How Risky Is High Yield, ECB Holds Steady, A Billion Shaves, Flattish Open by Richardson GMP
It looks like the new highs from yesterday are going to be met with a pause this morning. Futures are mixed as are Euro equities despite gains across Asia and the Pacific. The currency markets have tamed as well, with the US dollar index pausing here as well after running up more than 3 pennies in the last month. Loonies are still in their relatively narrow range since the May top.
Bond yields are moving higher for the 3rd time in four days, with the benchmark Canada 5 year hitting 0.70% for the first time since June 23. This is important as it means that the low yield from February has held. This should be supportive of rate-reset pref shares as well.
Since economic data has been crushing expectations lately, we will expect bond yields to keep moving higher – in the US at least. We feel that the drag lower from the miniscule yields in other countries has been overdone, and US yields still aren’t even close to representing the fundamentals. Not to say that they will, given global forces, but there has to be some kind of balance.
Morgan Stanley is starting to circle the high yield market as a risky one. Noting that defaults are on the rise, MS compares this cycle with previous ones in terms of timing to peak default. Perhaps surprisingly, the action from the Fed in 2008/2009 kept defaults from that cycle relatively low given the severity of the recession. However, MS notes that corporate credit ratings are at a 15 year low, risks are rising and the Fed does not have the tools that it had going into 2008 (or perhaps the “ammunition”). Valuewalk summarizes the report.
1 billion shaves? We aren’t mathematicians here, but this one seems pretty easy to calculate. Unilever is buying Dollar Shave Club for $1 billion.
Oil is still treading water around its two month low. Total U.S. oil inventories fell by a few million barrels, however combined supplies of crude and refined fuels hit a new record. Clearly this surplus will take time to clear and probably longer than most forecast. Gasoline inventories continue to worry energy bulls, as record highs impact future refinery demand. Most analyst reports over the past quarter painted a pretty story of a balanced oil market in 2H of 2016. The reality is that that narrative is looking more and more like total fiction.
We noted this in last week’s Weekly publication, but the bottom may very well be in in terms of rig counts. In Halliburton’s quarterly call, CEO David Lesar noted that “today, our customers are thinking about growing their business again rather than being focused on survival.” Production isn’t going to surge higher, however most of the pain might be done with. Wait for Schlumberger to report later today for another take on the industry with more of a global perspective. 28% North American derived revenue vs 45% for Halliburton.
One of the better articles I’ve come across the past 3 hours. From Bloomberg, Half Right Is Half Wrong in Markets Impervious to Political Risk. Call an outcome is only half the battle, as the market’s reaction is still anyone’s guess.
Such is the plight of forecasters, who have been mostly correct in their view that 2016 would be a year marked by rising political danger. The problem is, mostly correct has been pretty much wrong when it comes to calling markets, another example of the near impossibility of making accurate price predictions in a world dominated by central-bank stimulus, subzero bond yields and tepid economic growth.
Some blame it on central banks, but it has always been futile trying to make investment calls on geopolitical outcomes. June was a hot one that cumulated in the VIX shooting up to 26, only to be now at the lowest levels of the year. Who would have seen that coming?
Saudi Arabia has overtaken Russia to reclaim its spot as China’s top crude oil supplier. Saudi exported 1.112 million barrels per day (bpd) to China in June, topping Russia for the first time in three months. Competition between Saudi Arabia and Russia has increased China’s buying power. Its market is so big that eastern exporters have to no choice but to compete for the business. A growing economy and “stockpiling to boost government reserves” are driving imports. That said, there is an interesting divergence between OpEx products, such as gasoline, and CapEx products, such as diesel. Gasoline demand was up 13.7% YoY in June vs. diesel demand which was down 3.1% YoY. This is a reflection of the Chinese economy’s shift towards consumption and away from manufacturing. More from Reuters here.
GM blew away earnings expectations on the back of strong performance from North America and profitability in Europe for the first time since 2011. Their shift to focusing on retail sales has helped drive earnings. Blackstone Group saw profits rise 2% from real estate sales in the second quarter. Sales in the division amounted for $7.2bb in revenue. Their largest sale of stock in the quarter was from Brixmor Property. Mastercard has purchased a stake in VocaLink Holdings to expand operations in Britain. The deal is worth nearly $1bb and expected to be dilutive for the first 2 years. Roger’s reported a strongly quarterly result as new wireless adds exceeded expectations. Blackberry is hosting a live web event on July 26th where it is anticipated that CEO John Chen will launch the newest handset device.
Gold is up modestly this morning after Japan shrugged off the notion of using helicopter money as stimulus. That reduces demand for this safe-haven currency alternative, gold prices are off 4% since reaching a two year high last week. Oil prices are flat this morning holding near the lowest level in two months. Inventories were reported higher yesterday, showing resilience and proving that it will be challenging to work through the supply glut persistent in the market. Saudi Arabia, the world’s largest producer is maintaining production levels and sales to East Asia continue to rise.
Fixed Income And Economics
In their first meeting post-Brexit, the ECB has decided to leave all official interest rates unchanged today. The main refinancing rate stands at 0.00%, deposit facility at -0.40%, and the marginal lending rate at 0.25%. The accompanying statement said that asset purchases will continue at their current level until at least March 2017 (unchanged guidance from before) while simultaneously stating that interest rates will remain at present or lower levels for extended period of time. The USD/EUR cross is slightly weaker to 0.9047 from 0.9083 prior on the neutral tone. President Mario Draghi is speaking to the media as we write and has reiterated that fiscal policies currently in place should support the Eurozone recovery and that early surveys show no major impact from the Brexit result. No mention yet as to whether the ECB will loosen restrictions on what bonds they can purchase in their QE program.
Keeping with the Eurozone theme, rating agency S&P lowered its main sovereign bond rating for Turkey to BB from BB+. The creditworthiness of the beleaguered nation was already in junk territory so the one notch downgrade wasn’t a huge surprise given the current political turmoil. The agency added that it expects a period of heightened unpredictability in the country and maintains a negative outlook with the latter reflecting “our view that Turkey’s economic, fiscal, and debt metrics could deteriorate beyond what we expect, if political uncertainty contributed to further weakening in the investment environment”. The Turkish lira weakened by 1.5% against the U.S. dollar post-news and bringing its year-to-date decline to nearly -6% against the greenback. The iShares MSCI Turkey exchange-traded fund (TUR) slipped another -2.8%, bringing the ETF’s loss this week to more than -13%. Turkey’s 4.25% dollar bonds due in 2026 fell -1.3 points to 96.27 (4.38% YTM) in early trading according to Bloomberg.
On this side of the Atlantic, we do have some economic data that will help carry the tone of today’s trade (for those who get tired of watching earnings releases). Weekly jobless claims in the U.S. came in at 253K last week to beat the consensus for a 265K print. The number of Americans currently on government assistance fell to 2.128MM people (25K fewer) for the period ending July 9. Note that the U.S. is just 16K people away from making a new decade low on those seeking benefits. The Philly Fed sentiment index slumped to -2.9 in July (+4.5 expected, +4.7 prior) and marking the third negative print in four months. Falling prices were the main driver of the missed result. Lastly, resale home data in the U.S. is out after the equity open with a -0.9% decline expected in June. The 5.48MM annualized pace expected however is still near the nine year high reached in May.
Chart Of The Day
Quote Of The Day
Everybody loves you when you’re six foot in the ground. — John Lennon