Impaired Liquidity

September 26th, 2016 6:43 am

Via Bloomberg:
Carney’s Corporate-Bond Purchases May Worsen Liquidity Squeeze
Joe Mayes
September 26, 2016 — 6:05 AM EDT

Central bank aims to acquire 10 billion pounds of company debt
Buying may tighten shortage of notes in small sterling market


The start of the Bank of England’s corporate-bond buying program on Tuesday may exacerbate already tight liquidity in the sterling debt market.

The central bank plans to purchase 10 billion pounds ($13 billion) of sterling investment-grade corporate debt over 18 months, heightening competition in a relatively small market that is dominated by investors who favor sterling assets, such as U.K. pension funds. It also adds to a wider debt-market pinch, partly caused by the start of a similar European Central Bank corporate-bond buying program in June.

BOE note-buying “is another nail in the coffin of corporate-bond liquidity,” said Jeroen van den Broek, ING Groep NV’s Amsterdam-based head of debt strategy and research. “It creates a real squeeze in the market.”

Sterling corporate-bond yields fell after BOE Governor Mark Carney announced the purchase program last month as part of stimulus measures designed to help the U.K. economy weather uncertainty caused by the nation’s vote to leave the European Union. A flurry of issuance subsequently has also done little to expand the debt pool because sales have been dominated by companies such as National Grid Gas Plc refinancing existing debt.

“We’ve not really seen a lot of new issuers,” said Luke Hickmore, an Edinburgh-based senior investment manager at Aberdeen Asset Management Plc, which oversees about $380 billion. “That’s the thing we need to be looking out for.”
Shopping List

The Bank of England has drawn up a list of about 270 bonds that are eligible for purchase under its program, all of which have at least one investment-grade credit rating. The notes have a market value of about 150 billion pounds, the institution has said. The issuers are all non-financial companies that make a material contribution to the U.K. economy, including overseas companies, such as Verizon Communications Inc. and Apple Inc.


Under the purchase program, the bank will attempt to buy each bond on its list at least once a week through reverse auctions on Tuesdays, Wednesdays and Fridays. Purchases will be roughly in line with the makeup of the overall bond market, on an industry basis. In the first auctions on Tuesday, the bank will seek to buy notes in sectors including energy, industrial and transport, and water, according to a list on its website.

A Bank of England spokesman declined to comment on the impact of the program on market liquidity.
More Names?

To overcome the potential challenges in finding bonds, the Bank of England may extend its list of eligible notes. That could include adding companies such as GKN Plc, Telefonica SA and Wm Morrison Supermarkets Plc, which were surprisingly left out, said Joseph Faith, a credit strategist at Citigroup Inc.

“Some names that you would have expected to be on the list are not there,” Faith said. “We may see more bonds being added next month.”

Since the BOE announced the plan, yields on investment-grade corporate pound bonds have dropped to a record-low 2.06 percent from 2.48 percent, according to Bloomberg Barclays index data. They were at 2.23 percent on Friday.

National Grid Plc’s gas arm held a record 3 billion-pound sale earlier this month as it restructures debt ahead of a spinoff. That was the largest share of the about 8 billion pounds of highly rated corporate debt sold since the BOE unveiled the purchase plan on Aug. 4, based on data compiled by Bloomberg.

Central Banks Turn to Sellers

September 26th, 2016 6:29 am

Via Bloomberg:

Liz McCormick
Andrea Wong
Wes Goodman
September 25, 2016 — 7:00 PM EDT
Updated on September 26, 2016 — 4:04 AM EDT

Central banks have cut Treasuries for three straight quarters
Pullback may be a sign the bond market is at a tipping point


They’ve long been one of the most reliable sources of demand for U.S. government debt.

But these days, foreign central banks have become yet another worry for investors in the world’s most important bond market.

Holders like China and Japan have culled their stakes in Treasuries for three consecutive quarters, the most sustained pullback on record, based on the Federal Reserve’s official custodial holdings. The decline has accelerated in the past three months, coinciding with the recent backup in U.S. bond yields.

For Jim Leaviss at M&G Investments in London, that’s cause for concern. A continued retreat could lead to painful losses in a market that some say is already too expensive. But perhaps more important are the consequences for America’s finances. With the U.S. facing deficits that are poised to swell the public debt burden by $10 trillion over the next decade, foreign demand will be crucial in keeping a lid on borrowing costs, especially as the Fed continues to suggest higher interest rates are on the horizon.

The selling pressure from central banks is “something you have to bear in mind,” said Leaviss, whose firm oversees about $374 billion. “This, as well as the Fed, all means we are nearer to the end of the low-yield environment.”

To shield his clients from higher yields, Leaviss said M&G has scaled back on longer-term Treasuries and favors shorter-maturity securities.

Overseas creditors have played a key role in financing America’s debt as the U.S. borrowed heavily in the aftermath of the financial crisis to revive the economy. Since 2008, foreigners have more than doubled their investments in Treasuries and now own about $6.25 trillion.

Central banks have led the way. China, the biggest foreign holder of Treasuries, funneled hundreds of billions of dollars back into the U.S. as its export-based economy boomed.

