Brief: Historically unique financial conditions brought on by the coronavirus have changed the way the Federal Reserve is conducting its stress tests for banks this year. In addition to the usual rigors that measure how well institutions are prepared for sharp downturns, the Fed is adding three new scenarios this year, Vice Chair for supervision Randal Quarles announced Friday. The scenarios examine different patterns of recovery and look to see how banks will respond. The initial testing focus was for stress in corporate debt and real estate and an unemployment rate higher than the 10% peak that prevailed during the Great Recession from 2007-09. In effect, that situation was less drastic than the current jobless level, at 13.3%, but more so than the conditions in debt markets, which have eased amid aggressive Fed actions. “But the larger issue is the unprecedented uncertainty about the course of the COVID event and the economy,” Quarles said in prepared remarks. “The range of plausible forecasts is high and continues to shift. We don’t know about the pace of reopening, how consumers will behave, or the prospects for a new round of containment. There’s probably never been more uncertainty about the economic outlook.”
Brief: MSD Partners has raised about $1.1 billion for a fund dedicated to bets on structured credit secured by real estate, beating an initial target of $750 million. The MSD Real Estate Credit Opportunity Fund gathered about $300 million from Michael Dell and his family, as well as MSD employees. The vehicle will make and purchase commercial real estate loans and securities, in addition to structured investments.“ Since launching the fund, we have been investing actively, particularly during the recent market dislocation,” portfolio manager Rob Platek said in a statement, adding that the fund is positioned to tackle opportunities that arise in the current market environment. MSD Partners was formed in 2009 by partners of MSD Capital, the family office for Dell, the founder of the namesake computer maker. Starting with $400 million of capital two decades ago, the firms collectively manage about $16 billion. Dell is worth about $29 billion, according to the Bloomberg Billionaires Index. Previous wagers by the MSD Partners real estate credit team include buying transferable development rights attached to New York’s Grand Central Terminal and providing financing to One Thousand Museum, a luxury condominium in downtown Miami.
Brief: Hedge fund firm CQS has slashed at least 50 jobs in an overhaul, as billionaire founder Michael Hintze retrenches to focus on core credit trading strategies. The cuts are mainly concentrated in sales and support areas, but have also affected trading teams focused on asset-backed securities, according to people with knowledge of the matter, who asked not to be identified because the information is private. CQS is seeking to reduce costs following a slump in high-fee earning hedge fund assets, the people said. The firm employed more than 280 people globally at the start of December, according to a letter to investors seen by Bloomberg. A spokesman for the London-based money manager declined to comment. While CQS still manages $17 billion, up from about $15 billion in March, its share of lucrative hedge fund assets has shrunk to about a third of the money managed by the firm, down from around half last year. That’s putting pressure on revenues. The CQS Directional Opportunities strategy, run by Hintze himself, is facing redemptions after losing 33% in March and another 17% in April, according to people familiar with the matter.
Brief: Business activity across most sectors and regions is expected to return to a stable level within a year and grow to pre-Covid levels by the end of 2021, according to a survey of Fidelity International’s in-house analysts. This month’s survey shows growing optimism over the path of the Covid-19 outbreak, with business disruption estimated to come to an end within 10 months, according to the global average of responses. Fiona O’Neill, director, global research, Fidelity International, said: “Against tough economic data, green shoots are starting to emerge. China is leading the recovery, with our analysts expecting a wait of just under 6 months to reach stability, a sign the country’s economic momentum is gathering pace. “The general upbeat picture is confirmed by a noticeable jump in the proportion of Fidelity analysts seeing positive leading indicators in their sectors.” O’Neill highlighted that the energy sector has seen the greatest improvement in fortunes, led by the stabilising price of oil, with 73% of analysts responding that leading indicators are positive, up from just 8% two months ago.
Brief: BlackRock Inc. Chief Executive Officer Larry Fink said China remains one of the firm’s top regions for growth despite uncertainties brought on by trade tensions with the U.S. and the virus outbreak.“We are here to work with China,” Fink said via video conference at the Lujiazui Forum in Shanghai on Thursday. “We firmly believe China will be one of the biggest opportunities for BlackRock.”The company is expanding in China to tap one of the fastest-growing wealth markets. China’s trillion dollar industry opened further in April, luring investment from companies including BlackRock, Vanguard Group Inc. and JPMorgan Chase & Co. While the further liberalization of the money management sector in China has been overshadowed by the coronavirus crisis, wealth firms are nonetheless laying out plans to tap a market in which retail funds alone could reach $3.4 trillion in three years, says Deloitte LLP.Fink added he was hopeful that the U.S. and China would continue to develop their relationship. “Despite the noise in the markets now, I am optimistic that the U.S.-China relationship can continue to develop for the whole world in a positive manner,” Fink said.He also sees signs that China and the rest of the world are slowly recovering from virus-induced slowdowns.“Encouraging signs are emerging,” Fink said. “As dramatic as this has been, I do believe the global economy will stabilize and recover steadily.”
Brief: The heads of 27 Canadian companies, including the CEOs of two large banks and Brookfield Asset Management Inc., are urging Prime Minister Justin Trudeau and provincial premiers to ease air travel restrictions. Most international flights have been cancelled and the U.S.-Canada border has been shut to most travellers since March 21 — a policy that was extended to July 21. Last week, Air Canada Chief Executive Officer Calin Rovinescu called the restrictions “disproportionate” as the coronavirus outbreak improves in most parts of Canada. Now Rovinescu has the backing of the chief executive officers of nine companies in the S&P/TSX 60, who are among the 27 signatories to a letter published in Canada’s Globe and Mail newspaper on Thursday. “We are now entering a new phase, one in which we must find a responsible way to co-exist with COVID-19 until there is a vaccine. This includes prudently and thoughtfully opening aviation and lifting restrictions to safely resume travel throughout all provinces of Canada, as well as from select countries,” the executives wrote.