Earnings set to take US markets’ center stage

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Earnings news will take center stage Wednesday after another day of strong stock market gains cemented the view that the worst is over.

Boeing, Abbott Labs, Biogen Idec, GlaxoSmithkline, Norfolk Southern, Northrop Grumman, US Bancorp and Dow Chemical are among the companies reporting before the opening bell. CPI inflation data is also expected at 8:30 a.m., and that number should reflect falling gasoline prices.

Investors have been increasingly willing to dip into stocks with no new negative developments in Ebola, a steadying of oil prices, and the sense that the Federal Reserve will not move to raise rates quickly even as it ends bond buying. The start of a European Central Bank bond buying program this week and speculation it could do more also helped put a lift in risk assets.

“It’s a retracement of a decline that made no sense,” said Steve Massocca of Wedbush Securities. “We are now back to where we were on October 9. We’re back to where we were eight trading days ago…It put a damper on a lot of the deal activity that was going on, and that’s what we needed. Now we’re recovering. I think we’re going to consolidate here.” Massocca said with relatively high valuations, he does not expect the market to go much higher.

The S&P 500 regained its 200-day moving average at 1907 and surged higher to close up 37 at 1941. At its low point, the S&P was down about 9.5 percent on an intraday basis from its high, and it is now up 5 percent for the year. The Nasdaq closed up 103 points at 4419, in its first triple digit move since November 2011. The Dow rose for a third day, gaining 1.3 percent, to 16,614.

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US earnings season is in full swing, and is viewed as a positive influence even though there have been some misses among high profile blue chips, such as Coca-Cola and McDonald’s. The 106 S&P companies that reported as of Tuesday morning posted an average gain in profits of 15.6 percent, and 67 percent were better-than-expected, according to Thomson Reuters.

Considering both the results of companies that reported and estimates for those that have not, Thomson Reuters said profit growth now looks to be 7 percent for the third quarter, better than the roughly 6.4 percent expected at the start of the month.

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“Everyone is willing to look past Coca-Cola and McDonald’s and IBM. They don’t get it. The millennials are changing tastes,” said Jack Ablin, CIO of BMO Capital Markets.

Dovish Fed comments, including from St. Louis Fed President James Bullard last week, have boosted market confidence that the Fed will not act quickly to return to normal.

“l see no reason interest rates are going to go up any time soon,” said Massocca. The next big event for the market is the Fed’s meeting next week, where it is expected to announce the final purchases under quantitative easing. Though Bullard cast doubt on the meeting by saying the Fed could extend the program if it saw need. “I see no reason to think the Fed is going to do anything,” Massocca said.

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Paul Hickey, co-founder of Bespoke, said he expects the market to trade more positively, but he doesn’t expect all smooth sailing.

“Our view is that this was more of a short term thing…The U.S. economy continues to be positive and outperforming practically every other economy out there.”

Hickey said he expects the market to close out the year at higher levels. “When you see these kinds of pick up in volatility, they don’t just go right away. It’s one of those things where I would expect to see volatility in the market going forward,” said Hickey. “We’re not just going to keep going up forever. Today investors were encouraged by news on future easing out of Europe. We’ve had those false alarms before.”

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Traders will be watching inflation data Wednesday, particularly those in the gold market where the metal has risen even with no signs of inflation in sight. Gold is viewed as a hedge against inflation.

Win Thin, senior currency strategist at Brown Brothers Harriman said gold’s move is puzzling. “I’m not sure why it’s still up here. We’re seeing deflation,” said Thin, adding the dollar usually moves in an opposite direction. Gold was higher after trading above the key USD 1250 level. “Commodities in general are firmer. We saw the selloff earlier in the month.”

Economists expect the Consumer Price Index to be flat, but up 0.1 percent when excluding food and energy. Gasoline is a wild card for the number, and the drop in gasoline prices could shave 0.3 percent from the number, according to Deutsche Bank chief US economist Joseph LaVorgna.