Now, that’s all starting to change. The amount of U.S. government debt held in custody at the Fed has decreased by $78 billion this quarter, following a decline of almost $100 billion over the first six months of the year. The drop is the biggest on a year-to-date basis since at least 2002 and quadruple the amount of any full year on record, Fed data show.

The custodial data add to evidence that the retreat isn’t simply a one-off. Separate figures from the Treasury Department showed that China pared its stake to $1.22 trillion in July, the lowest level in more than three years. Others, like Japan and Saudi Arabia, have also reduced their holdings this year.

Big holders of Treasuries are selling for a variety of reasons, but they’re all tied to each country’s economic woes. In China, the central bank has been selling U.S. government debt to defend the yuan as slumping growth leads to more capital outflows. Japan, the second-biggest foreign holder, has swapped Treasuries for cash and T-bills as prolonged negative rates in the Asian nation pushed up dollar demand at local banks.

Oil-producing countries like Saudi Arabia have been liquidating Treasuries to plug their budget deficits following the collapse of crude prices. Saudi Arabia’s holdings have declined for six straight months to $96.5 billion — the lowest since November 2014.

“Their trade position is markedly worse” because of the slump in oil, said Peter Jolly, the head of market research at National Australia Bank Ltd. That means “their need to purchase Treasuries is greatly reduced.”

The decline in central bank demand — which some models show has cut 10-year Treasury yields by an extra 0.4 percentage point — points to one reason that U.S. borrowing costs may finally be on the upswing after they fell to a record-low 1.318 percent in July.

What’s more, some measures suggest Treasuries aren’t providing any margin of safety.

While 10-year notes yielded 1.60 percent as of 9 a.m. in London, that’s still leaves many overseas investors vulnerable. For yen- and euro-based buyers who hedge out the dollar’s fluctuations — a common practice among insurers and pension funds — yields are effectively negative. Meanwhile, a valuation tool called the term premium stands at minus 0.58 percentage point for 10-year notes. In the previous 50 years, it has almost always been positive.

Despite those warnings, the bulls say things like tepid U.S. growth and $10 trillion of negative-yielding government debt will keep Treasuries in demand.

“It’s still attractive of course,” said Hideo Shimomura, the chief fund investor at Mitsubishi UFJ Kokusai Asset Management, which oversees about $118 billion. “People might begin to chase yields again.”

Homegrown demand has helped pick up the slack. Excluding short-term bills, U.S. money managers have snapped up 45 percent of the $1.1 trillion in Treasuries sold at government auctions this year, the highest share since the Treasury began breaking out the data six years ago. In 2011, it was as low as 18 percent. U.S. commercial banks, for their part, have also added to their investments of government debt, boosting stakes to a record $2.38 trillion at the end of August.


Nevertheless, some of the most influential players say in the market it’s time to get defensive. Last week, DoubleLine Capital’s Jeffrey Gundlach predicted that benchmark Treasury yields will exceed 2 percent before year-end, echoing his earlier call that the bond market had finally reached a tipping point. At the same time, the Fed signaled at its September meeting that it’s likely to lift rates by December.

For central banks, “why wouldn’t they reduce their Treasury holdings?” said Mark Holman, the chief executive officer at Twentyfour Asset Management, which oversees $9.8 billion. “There is yield available there, but you have a Fed that’s been reasonably clear in what it wants to do — it’s looking to hike.”

Whatever the case, there’s little doubt that America’s borrowing needs will only grow with time — and that could add up to hundreds of billions of dollars in additional interest if foreign demand doesn’t hold up.

The Congressional Budget Office forecasts the U.S. deficit will rise to $590 billion in the fiscal year ending Sept. 30, the first annual increase since 2011. Over the next decade, successive shortfalls to cover costs for Medicare and Social Security will cause the public debt burden to balloon to $23 trillion.

“It’s just the beginning,” said Park Sung-jin, the head of principal investment at Mirae Asset Securities Co., which oversees $8 billion.


September 26th, 2016 6:19 am

Via Marc Chandler at Brown Brothers Harriman:

Drivers for the Week Ahead

  • The first US Presidential debate is a wild card, in the sense that the outcome is unknown
  • The weekend elections in Spain’s Basque country and Galicia may resolve the nine-month deadlock in Spain’s national politics
  • The OPEC meeting in Algiers may prove anti-climactic
  • Both the US and UK report updated estimates of Q2 GDP
  • Cabinet shuffle in Poland and Turkey downgrade underscore political risks in EM

The dollar is mixed against the majors in narrow ranges.  The yen and the Swiss franc are outperforming while sterling and the Loonie are underperforming.  EM currencies are mixed too.  IDR and ZAR are outperforming while PHP and TRY are underperforming.  MSCI Asia Pacific was down 0.8%, as Japan markets fell 1.3%.  MSCI EM is down 1.2%, as Chinese markets fell 1.7%.  Euro Stoxx 600 is down 1.5% near midday, while S&P futures are pointing to a lower open.  The 10-year UST yield is down 2 bp at 1.60%.  Commodity prices are mixed, with oil up 0.7%, copper down 0.6%, and gold flat.

The major central banks have placed down their markers and have moved to stage left.  There are the late-month high frequency data, which pose some headline risks in the week ahead.   The main focus for most investors will be on several political developments.

