The Daily Prophet: Animal Spirits Take Over the Credit Markets

Connecting the dots in global markets.

Those concerned that the nasty selloff in equities a month ago and the return of volatility are a bad omen for markets might want to take a close look at a landmark debt deal on Tuesday. That's when CVS Health Corp. launched the third-largest corporate bond sale on record, offering $40 billion of securities to fund its acquisition of Aetna Inc.

In a sign of strength, the investment-grade bond market barely budged despite all the new supply. In fact, the extra yield investors demanded to own high-grade company debt instead of U.S. Treasuries actually shrank by a basis point or two, according to data compiled by Bloomberg. Because of high demand, CVS was able to market the debt at lower yields than it initially anticipated. “We’ve been saving all of our chips for this” deal, Matt Brill,  a senior portfolio manager at Invesco, told Bloomberg News.  By most measures, credit -- the lifeblood of global markets -- is in good shape, thanks to the synchronized global economic recovery and the big gains in corporate earnings. The number of companies at risk of a downgrade has fallen for 15 straight months, while the number of issuers poised for an upgrade stands at 344, the most in a decade, according to S&P Global Ratings. Although yield spreads have widened from where they were a month ago to about 92.5 basis points, they are still narrower than this time last year, when they were at about 115 basis points.

To be sure, there are concerns. Overall yields are the highest since 2011, and S&P says that global nonfinancial corporate debt grew by 15 percentage points to 96 percent of gross domestic product between 2011 and 2017. The firm estimates that 37 percent of corporates -- based on a global sample of 13,000 entities -- could be categorized as highly leveraged with debt exceeding earnings by five times. Back in 2007, 32 percent of corporates were considered highly leveraged.

The bull market in U.S. stocks turns nine years old this week. The S&P 500 Index has surged about 300 percent since March 9, 2009, when it closed at a more than 12-year low. Along the way, it has hit highs, most recently on Jan. 26, before concerns about faster inflation, rising volatility and trade wars caused the index to fall into its first 10 percent correction since 2016. It's currently about 5 percent below its high. Although nobody is forecasting a bear market anytime soon -- you usually need a recession to trigger one -- the outlook for equities has turned more cautious. In fact, it's likely to be two to three months before the S&P 500 rises to new highs, according to the equities strategist at Bloomberg Intelligence. That's because the declines put the back within its so-called channel uptrend that began with the February 2016 low. If the channel holds, stocks likely won't rise above their levels from January levels until late April or early May, according to the strategists.

Foreign-exchange traders forgot all about fundamentals such as economic growth, interest rates and balance of payments on Tuesday, Instead, politics ruled the day. Two of the biggest gainers against the U.S. greenback were the New Zealand and Australian dollars. They jumped immediately on the news that the  North Korea regime of Kim Jong Un told South Korean envoys that he’s willing to consider giving up his nuclear weapons -- a potential breakthrough after months of bellicose talk. Clearly, at least some traders thought New Zealand and Australia were at risk from North Korea's nuclear missiles. In Brazil, traders bid up the real after a majority of judges on a superior court denied former President Luiz Inacio Lula da Silva’s request for a preventative habeas corpus, bringing the popular leader a step closer to serving a prison sentence. Lula leads all presidential polls in every scenario, and a victory in court would be negative for the market as he has opposed austerity measures, according to Bloomberg News' Davison Santana.

Back in 2010, China surpassed Japan to become the world's second-largest economy. The total value of goods and services produced by the nation continued to grow, and now exceeds $11 trillion. Barring a disaster, China is on pace to surpass the euro area in the size of its economy this year, according to Bloomberg News' Michelle Jamrisko. China’s gross domestic product is forecast to reach about $13.2 trillion in 2018, beating the $12.8 trillion combined total of the 19 countries that use the euro, according to data compiled by Bloomberg. In 2017, the euro cohort edged China by less than $200 billion. Asia -- including powerhouses Japan and India as well as fast-emerging emerging nations such as the Philippines and Indonesia -- already crowded out the combined economies of North and South America in 2016, data compiled by Bloomberg show. China’s leaders, convening in Beijing for the National People’s Congress, have doubled down on President Xi Jinping’s ability to keep growth stable, having removed the limit on his rule. China still has a long way to go to reach the U.S., which has an economy totaling about $19 trillion.

There's an old market adage that say you should buy when everyone else is selling. We may be seeing that play out in the silver markets. Silver futures climbed as much as 2.94 percent on the Comex, the biggest increase since Jan. 24. The rally comes after news that hedge funds and other large speculators are the most bearish ever on the metal. Money managers extended their net-short position in silver to 16,593 futures and options contracts, the most since record-keeping began in 2006, U.S. government data released March 4 showed. It's been a tough year for silver, with prices down about 4 percent this year through March 4, making it among the worst-performing metals on the Bloomberg Commodity Index, as the outlook for higher interest rates diminishes the appeal of non-interest-bearing assets, according to Bloomberg News' Susanne Barton.

Just because the Bank of Canada isn't expected to raise interest rates when policy makers meet Wednesday doesn't mean the gathering can be overlooked. The statement announcing the decision will be closely parsed for clues as to what the central bank thinks about the potential for a trade war with the U.S. and a renegotiation of the North American Free Trade Agreement may mean for the economy. Investors have been paring back the odds of rate hikes in recent weeks on the back of a run of soft economic data, global market turmoil and growing geopolitical concerns that are expected to heighten Bank of Canada Governor Stephen Poloz’s already-elevated levels of caution with tightening monetary policy further, according to Bloomberg News' Theophilos Argitis. The next rate increase -- which would be the fourth in the current cycle -- isn’t being fully priced in until July, trading in swaps suggest. A month ago, investors were pricing in at least one increase by May, with a good chance of an April hike.

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Powell Wants to Keep the Party in Markets Going: Neil Dutta

Euro Zone Investor Patience Will Be Rewarded: Komal Sri-Kumar

What to Expect From BOJ and ECB This Week: Mohamed A. El-Erian

Boom in Share Buybacks Is Big and Possibly Dumb: Justin Fox

Trump Is Overhyping the U.S.-EU Trade Issues: Leonid Bershidsky



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