Regular unleaded gasoline was at a national average of USD 3.09 per gallon Tuesday, according to AAA. It was at USD 3.34 a month ago.

Companies reporting after the close Wednesday include AT&T, Cheesecake Factory, Yelp, Morningstar, Plexus, Equifax, NXP Semiconductors and Citrix.

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China Q3 GDP +7.3% on year, versus +7.2% forecast

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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China’s economy grew at a faster-than-expected pace in the third quarter, official statistics showed Tuesday.

Gross domestic product (GDP) growth for the July-September quarter came in at 7.3 percent from the year-ago period, beating a Reuters forecast for a 7.2 percent expansion and after the 7.5 percent growth in the second quarter. First-quarter growth came in at 7.4 percent on-year.

The Shanghai Composite erased earlier losses to enter positive territory and the Australian dollar gained 0.3 percent against the greenback, the best level since Thursday’s high of USD 0.8830.

The GDP data have been closely watched for hints on whether policymakers will unleash further stimulus to buoy an economy struggling with a slump in its key property sector, a slowdown in credit growth and subpar inflation.

Late last week, media reports said China’s central bank is planning to inject 200 billion yuan (USD 32.6 billion) into the banking system, its latest targeted easing in recent months.

“The question for me and a lot of analysts is what they [policymakers] are going to draw from slowing growth. Do they draw the conclusions that they need to find other sources of growth? If they just keep trying to stimulate, it just reinforces the cycle that has produced the distortions seen in the economy,” Evan Feigenbaum, vice chairman of the Paulson Institute, told CNBC’s “Asia Squawk Box.”

In other data, industrial output for September rise 8 percent year on year, beating the 7.5 percent forecast by Reuters.

Meanwhile, retail sales rose 11.6 percent from the year-ago period, a tad below the 11.8 percent expected gain.

And fixed asset investment jumped 16.1 percent in the January-September period, short of the 16.3 percent forecast rise.

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Why India’s fuel reforms are a big deal

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The Indian government announced two important fuel reforms – a deregulation of diesel prices and a hike in natural gas prices – over the weekend, a signal of Prime Minister Narendra Modi’s commitment to tough economic reforms.

The price of widely-used diesel was deregulated effective midnight of October 18, while natural gas prices will be raised to USD 5.61 per million metric British thermal unit from USD 4.20 on November 1, and revised every six months.

So what are the implications of the fuel reforms for Asia’s third largest economy?

Controlling the fiscal deficit

Freeing diesel prices from state controls and pegging them to international rates effectively eliminates the subsidy on fuel. This will lower the government’s subsidy bill by around 0.3-0.4 percent of gross domestic product (GDP), DBS estimates, and shield the government’s balance sheet from volatility in global crude prices.

The government’s fuel subsidy bill was about USD 11 billion in the year ended in March, around half of which was for diesel. Diesel accounts for around 44 percent of total fuel consumed in the country.

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“The fuel reforms bode well for the fiscal outlook,” said Sonal Varma, chief India economist at Nomura, noting that with both diesel and petrol prices now market-determined, the government will subsidize only liquefied petroleum gas (LPG) and kerosene.

India’s fiscal deficit was 3.98 trillion rupees (USD 64.4 billion) during April-August, or about 74.9 percent of the full-year target.

Investment boost

Higher natural gas prices are set to encourage investment into the gas sector, say analysts.

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Artificially low prices have discouraged investment in developing production capacity, including the building of pipelines and terminals for more expensive liquid natural gas.

There have been growing calls by producers reeling from high production costs to hike natural gas prices, said Radhika Rao, economist at DBS. “With higher prices, one can expect more investment interest in that field,” she said.

Inflation implications – not much

The fuel reforms will have a marginal impact on inflation as the consumer price index (CPI) basket is predominantly made up of food and services, says Rao. The CPI is the key measure of inflation for the Reserve Bank of India.