The first US Presidential debate is a wild card, in the sense that the outcome is unknown.  In recent weeks, the polls have drawn close.  In early August, Nate Silver’s, the gold standard of the poll analysis, gave Trump about a 15% chance of becoming President.  It now puts the odds at near 40%.  Rarely have the odds of Trump’s election been higher.  

At the same time, it should quickly be added that Silver has never had Trump the favorite.  In addition, the well-rehearsed narrative of high disapproval ratings of both Clinton and Trump, and the general disdain for both parties, the two leading third-party candidates are polling less than half of Ross Perot’s nearly 19% share of the popular vote in 1992.  

Surveys indicate that nearly 20% of the electorate is either undecided or does not plan on voting this year.  The first of three presidential debates Monday night is expected to draw a large audience, but whether it will help the undecided decide or change many minds, is a different story.  Although momentum has favored Trump since the start of the month, it seemed to stall at the end of last week.  

The weekend elections in Spain’s Basque country and Galicia may resolve the nine-month deadlock in Spain’s national politics.  Galicia is Prime Minister/caretaker Rajoy’s home region.  His party, the PP, won in both.  The decisive factor may be the fact that Podemos overtook the Socialists in both regions.  Pressure may grow on its leader Sanchez to relent and support a minority national government.  

In Basque Country, the local Basque Nationalist Party (PNV) was returned to office and picked up two more seats.  It is expected to garner a simple majority.  With the right concessions from Rajoy, such as decentralization and territorial reforms, the PNV can support the PP in Madrid.  

The weekend elections will set off a period of negotiating and jockeying for position.  A resolution is needed by the end of October, or the country faces a third election in a year.  If necessary, it would be held before the end of the year.  

The OPEC meeting in Algiers may prove anti-climactic.  Speculation of a deal had lifted oil prices, but before the weekend, it became clearer to many that there would be no deal.  The price of oil slid 4%, the most since mid-July.  The technical condition warns of further losses in the week ahead.  

We are neither experts in the oil market nor specially trained in the nuances of Middle East affairs, but as acute students of political economy, we have consistently warned against ideas that an agreement is at hand, which have arisen on a number of occasions this year.  The bedrock of our argument is that Saudi Arabia will not yield market share to Iran.  Iran cannot agree to freeze its output until its production reaches pre-embargo levels near 4 mln barrels a day.  It has been stuck at about 3.6 mln barrels for the last few months.  

What seemed to excite many were reports that the Saudi’s offered to cut output if the Iranians froze their production.  We suspect the Saudis understood that this was a non-starter, even if many market participants took the bait and drove prices nearly six percent higher in the four-day rally that ended before the weekend.  The Saudis’ tactics may have been aimed at deflecting criticism of low oil prices away from it, and its near-record output (~10.6 mln bpd in August), to Iran.

Hungary holds a referendum on October 2.  The referendum is on the EU refugee resettlement plan, which attempts to relieve some of the pressure on the frontline states like Greece and Italy.  The phrasing of the referendum points to its outcome:  “Do you want the European Union to be entitled to prescribe the mandatory settlement of non-Hungarian citizens in Hungary without the consent of parliament?”  It seems clear that Hungary will vote against the EU plans.

Although Prime Minister Orban will be able to claim popular support for his opposition, it is not like he waited for it.  A year ago, he sealed the border with Serbia, diverting the refugee flow away from the West Balkans toward Slovenia and Croatia.  He has taken a strong nationalistic, and anti-Islam stance.  The risk is that the Hungarian referendum emboldens others, especially, in eastern and central Europe, to reject the EU resettlement strategy.  Some fear that the Hungarian referendum is part of the EU existential crisis of which Brexit was the first expression.  

There is a mitigating factor here:  Germany.  After the CDU lost two state elections in September, the doubts over Merkel’s willingness and ability to seek a fourth term as Chancellor was a favorite topic among pundits.  We cautioned against repeating the mistake of many of Merkel’s critics who historically underestimated her.  

Although it may not be widely recognized, the beginning of Merkel’s 2017 campaign began last week.  The most important step it to secure her flank.  This means healing the damage in the alliance with Bavaria’s CSU.  Immigration is the largest divisive issue.  Bavaria has borne the brunt of Merkel’s immigration initiative.  

The head of the CSU, Seehofer, demanded a 200k cap on immigration for Merkel to secure its support for a fourth term.  Although Merkel has not endorsed this proposal yet, she does seem to be moving closer to it, and Seehofer appeared optimistic after meetings with the Chancellor at the end of last week.    

Merkel tacked to the left take some of the SPD agenda, as in introducing a minimum wage, and embracing equal pay, which had also antagonized her conservative CSU ally.  In the national campaign, Merkel is expected to shift to the right.  This may entail an emphasis on law and order, and a harder line within the EU itself.  Merkel has about six weeks to make the political pivot.  The CSU holds its party conference in early November, where it is to decide whether to support Merkel or not.  Since the birth of the modern German republic, the CSU has endorsed the CDU candidate.  

Although overshadowed by political developments, some economic data stand out.  In Japan, price pressures in August likely edged in the wrong direction.  Headline CPI is expected to have slipped to -0.5% from -0.4%.  If so, it will match the lowest of this year.  Excluding food and energy, prices may have eased to 0.2% from 0.3%.  That would be a nearly three-year low print.  Household spending continues to fall on a year-over-year basis.  The 2.2% decline expected in August follows a 0.5% decline in July and would match the average over the past two years (24 months).  

