The “Great Lockdown” has caused a dramatic drop in 2020 growth expectations from the IMF, which said we are likely to see the worst recession since the Great Depression. But the big news was that the market was up 3% on the back of negative earnings reports from the country’s largest banks, Ash Bennington and Ed Harrison said during today’s Real Vision Daily Briefing. 

It came as no surprise that first-quarter earnings took a hit as JPMorgan and Wells Fargo brace for a deep recession; Bennington and Harrison said that uncertainty will come in Q3 and Q4. No models have ever done this before, we don’t have visibility into the future, and that uncertainty will feed volatility once we move out of this hope phase, they said.

Harrison said a lot of the losses are going to be taken by asset managers, and he’s also looking at leveraged loans for signs that banks are in trouble and we’re moving into the third phase of the crisis.

Even though the Fed has now decided to wade into junk and they’re buying fallen angels and high yield, Harrison pointed out that they’re not doing indiscriminate buying of high yield bonds so there’s the potential for a lot of defaults there. And the Fed is doing nothing in the leveraged loan market, which is on the balance sheets of banks. 

“I think right there with regard to asset managers and leveraged loans is a place to watch in terms of this third phase, the insolvency phase, because that’s where the write downs are going to hit and that’s where, in the financial sector, you’re going to have distress appear as a result,” he said.