Nevertheless, higher natural gas prices could push up the cost of cooking gas and compressed natural gas used by buses, taxis and other vehicles.

Read More: Lower oil prices are unambiguously good

Finance Minister Arun Jaitley said the central government will urge state governments to cut local taxes to soften the impact of this.

Double-edged sword

While the recent decline in global crude prices along with the deregulation is positive for the economy, there’s a caveat.

“Any sharp rebound in global crude prices will filter through as a negative trade shock, especially as petrol and diesel prices are now market-determined,” said Rao.

“Such an event will truly test the government’s resolve in keeping prices market-linked and not reviving state interference.”

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What could rock the markets in week ahead

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Get ready for another blast of head-spinning volatility.

Following the most turbulent market week in years, some strategists are ready to call the all clear. But others say stocks could test the lows of the past week—especially if there are more signs of a weakening global economy; Ebola headlines get worse, or US corporate earnings fail to deliver.

Earnings are expected from about 20 percent of the S&P 500, including tech companies, like Apple and Microsoft. Big Dow stocks Boeing, McDonald’s, Coca-Cola and Caterpillar join a parade of consumer companies, automakers and industrials. However, there is little fresh U.S. economic data with the exception of existing home sales Tuesday and CPI inflation data Wednesday. Chinese retail sales, GDP and industrial production data will be important for markets Tuesday as traders try to assess whether its economy is weakening.

“This volatility is going to last through the election. It’s upside and downside volatility. It’s still two- way,” said Julian Emanuel, equity strategist at UBS. “Is the worst of what we’ve been calling a growth scareover?…We think so.”

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Stocks closed out the past week with near 1 percent losses, despite tumultuous trading that saw the Dow travel a 900-point weekly range in jarring triple-digit daily swings—both lower and higher. The Dow was down 163 points for the week, or 1 percent, at 16,380, and the S&P 500 lost about 19 points to 1,886. The S&P 500 had its first four-week losing streak since August 2011.

The VIX, the CBOE volatility index reflecting options positioning in the S&P 500, jumped to 30 for the first time in nearly three years this past week.

The Nasdaq was off 0.9 percent at 4,258, but the standout was the Russell 2000, up 2.8 percent for its first weekly gain in seven weeks, after selling off well ahead of the broader market.

“Everyone wants to call the bottom. I feel like we’re at the point where we are feeling more neutral, but it still feels very premature to me to call the bottom here,” said Lori Calvasina, small-cap strategist a tCredit Suisse. She said, however, she is more negative on mid caps than small caps since forward price-to-earnings ratios on the small-cap Russell 2000 stocks have fallen back to the more normal 15.99 from over 19.5.

Read More Small caps rake in big bucks; top week in 14 years

Andrew Burkly, Oppenheimer Asset Management head of institutional equity portfolio strategy, said he thinks the worst is over, and the S&P probably set a bottom at the 1,820 level Wednesday.

“We do think this dip is definitely buyable. We do think the low probably was on Wednesday,” he said. “I still think we go out making new highs by the end of the year, 2,050 or so.”

The typically less volatile Treasury market also lit up with a record volume day Wednesday and historic moves in price and yields. On that day the Dow moved more than 450 points intraday.

“These moves end up reverberating for a while though the system until we get really good clarity on what direction we’re going,” said George Goncalves, head of rates strategy at Nomura. “There’s been a lot of damage done to the internals for all markets. It’s time to reset and reassess. During that period, (volatility) remains elevated.”

Goncalves said the CPI inflation data will be important this week. Its release follows last week’s decline in U.S. PPI and signs of deflation in recent data for the eurozone.

“Before, we were running at aboutfour basis point moves a day. Now we’re running at 15 or 10. We’ve been doubling the intraday volatility,” he said. “This is big. It’s not just going back to normal…We didn’t want this. This is not the right way to end a bond rally.”