One bright spot for Japan will be industrial output.  It is expected to have risen 0.5% in August after a 0.4% decline in July.  A positive reading on a year-over-year basis would only be the second such reading of the year.  

The eurozone reports August unemployment and preliminary September CPI.  Unemployment is expected to have slipped to 10.0%.  That would represent a new cyclical low.  The last time unemployment in the eurozone was that low was June 2011.  The PMI surveys showed prices rising, and it does seem that the low point in the cycle is behind it.  CPI is expected to tick up to 0.4% from 0.2% in August.  This would match the January high.  Eurozone inflation has not been higher since June 2015.  

A key takeaway from such reports is that it may be difficult to forge a consensus at the ECB to do more than modestly tweak of its current orthodox and unorthodox measures.  After passing on the opportunity to decide to extend the asset purchases program earlier this month, the next opportunity comes in December with updated staff forecasts.  Even if tapering is announced, it would imply an extension beyond March 2017.  A conservative way to ease the anticipated shortage of securities is to modify the -40 bp limit (deposit rate) so that it applies to the average of purchases not to a single asset.  

Both the US and UK report updated estimates of Q2 GDP.  There is a modest risk that the UK’s estimate may be shaved slightly owing to somewhat weaker services spending. The second estimate put UK growth at 0.6% on the quarter and 2.2% year-over-year.  Growth appears to have slowed here in Q3 to 0.3%-0.4%.  

Note that Corbyn handily turned back the challenge to his leadership of the Labour Party.  It represents the tightening grip of the fundamentalist wing of the party, which seemingly prefers principle to exercising power.  Prime Minister May has ruled out maneuvering to an early election, even though Labour seems unelectable.  However, the more she shifts away from Cameron’s agenda, which did secure a parliamentary majority, realpolitik considerations could encourage her to reconsider.  

In the US Q2 GDP is likely to be revised higher to 1.3% at an annualized pace from 1.1%.  The NY Fed’s GDP tracker has the economy growing 2.26% here in Q3, while the Atlanta Fed puts it at 2.9%.  It would be the first quarter in four that expands by more than 2%.  

One of the under-appreciated shifts in the Fed’s dot plot was to cut its estimate long-term US growth (growth potential) to 1.8% from 2.0%.  Some saw this as a dovish signal, but we demur.    It implies that the non-inflationary pace of growth is lower than previously estimated.  It is not the ideal way to close the output gap, but the consequence is the same and justifies the gradual pace of normalization of monetary policy.  Increasing growth potential is not a something that monetary policy can address. It is a challenge for structural reforms and fiscal policy (public investment).

EM initially benefitted from the FOMC decision, but softened into the weekend.  It is mixed today, as EM tries to gain some traction.  Looking at individual country storylines, a cabinet shuffle in Poland is a good reminder about political risk.  So too is Moody’s downgrade of Turkey to Ba1 right before the weekend.  The Israeli, Czech, and Colombian central banks are all expected to stand pat this week.  China provides its first snapshot of its manufacturing sector this week with PMI readings, while Korea will give the first reading for trade this weekend.  

Some Corporate Bond Stuff

September 26th, 2016 6:10 am

Via Bloomberg:

IG CREDIT: Shire, Gilead 10Y, 30Y Top Most Active List
2016-09-26 09:44:37.531 GMT

By Robert Elson
(Bloomberg) — Secondary IG trading ended with a Trace
count of $13.3b Friday vs $18.5b Thursday, $12b last Friday. 10-
DMA $15.5b; 10-Friday moving avg $11.3b.

* 144a trading added $2.9b of IG volume Friday vs $2.7b on
Thursday, $1.8b last Friday

* Trace most active issues:
* SHPLN 3.20% 2026 was 1st with client and affiliate flows
accounting for 81% of volume; client selling 1.6x buying
* GILD 2.95% 2027 was next with client and affiliate flows
taking 63% of volume; client selling twice buying
* GILD 4.15% 2047 was 3rd with client trades taking 71% of
* AIFP 2.50% 2026 was the most active 144a issue with client
and affiliate trades taking 83% of volume

* Bloomberg Barclays US IG Corporate Bond Index OAS unchanged
at 137
* 2016 wide/tight: 215 (a new wide since Jan. 2012)/135
* 2015 wide/tight: 171/122
* 2014 wide/tight: 137/97
* All time wide/tight back to 1989: 555 (Dec. 2008)/54
(March 1997)

* Current market levels vs early Friday:
* 2Y 0.765% vs 0.766%
* 10Y 1.601% vs 1.606%
* Dow futures -100 vs -16
* Oil $44.74 vs $45.60
* ¥en 100.55 vs 100.82

* IG issuance weekly recap
* September volume at $147.21b; YTD $1.3t

Travails at DeutscheBank Weigh on Equity markets

September 26th, 2016 5:56 am

Via Bloomberg:

Jan-Henrik Foerster
September 26, 2016 — 3:18 AM EDT
Updated on September 26, 2016 — 4:52 AM EDT

Short sellers renew wagers as price of convertible debt drops
U.S. seeking $14 billion to resolve mortgage securities probe


Deutsche Bank AG shares dropped to a record low amid concerns that mounting legal bills, including a looming fine over its pre-crisis mortgage bond business, may force the lender to raise capital.

