Who doesn’t like to start the day with a nice hot cup of vindication? There will be plenty of time to recognise those who have been warning about a lack of real liquidity and the chance of real volatility later. For now the question is what to do?
Credit strategist Alberto Gallo of RBS, who has been on team no-liquidity for a while, says wait and see.
What do we do now? We wait a bit longer. Our high yield macro-spread model shows cash should trade at around 500bp in € vs 400bp currently. European high yield spreads are still below last year’s tantrum levels, while US HY spreads are just getting there (508bp). Compared to previous bull market selloffs, this isn’t a short one – but could still last for a while longer.
Cross-posted from Lex Live — which is Lex’s new, free (you don’t even have to register) blog giving an insight on what Lex writers are reading and thinking…
Not that negative zone – Europe: Read more
If you buy this…
… keep reading. Read more
From UBS’s Wang Tao on the sharp slowdown in Chinese credit creation last month (with our emphasis):
China’s July credit data came in sharply weaker than expected. July new RMB lending declined to 385 billion from 1.1 trillion in June. More importantly, new total social financing (TSF) was only RMB 273 billion, led by the drop in new bank lending and a 400 billion shrinkage of bank bill acceptances. As a result, credit growth slowed visibly and our credit impulse plummeted (Figure 1).
Given recent signs of further policy easing and persistently low interbank rates, the market has been expecting additional monetary and credit support. Today’s credit data are therefore a negative surprise. However, we do not believe these data reflect a credit tightening by the PBC – as evidenced by recent policy intentions expressed by the Politburo and the central bank, as well as ample interbank liquidity and strong credit growth in June which surprised on the upside.
RBS have joined the chorus of concerns about dangers in credit markets from thin trading volumes and a lack of risk takers making markets.
The bank also, it turns out, has a measure for trading lubricacity:
Our Liquid-o-Meter shows liquidity in the credit markets has declined around 70% since the crisis, and it is still falling. We define liquidity as a combination of market depth, trading volumes and transaction costs: all have worsened. We also measure the premium for illiquidity: it is at a record low, meaning investors are not getting paid to take liquidity risk.
More on the topic of liquidity, which we’re choosing to understand as the ability to buy or sell when you want to without paying a lot for the privilege. Markets composed of rational, or at least reasonably calm, buyers and sellers. That sort of thing.
From San Francisco comes a video of JP Morgan’s Jan Loeys, shot in the straight-to-camera style of a 1970s news bulletin which lends the whole thing a certain gravitas. The message is to think about liquidity, and to prepare for its possible absence. Read more
You may detect a sceptical tone there, but the question is real: does it matter if something unexpected occurs in the world of credit and rates?
We’ve been on this point for a while — assessment of risk is sticky, until it’s not — but were struck by a recent conversation with a market maker about his clients:
Everyone is acting like an LTCM.
How much forecasting, we wonder, amounts to ‘the present, plus or minus a bit’.
Not because it is a bad way to make predictions, rather that if there has been little change for a long time in something like benchmark interest rates, the expectation for change itself is likely to shrink. Eventually it becomes hard to imagine anything much different from the present at all.
Thoughts which arise thanks to Gary Jenkins, Chief credit strategist for LNG Capital, who draws our attention to an unscientific poll taken at the recent European Leverage Finance Conference. Read more
We detect a theme. It may be that with financial markets becalmed a new subject is needed. Perhaps it reflects the way Piketty has become an instant bookshop-to-shelf classic, but something has investment strategists reaching for insight from an eighth century theologian.
“And those people should not be listened to who keep saying the voice of the people is the voice of God, since the riotousness of the crowd is very close to madness.” — Alcuin to Charlemagne, 798 A.D. Read more
That’s the title of the latest from Matt King, one of the credit strategists we dubbed “bearullish” earlier this year.
King is short-term bullish on credit but, in his own words, “for all the wrong reasons”. He believes that the combination of the remarkably supportive liquidity environment of the past few years and the lack of better alternatives will remain in place for a while — even as credit fundamentals keep deteriorating and valuations become less and less attractive. Read more
Some expansive credit-related thoughts arrive from Alberto Gallo at RBS, for a quiet May Day when Europe’s capitalists take the day off in honour of its workers.
In short, its the safe stuff that may not be safe anymore as/if/when the continent’s economy expands: Read more
Returning to that theme of sticky risk, the search for yield and returns and what happens when the Federal Reserve et al point towards the exit, here are some charts of the divergence between fundamentals and markets courtesy of Matt King at Citi.
