traders were able to ship it around the world in areas with higher demand. In the worst case, companies rent some tankers and fill them waiting for positive periods. Vice versa, for the WTI this solution is more expensive since it is not extracted next to the sea.

We mentioned the two widely used benchmarks in the oil prices, namely Brent and WTI. The main difference between these two types of crude concern composition. Both are classified as sweet light crudes, a term linked to crude oil containing less than 1% sulfur and that are less dense than other crude oils. WTI has a sulfur content of 0.24% while Brent of 0.37%[5]. Moreover, respectively, they count 39,6 and 38 of API gravity[6]. Clearly, another difference regards the extraction location. WTI is extracted from oil fields in the United States, in Texas, Louisiana, and North Dakota and is then transported via pipeline to Cushing, Oklahoma for delivery. Brent crude is extracted from oil fields in the North Sea.

* The chart takes into account future contracts roll over (the maturity of a position is extended forward for the same underlying asset at the current market price). Monthly prices.

The different properties and geographies explain the price differential between Brent and WTI, technically defined as quality spread. Despite that, as we can see from the chart, prices are perfectly correlated[7], and the lack of demand influences all types of oil. The consequences may impact the surrounding multi-billion market.

Oil producers are suffering large losses (the last to report was Eni, with a €2.9 bln loss[8]) putting a strain on liquidity and solvency risk. The plunge in price exposes the weaknesses of the most indebted companies in the US and a potential spillover effect on other sectors must not be excluded. Currently, a large part of high yield bonds is under the distressed area[9] in the Oil&Gas industry. Companies are trying to reduce cash out, cutting for example dividends and new investments, but, if the crises will protract for a longer period, some oil companies will struggle to survive, especially in a deeply oversupplied market. Rating agencies may start the ripple effect by downgrading these companies. In the future, if many firms will be rated in the non-investment grade area, the new debt issuance might be costly and complicated in a period of credit restrictions.

Unfortunately, the first way to remain competitive on a market with compressed demand is to lay off workers, radically the fastest way to reduce costs and survive in a very turbulent market. Oil price is also the main towing to maintain inflation in a positive area. With a so cheap price, we may expect a possible deflation or very low inflation. The Wall Street Journal has analyzed the possible spillover effects of the oil crisis highlighting that the Real Estate sector is already suffering in Houston due to the oil crisis. Furthermore, some banks, mainly the ones close to the extraction area, lent an important portion of their capital to Oil&Gas companies which now are very close to default (there are more than one thousand producers and most of them are relatively small). Credit Default Swaps[10], a sort of insurance that investors try to obtain against the failure of a company, on oil firms have exponentially widened their spread providing a very negative signal about financial stability. Likewise, bid-ask spread on corporate bonds, an indicator of market liquidity, has widened. Trading has become more difficult since liquid instruments have transformed into illiquid instruments.

The plight to have a domino effect is real, people do not have to underestimate the financial crisis that the oil price might trigger. The failure of some companies in this industry might generate some troubles for other sectors. The default risk is imminent, and oil producers, together with government, must take unidirectional action to support prices because, at the current state, it is risky for the entire economy. Possible effects? credit contraction, unemployment, defaults, deflation, and finally recession.

[1] Agreement to trade an underlying asset at a predetermined price and time



[4] It differs from the cash settlement where it is only transferred the net cash position.

[5] The lower the sulfur content the ‘sweeter’ the oil and the easier it is to refine

[6] The gravity of the oils is rated on a scale from 10 to 70, where the higher the number the less dense the oil.



[9] Financial distress is a situation in which a firm is not able to meet its financial obligations, it might unable to payback its debt or just a portion of it


Will we emerge stronger from the Covid-19 crisis?

While China is just getting back on its feet from what was and still is one of the biggest sanitary crisis and epidemic of its history, the virus prettily-named Covid-19 has now found a new outbreak in Europe. We did not think that this situation could be possible in our democratic and developed societies and yet, this is happening. We feel like we are living inside a futuristic novel, or even a dystopia. What we, young Europeans, didn’t think would ever happen during our lifetime, is yet happening: freedom, the main feature of our societies, is now deeply restricted; the borders our parents and grand parents abolished are now closed again; forces of order are in the streets to control our every move; but, most of all, science, which we thought was more developed than ever at this point of the history of mankind, is actually failing us. This crisis is therefore way more than just a sanitary crisis. It is also an economic, political, and social crisis – all in all, a human crisis. Apart from being rightly anxious, it is interesting for us now to observe our societies. The Occident seems to be facing a wall, that would have appeared suddenly and which, in the hurry, is forcing it to rethink its whole way of working, of existing.