The shares dropped 6.3 percent to 10.70 euros at 10:14 a.m. in Frankfurt. The 38-member Bloomberg Europe Banks and Financial Services Index slipped 1.5 percent, with Deutsche Bank the worst performer.

The U.S. Justice Department earlier this month opened negotiations to settle a long-running investigation of the bank’s mortgage securities business with a demand for $14 billion. That’s more than twice the 5.5 billion euros ($6.2 billion) Deutsche Bank had set aside for litigation at the end of June.

“Clearly headlines around the DoJ settlement and those $14 billion continue to weigh on the stock,” Daniel Regli, an analyst at Main First, said by phone. “Nobody believes that they will end up paying that amount, but for some investors it might be a concern that even the German government is discussing Deutsche Bank’s situation.”

Chancellor Angela Merkel has ruled out state aid for Deutsche Bank ahead of national elections in September 2017, Focus magazine reported last week, citing unidentified government officials. The German leader also declined to step into the bank’s legal imbroglio with the Justice Department, the magazine reported.


The case concerns allegations that the bank misled investors about the quality of subprime mortgage bonds it created and sold during the U.S. housing boom that led to the 2008 crisis. Deutsche Bank also faces inquiries into legal issues including precious metals trading and billions of dollars in transfers out of Russia, complicating Chief Executive Officer John Cryan’s efforts to bolster profitability and capital ratios.

Germany’s biggest bank would be “significantly under-capitalized” even assuming enough provisions to cover the settlement in the mortgage securities case, Andrew Lim, an analyst at Societe Generale SA, said in a note earlier this month.

A settlement range of $3 billion to $3.5 billion would leave the bank room to settle other legal issues, while any additional $1 billion in litigation charges would erode 24 basis points in capital, JPMorgan Chase & Co. analysts wrote.

The lender’s 1.75 billion euros of 6 percent additional Tier 1 bonds, the first notes to take losses in a crisis, fell about 2 cents on the euro to 73 cents, near a seven-month low, according to data compiled by Bloomberg.

Short sellers, who profit by selling borrowed shares and buying them back at lower prices, have renewed their wagers against the bank. Bearish bets rose to 3 percent of shares outstanding on Sept. 22 from almost a three-month low of 1.7 percent on Sept. 16, according to data compiled by Markit Ltd.

Credit Pipeline

September 26th, 2016 5:46 am

Via Bloomberg:

2016-09-26 09:23:28.443 GMT

By Robert Elson
(Bloomberg) — Set to price today:

* Goodman Australia (GAIF) Baa1/BBB+, to price $bench
144a/Reg-S 10Y, via ANZ/HSBC/JPM; IPT +215 area
* ICBC Finance (ICBCIL) A2/A, to price 2-part 144a/Reg-S deal,
via C/BNP/BoC/GS/ICBC/JPM/ShangPudong
* 3Y, IPT +155 area
* 5Y, IPT +160 area


* Sumitomo Mitsui Trust Bank (SUMIBK) A1/A, mandates
C/Daiwa/GS/JPM to arrange investor calls to begin Sept. 26;
144a/Reg-S 3Y fixed and/or floating issue expected to price
in the near future
* El Puerto de Liverpool (LIVEPL) na/BBB+/BBB+, mandates
C/CS/JPM for investor meetings Sept. 26-28; 144a/Reg-S 10Y
expected to follow
* Korea Housing Finance (KHFC) Aa1/na, mandates BNP/C/ING/SCB
for investor meetings; 144a/Reg-S covered 5Y is expected to
* Viacom (VIA) Baa2/BBB-, will proceed to access debt markets
in near term
* Starbucks (SBUX) A2/A-, filed a debt shelf Sept. 15; has
$400m maturing Dec. 5
* Bayer (BAYNGR) A3/A-; ~$66b Monsanto acquisition
* Deal agreed Sept. 14 after fourth bid
* Hybrid bond sales planned as part of $57b bridge
* HollyFrontier (HFC) Baa3/BBB-, hires BAML/C/MUFG/TD for
investor calls Sept. 15-16
* KEB Hana (KEB) A1/A, mandates C/CA/JPM/SCB/UBS for investor
meetings from Sept. 26; 144A/Reg S transaction may follow
* MTN Group (MTNSJ) Baa3/BBB-, mandates Barclays/BAML/C/SCB
for roadshows from Sept. 9; 144a/Reg-S may follow
* Danaher (DHR) A2/A to buy Cepheid for ~$4b; sees financing
deal with cash and debt issuance
* BRF (BRFSBZ) Ba1/BBB, to hold investor meetings Sept. 12-13,
via BBSecs/Bradesco/Itau/JPM/SANTAN; 144a/Reg-S deal may
* Banco Inbursa (BINBUR) na/BBB+/BBB+, mandates BAML/C/CS for
investor meetings Sept. 7-12
* Fitch says may price $1.5b 10Y
* Brunswick (BC) Baa3/BBB-, files automatic mixed shelf; last
issued in 2013
* Woolworths (WOWAU) Baa2/BBB, to hold U.S. debt investor
update call Sept. 7; last priced a new deal in 2011
* Sydney Airport (SYDAU) Baa2/BBB, to hold investor conference
calls Sept. 6-7, via BA,L/JPM/Sco; last issued in April,
$900m 144a/Reg-S 10Y
* Municipality Finance (KUNTA) Aa1/AA+, to hold Green Bond
roadshows over the coming weeks, via BAML/CA/HSBC/SEB; plans
$500m 5Y-10Y 144a/Reg-S deal
* Kingdom of Saudi Arabia (SAUDI), may raise more than $10b
following roadshows in late Sept.
* Said to have hired 6 banks to lead first intl bond sale
(July 14)
* Korea National Oil (KOROIL) Aa2/AA, has mandated
C/GS/HSBC/SG/KDB/UBS for investor meetings to begin Sept. 6;
144a/Reg-S deal may follow
* Pfizer (PFE) A1/AA, to buy Medivation (MDVN) for ~$14b;
expects to finance deal with existing cash
* Moody’s maintained its negative outlook on PFE, saying
low cash levels may “lead to future debt issuance for
US cash needs.”
* Couche-Tard (ATDBCN) Baa2/BBB, expects to sell USD bonds
related to ~$4.4b acquisition of CST Brands (CST) Ba3/BB
* Enbridge (ENBCN) Baa2/BBB+, files $7b mixed shelf Aug.22;
$350m matures Oct. 1
* General Electric Company’s plan to take on additional $20b
of debt could pressure ratings, Moody’s says
* Industrial Bank of Korea (INDKOR) Aa2/AA-, mandates HSBC/Nom
for roadshow from Aug. 22; 144a/Reg-S deal may follow
* Israel Electric (ISRELE) Baa2/BBB-; said to hire C, JPM for
at least $500m bond sale in 4Q