The point, as ever, is that while the Fed is handing out donuts then you want to grab your share. But everyone has been eating free food for a long time now, and there are a lot of fat and happy credit investors to fit through the door when the donuts run out… Read more
Our broad US outlook for 2014 is that it represents an inversion of the situation from the start of last year: while the conditions for economic growth in the US now seem better than they were then, the prospects for debt and equity markets are much more complicated.
It’s easy to understand this flipped dynamic in equities. After a 30 per cent return in the S&P 500 last year, stocks are widely thought to be either fairly priced or perhaps a little overpriced, making it tough to know what happens next. Read more
From where this blogger is sitting WMPs do a pretty good job of summing up the different ways of looking at what is going in China at the moment. On the one hand you have those who see WMPs more as “off-balance-sheet deposit rate liberalisation, with a twist of risk” which are a useful tool on the liberalisation path, and on the other hand you have the Weapons of Mass Ponzi-focused brigade. Read more
We don’t know exactly what next year’s Asset Quality Review will involve yet, but we are starting to get a picture of what investors think about the ECB’s forthcoming burrow through bank balance sheets.
In short, given that it might not be all over until the end 0f 2014, everyone is feeling pretty good about the banks right now, and that might explain a surge of appreciation for European stocks. Read more
On the danger or not of China’s inflation rate:
Is this hundreds of basis points safer than the Greek government?
You might well ask. Read more
We missed this speech by Lord Hope, the former Deputy President of the UK Supreme Court, last week. Shame.
It covers the plight of Rangers Football Club, the Insolvency Act 1986; why legal textbook writers don’t have to be dead before you can cite them any more; and the implications of the court’s May decision in the Eurosail case — one of the most important judgments for securitisation law in years. Read more
These sorts of charts have been bothering a lot of people lately, including us:
This one, via UBS’ George Magnus, shows China’s debt back near a 2009, stimulus-era ratio. Only, this time, it’s without the stimulus-era boost to the economy. Read more
Every strategist around, it seems, was expecting an increase in China’s growth rate after the recent credit surge. Of course… it didn’t happen.
Yet much of the reason for those expectations of credit tightening are still there: credit really surged, particularly in March. Read more
Enjoy! Some 148 pages of accounting-for-loan-losses reading:
It’s the IASB’s latest version of its attempt to make banks recognise “lifetime expected” losses on loans or bonds as soon as there are “significant” signs of a credit going bad, instead of waiting until it’s too late and risking a sudden wave of defaults. Read more
The CLO kind of got off lightly in Fed governor Jeremy Stein’s “Overheating in credit markets” speech.
Makes sense, given what Stein was mostly talking about — places in the market where the yield chase could be relying on assets that in turn rely on short-term funding. In other words, leverage that turns “overheating” into a supernova. Read more
Taken together, the policy vol crunch and regret factor must be putting the remaining bears in a paroxysm of remorseful fear.
He’s very quotable, Nomura’s Kevin Gaynor. Read more
Plenty of analysts and pundits have gone to the trouble of explaining the challenge confronting savers in the current low-yield environment…
But how many of them go to the trouble of putting on a barbecue to illustrate various credit strategies one may respond with? Read more
Ireland: Eurostat is withdrawing a specific reservation, expressed in April 2012, on the data reported by Ireland, relating to the statistical classification of National Asset Management Agency Investment Limited (NAMA-IL). On the basis of documents provided by the Central Statistics Office of Ireland, NAMA-IL is majority privately-owned, following the sale by Irish Life of its stake in NAMA-IL to a private investor. This is a necessary condition for a special purpose entity to be classified outside the General Government sector, pursuant to Eurostat’s decision of 15 July 2009 on public interventions during the financial crisis.
That’s from Monday’s Eurostat release on European government debts and deficits. Monday, perhaps not coincidentally, also saw names put on the announced sale of Irish Life’s 17 per cent stake in Nama Investment Ltd. Read more
A safe assets-themed argument in three charts, from Barclays’ latest global outlook. (Click to enlarge)
In the States, we’re still picking our jaws off the floor from the lowest CCC-rated issuance yield on record, earlier this week.
In Europe… Societe Generale’s credit strategists have an interesting round-up: Read more
US banks as one of the last big carry opps, really? Chart via Ralph Axel at BofA Merrill Lynch:
Here’s a call from Sober Look on Tuesday — Germany’s growth might be on the cusp of going negative:
So much for the hopes and dreams of German decoupling from the Eurozone’s economic troubles. How things have changed in just six months… Germany’s growth trajectory is now converging with the rest of the euro area’s weakened economic conditions. Read more