The first characteristic of the globalized societies that the Covid-19 has put into question is the economic model, both capitalist and global. When the sanitary crisis first struck the “factory of the world”, but also one of the most powerful economies of the planet, it is not only a city, not even a country, but the whole world which suffered the consequences. Trade and production were slowed down, sometimes even to a critical point. Then, when Europe and other important actors of the global economy, like the USA or Iran, were touched in turn, what has been observed in China happened to them too, but on an even bigger scale. Up to that moment, the world’s most important stock markets had already been weakened in February, before crashing  repeatedly as the virus outbroke in Europe and US. There was a “black Monday” the 9th of March; and another crash on the 12th of March. On March, the 9th, The European and American stock markets recorded their worse performance since the economic crisis of 2008. On March, the 12th, the Paris stock market index, the “CAC 40”, and the Milan FTSE MIB recorded the worst decline of their history, respectively -12.3% and -16.92% The German index, “DAX”, followed closely (-11.4%). The Wall Street Stock Exchange stopped twice for fifteen minutes, before reaching on the 16th of March its worst day since 1987. The financial crisis has required the intervention of the Federal Reserve and the European Central Bank which announced extraordinary plans to provide liquidity to the financial system and to appease the markets. However, the financial instability persists and further economic measures from US government, EU and the other European countries will soon follow. All of that added to disagreements between Russia and Iran on the oil prices, created a very strained and anxious atmosphere in the whole world. The question we are now facing in this economic crisis (which is probably only beginning), is about the legitimacy of this system, in which we live and on which we rely. How can we keep providing each individual with the bare necessities, when we rely on a worldwide trading system that is temporarily amputated? The lack of national, or even continental resources and the inability of States to produce some materials without relying on other countries ; added to a consumer society that is used to have access to any existing food or object within easy reach, underlines clearly the limits of our current economic system. Numerous factories had to convert themselves in order to keep providing with the bare necessities that were lacking. This is the case of LVMH which turned many of its French sites into a fabric of production of hydroalcoholic gel, in short supply in France. But LVMH could do this only because it had the practical and financial resources to do it. In spite of everything, this whole situation demonstrates that, because we do not have any system of local production, trade or consumption, we are now stuck in a worrying situation, provoked by an international crisis. The partial failure of the current system is even more blatant that the very idea of producing and consuming locally has been promoted for a while now by ecologists and environment activists. It thus took a consequent sanitary crisis to put into question our global system and underline its limits – without putting an end to it. We can only hope to emerge from this crisis aware of those limits and ready to change them, or even to give it up if that is necessary.


Naturally, democracy is also suffering from the Covid-19 epidemic. This model of society, which highlights personal freedom, is now facing obvious difficulties. When the time came to count on civic-mindedness and individual responsibility to face this sanitary crisis, problems started. It was the case for Italians and Spanish, peoples so “external”, who were forced to stay stuck indoors – at first reluctantly resigning themselves to do so, thanks sometimes to preventive penitential measures. It was also the case in France, which tried to put back the confinement measures up to the last minute. But it finally came to it, when facing a crowd of French people who were sure they had all the rights to keep on moving freely. If we compare this situation to the one that took place a couple of months ago in China, an authoritarian country, we highlight the difficulties faced by the modern democracies to implement such drastic measures, which go against their values. Besides, in France, which was suffering since a few months from a crisis in its hospitals, this unprecedented epidemic is allowing doctors and hospital staff to finally be heard. Indeed, the epidemic is pointing out all the problems they were already reporting. They are now finally granted all of the government’s attention and we can only hope that this country will emerge stronger from this crisis: with a government which would have finally understood the importance of taking care of its health system; and which would have understood that a democratic society worthy of the name can not work if its doctors, nurses and nursing assistants are suffering.

The third distinctive element of modern societies that is put into question because of this historical sanitary crisis, is, of course, scientific progress. The occidental Man from the 21st century, who comes from a society built on technological and scientific advances, probably had a too strong tendency to think he/she is invincible. Reinforced by medical advances and born in a complete comfort thanks to technological advances, he/she is now like violently slapped on the face. What he/she thought was possible only in Africa (still at war against Ebola) or in Asia – all in all, only in developing countries – has eventually come to him/her as well: a pandemic that may kill him/her. Let him/her be reassured: this generation won’t be the last, and most of us will get by fine, safe and sound. But this is an ancestral fear that springs back up, that of a combat against an invisible enemy, against which we cannot fight because we do not have the right weapons. It is the fear to die, or to see our loved ones die, and not to be able to do anything against it. Feeling immensely helpless. Finally, it is about feeling ourselves as bodies before anything else, even though we try so hard to convince ourselves that we are only made of souls. This is about feeling ourselves as bodies, and being aware more than ever of our bodies’ limits and weaknesses. The occidental Man of the 21st century should thus emerge from that epidemic as a reborn Man, will it be regarding his/her relationship to Science, but also to his/her own identity.

Eventually, last but not least element challenged by the pandemic is free movement. That principle is at the core of the European Union’s values. It has already been jeopardized those past few years by the migration crisis, true challenge of modern Europe and USA, and by the resurgence of nationalisms. However, it is now completely call into question, as many States are barricading themselves. This will be one of the biggest challenge of this sanitary crisis for the “Old Continent”: prove that closing the borders is not a long-term solution, and that it should not, under no circumstances, divide us – on the contrary, we should unite to fight against this common enemy.

Laura Poiret


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