* Sumitomo Life (SUMILF) A3/BBB+; investor mtg July 19


* Analog Devices (ADI) A3/BBB; ~$13.2b Linear Technology acq
* To raise nearly $7.3b debt for deal (July 26)
* $63b financing said secured w/ $20b-$30b bonds seen
* Danone (BNFP) Baa1/BBB+; ~$12.1b WhiteWave (WWAV) Ba2/BB
* Co. Says deal 100% debt-financed, expects to keep IG
profile (July 7)
* Zimmer Biomet (ZBH) Baa3/BBB; ~$1b LDR acq
* Plans $750m issuance post-completion (June 7)
* Great Plains Energy (GXP) Baa2/BBB+; ~$12.1b Westar acq
* $8b committed debt secured for deal (May 31)
* Abbott (ABT) A2/A+; ~$5.7b St. Jude buy, ~$3.1b Alere buy
* $17.2b bridge loan commitment (April 28)
* Sherwin-Williams (SHW) A2/A; ~$9.3b Valspar buy
* $8.3b debt financing expected (March 20)


* IBM (IBM) Aa3/AA-; automatic mixed shelf (July 26)
* Nike (NKE) A1/AA-; automatic debt shelf (July 21)
* Potash Corp (POT) A3/BBB+; debt shelf; last issued March
2015 (June 29)
* Tesla Motors (TSLA); automatic debt, common stk shelf (May
* Debt may convert to common stk
* Reynolds American (RAI) Baa3/BBB filed automatic debt shelf;
sold $9b last June (May 13)
* Statoil (STLNO) Aa3/A+; debt shelf; last issued USD Nov.
2014 (May 9)
* Corporate Office (OFC) Baa3/BBB-; debt shelf (April 12)
* Rogers (RCICN) Baa1/BBB+; $4b debt shelf (March 4)


* Visa (V) A1/A+; CFO says will issue $2b debt for buybacks by
yr end (July 21)
* Investment Corp of Dubai (INVCOR); weighs bond sale (July 4)
* Alcoa (AA) Ba1/BBB-; upstream entity to borrow $1b (June 29)
* GE (GE) A3/AA-; may issue despite no deals this yr (June 1)
* Discovery Communications (DISCA) Baa3/BBB-; may revisit bond
market this yr, BI says (May 18)
* American Express (AXP) A3/BBB+; plans ~$3b-$7b term debt
issuance (April)

Early FX

September 26th, 2016 5:39 am

Via Kit Juckes at SocGen:


I knew this was going to be a long day when , rushing out of the house late, the first thing I heard on the radio was the shipping forecast, which is on at 5:30 (not 6:30, doh!), but I was rewarded with a spectacular red sky when I got to work. So that’s OK. It could be quite a long day however, since the highlight for markets (the Presidential debate) is at 2 a.m tomorrow UK time. We’re starting the week in a slight risk-off mood, with Asian equities soggy, currency markets quiet, 10-year Treasury yields down a bit at 1.62% (the average of the month so far) and oil slightly higher ahead of the informal oil producers meeting.

If the main drivers of the start of the week are going to be Trump/Clinton and the OPEC meeting, that brings the recent highs in USD/CAD back into focus. Yield differentials have been edging higher and threaten to drag USD/CAD through 1.3250, the main psychological barrier to a bigger move. It goes without saying that any further dip in oil prices would increase the risk of that happening. CAD/NOK spiked lower last week and optically this isn’t a great place to get involved, but even so this is a decent cross to trade CAD political risk separately from guessing the next move in oil prices.

USD/CAD – sensitive to oil, yields and Trump…


We put out a long recommendation for USD/JPY last week (long at 100.30, stop at 99.00) and we’re comfortable with that, albeit within the context of keeping a tight stop. Professor Eisuke Sakakibara’s comments about medium-term risks to USD/JPY (towards 90) have made headlines overnight and the market consensus on the BOJ last week is that it was a damp squib. Bank share prices are back down a touch and 10-year year JGB yields are down at -6bp, which isn’t quite where the BOJ want them. And prompts questions about what exactly the BOJ is going to do to get them up apart from not buying any. But for all that, I think that US real yields are bottoming, the differential with Japan likewise and the market is long yen.

USD/JPY – making a stand here


It’s hard to pin sterling weakness on any single factor, other than the government’s handling of the EU referendum and its aftermath. Sleepwalking to a ‘hard Brexit’ seems the latest ‘plan’ and now that the novelty of the economy not falling over a cliff straight after the vote has worn off, the currency lacks clear support. The move will be choppy, corrections will come along, but I think long EUR/GBP is good way both to position for the pound’s slow demise and the risk of a sudden stop to Euro Area capital outflows, which would drive the euro higher.

We’ll get German IFO data this morning (exp 106.7), US existing home sales (exp -11.3% to 580k), as well as Euro Area M3 tomorrow, US durable goods orders on Wednesday, Euro Area CPI and Chinese PMIs on Friday. I’m not sure any of those will materially change the market mood. Politics and oil, and bond yield-watching will be the main focus. We’re also staying short NZD vs both USD and AUD.

Threat to Yuan in China Housing Boom

September 25th, 2016 9:32 pm

Via Bloomberg:

China’s Runaway Housing Market Poses Latest Challenge for Yuan
Bloomberg News

September 25, 2016 — 7:34 PM EDT

Here’s the latest uncertainty facing China’s currency: sky high house prices.

A runaway boom in the largest cities will push investors to look for cheaper alternatives overseas, draining money out of China and putting downward pressure on the yuan in the process, according to analysis by Harrison Hu, Chief Greater China Economist at Royal Bank of Scotland Group Plc. in Singapore.

An “enlarged differential between domestic and foreign asset prices will lead to capital outflows and depreciation, until parity is restored,” Hu wrote in a note. He said that the 30 percent year-on-year price gain in Tier 1 and leading Tier 2 cities implies a 25 percent rise in dollar terms, which far outpaces the 5 percent gain in major U.S. cities. That ratio is here in red:


“It’s commonly believed that China’s policymakers will sacrifice the yuan exchange rate to avoid a sharp correction in domestic property prices, as the latter will more significantly derail China’s economy and the financial system,” Hu wrote.

That’s because the importance of the property market in the world’s second largest economy far outweighs many sectors, including the stock market. Hu compares property as a percentage of economic output to the far lighter footprint of stocks:

A real estate crash in China could have far reaching consequences and it would be a long time before investors regained their confidence, according to Hu.

That will put policy makers in a very difficult position. While the government has some cards in its hand, such as an ability to control land supply and enforce curbs on new home-buying, history shows that some tightening measures risk backfiring and only stoking speculative behavior such as “panic buying” like that seen in Shanghai earlier this year.

Besides, the regulator’s handling of last year’s stock market turmoil did little to inspire confidence in the government’s ability to oversee the bubbly housing market.

“No bubble has a happy ending,” Hu wrote.

Profit Recession

September 25th, 2016 6:23 pm

Via WSJ:

Profit Slump for S&P 500 Heads for a Sixth Straight Quarter
Analysts have been cutting estimates for U.S. earnings, after earlier projecting a return to growth during the third quarter

By Corrie Driebusch
Sept. 25, 2016 4:45 p.m. ET

The third quarter was supposed to be when earnings growth returned to U.S. companies. Not anymore.

Companies in the S&P 500 are now expected to report negative earnings growth for the sixth consecutive quarter in the coming weeks, according to analysts polled by FactSet. That slump would be the longest since FactSet began tracking the data in 2008.

The prolonged contraction has raised questions about how far stocks can rise without corresponding strength in corporate earnings.

As recently as three months ago, analysts estimated U.S. corporate earnings growth would return to positive territory by the third quarter. As of Friday, they were predicting a 2.3% contraction from the year-earlier period.

Many of the factors pressuring U.S. corporate earnings in recent quarters—including a stronger dollar and falling oil prices—have abated in 2016. The WSJ Dollar Index, which measures the U.S. dollar against a basket of 16 currencies, is down 4% this year, versus up 8.6% for all of last year, and the price of U.S.-traded crude oil has risen 20% in 2016, rebounding from its extreme lows.

Still, those moves haven’t been enough to project an end to the earnings recession.

The battered energy sector of the S&P 500 had the largest downward earnings revision for the third quarter. Exxon Mobil Corp. , for instance, was expected to report 80 cents a share of earnings for the third quarter as of the end of June, but as of Friday that expectation had worsened to 66 cents a share.

DuPont Co. was a drag on the projected earnings-growth rate for materials companies, while Ford Motor Co. has contributed to a decrease in earnings expectations for consumer-discretionary firms, according to FactSet.

For the third quarter, the energy sector is projected to yet again report the largest year-on-year earnings decline of all sectors in the S&P 500, with a drop of 66% expected. It would mark the eighth consecutive quarter that energy companies in the index have reported a year-on-year fall in earnings, FactSet data show.

Even as U.S. oil prices have stabilized, they remain far below their 2014 highs and marginally below where they were this time last year. In the third quarter of 2015, the average price of U.S.-traded oil was $46.50 a barrel. During the third quarter of 2016 through Friday, the price of U.S. oil averaged $44.79 a barrel.

In four of the past five quarters, S&P 500 earnings would have been positive if the energy sector were stripped out, according to FactSet.

Declining earnings forecasts don’t necessarily mean falling stock prices. On average, earnings estimates are revised lower during the three months ahead of the quarterly reporting season, according to FactSet.

Those revisions make the forecasts easier to beat, and actual earnings tend to be better than the forecasts. Earnings growth for the S&P 500 comes in on average 2.8 percentage points ahead of estimates, FactSet data show.

Revenue growth, meanwhile, is set to return for companies in the S&P 500 for the first time since the end of 2014, according to analysts polled by FactSet. Nine of the eleven sectors are predicted to report year-over-year sales growth during the third quarter. Consumer-discretionary companies lead with a projected rise of 8.7%.

Grim corporate results haven’t kept stocks from reaching highs. Since the start of this period of earnings contraction, the end of March 2015, the S&P 500 has risen about 4.7% and hit 15 fresh records.

One reason for stocks’ climb even as earnings shrink is easy-money central-bank policies. Some investors are using the resulting low government-bond yields as justification to buy more stocks in a search for yield, pushing up major indexes.

“Investors don’t care about fundamentals as long as central banks have their back,” said Jack Ablin, chief investment officer at BMO Private Bank, though he added that he finds the lack of earnings growth for such a long period is “certainly problematic.”

Some analysts say they aren’t concerned with the stock market’s gains in the face of earnings contraction—a dynamic that stretches price-to-earnings ratios, a metric investors use to evaluate whether stocks are overpriced—because the gains have been relatively slow and steady.

The S&P 500 is trading at 19.7 times its past 12 months of earnings, above its average of 16 times earnings over the past decade, according to FactSet.

However, stock prices are meant to be forward looking, some say. And indeed, analysts now expect earnings growth to resume in the fourth quarter.

“The market is anticipating we’re going to see a resumption of earnings growth, and I think that’s the right perspective,” said David Lefkowitz, senior equity strategist at UBS Wealth Management Americas. “If we were talking about an earnings outlook where earnings were going to be contracting for as far as the eye can see, I’m fairly confident that the market wouldn’t be within a hair’s breadth of an all-time high.”

Write to Corrie Driebusch at

Goldman Layoffs

September 25th, 2016 12:50 pm

Via Bloomberg:
Goldman Sachs Said to Plan 25% Cut to Asia Investment Bank Jobs
Cathy Chan
September 24, 2016 — 5:07 AM EDT

About 75 posts said to be lost in Asia region, excluding Japan
Goldman Sachs is said to make job cutbacks later this year


Goldman Sachs Group Inc. plans to cut about a quarter of its investment-banking jobs in Asia, excluding Japan, because of a slump in deal-making in the region, according to a person with knowledge of the matter.

The New York-based bank plans to make the cutback of about 75 jobs in the region later this year, the person said, asking not to be identified because the matter is confidential. The job reduction comes as the bank faces its worst Asia ranking in equity issuance since 2008, according to data compiled by Bloomberg data. A Goldman Sachs spokesman said he was unable to comment.

Asia ex-Japan equity offerings have declined 29 percent this year, and Goldman’s ranking plummeted to 11th from second in 2015, its worst showing in about eight years, the data show. The company also has come under scrutiny by authorities for its role in underwriting $6 billion of bond sales for 1MDB, the Malaysian government fund at the center of several international investigations into suspected corruption and money laundering.

Chinese securities firms are mounting a challenge to western banks like Goldman Sachs and Morgan Stanley in Asia, with mainland companies occupying seven of the top 10 positions in advising on Hong Kong initial public offerings this year, data compiled by Bloomberg show. Postal Savings Bank of China Co. raised $7.4 billion in a Hong Kong initial public offering this week, the world’s biggest first-time share sale this year.
Trim Costs

Global investment banks have reduced headcount to trim costs after reporting declines in profit this year. UBS AG trimmed senior management ranks in the region, removing an Asia investment banking co-head position in July. The bank’s pretax profit at its investment bank slumped 48 percent in the second quarter, which the bank partly blamed on a slowdown in its Asia-Pacific equities business. Nomura Holdings Inc. and Macquarie Group Ltd. also cut jobs this year.


Goldman Sachs last month told U.S. regulators it plans to eliminate 15 positions in New York before the end of this year to reflect slower trading and investment-banking activity. Goldman Sachs has cut jobs at least four times this year, with prior announcements informing New York officials of 408 dismissals. The bank has also extended cutbacks in its fixed-income division to roughly 10 percent of staff, double what it normally culls every year.

Reuters earlier reported Goldman is cutting almost 30 percent of the investment-banking jobs in ex-Japan Asia.