Multiple reasons were pinned on the market drama in the past week, but one common theme was a cross-market fixation with the Fed’s plan to end quantitative easing at its late October meeting. By Thursday, St. Louis Fed President James Bullard helped turn the tide when he said maybe the Fed should extend its tapering, given market conditions. That was an idea risk markets liked, but many Fed watchers thought unlikely.

At the same time, the markets pushed expectations for the Fed’s first rate hike to the end of 2015 from the middle of the year.

“As far as the Fed goes, the pendulum is swinging back and forth. But I think the center is going to hold here. It’s not more QE. It’s not imminent tightening. We’re thinking one or two hikes are likely late next year,” Burkly said.

Calvasina said small caps are especially sensitive to Fed stimulus and tightening. “I think if the Fed does something (to extend QE), that’s a positive. I think the unwinding of stimulus we’ve been seeing is a negative,” she said, adding the Fed is one risk she continues to see for the small-cap space. Small companies are particularly sensitive to rising rates so the timing of the rate hikes has also been issue.

Markets mayhem

In the bond market, the 10-year and 30-year both saw big moves Wednesday. The 10-year fell below 2 percent for the first time in more than a year. “This was a long overdue purge in the bond market for people with stubborn shorts, and it was a pretty epic in terms of the overall moves and volumes, and the price action will definitely go into the record moves. Usually when you have these things it’s a game changer,” Goncalves said.

He now expects the 10-year yield to range from 1.9 to 2.4 percent through the year-end, while many strategists had been expecting 3-percent yields as the Fed moved away from QE and closer to its first rate hike.

Read More Abnormal bond market move signals bears capitulating

“There’s aftershocks, and those aftershocks remain for quite some time and we’re nowhere near through,” he said.

Oil continued to pressure the stock market, as West Texas Intermediate fell 3.4 percent for the week. But in the final two sessions, it moved higher and WTI moved from a low below $80 on Thursday morning to as high as $84.45 a barrel Friday.

“For us, even though you had these extremes, and you certainly had a fear mentality in the stock market, the bond market and the energy market in the first few days of the week, what you didn’t have was the dollar getting stronger or small caps selling off,” Emanuel said. “The stronger dollar and small caps underperformance were the things that led this entire trade for the last few months. While we’re not calling the bottom we want people tiptoeing into places that are likely to work coming out of the growth scare.”

Emanuel said the divergence with small caps could be signaling a healing and he does not expect to see the Russell make a new low, even if the market does sell off. The S&P could make a marginal new bottom before the market moves higher.

“The worst is behind us. We’re not out of the woods so basically what you could do is range trade in between the lows of earlier this week, and the (S&P’s) 200-day moving average which right now is 1,906. To think the market is going to rip right through that 200–day moving average is a bit too wild-eyed bullish for us right now,” he said.

Many strategists in the past several weeks had expected stocks to shift focus to earnings news and make gains on the positive results. But the market volatility and fear factors make that less likely. “It’s going to be a good week. There’s a good cross-section of earnings…They may not take over but they’re playing a strong supporting role because they’ve been better,” said Art Hogan, chief market strategist at Wunderlich Securities.

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Why all this market volatility is here to stay

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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What is making the market volatile is pretty obvious. What is likely to keep it volatile is a little less so.

Wall Street pros have trotted out all the usual suspects to explain why the major averages have wiped out almost all their gains for the year: Europe, Ebola, ISIS and a pick-your-poison menu of other headwinds that have made a world full of promise suddenly appear to be a minefield without a map.

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Underlying the investing climate is a general level of uncertainty.

A growing chorus of investors worry not simply that the world is changing but is doing so in ways for which policymakers are not prepared. How does the Federal Reserve unwind its massive easing measures? What happens if things don’t go as planned? In the case of a big scare, particularly in the fixed income market, will a lack of buyers turn a selloff into a stampede?

“We’re seeing this move for the third time,” Peter Boockvar, chief strategist at The Lindsey Group, said in reference to the Fed likely exiting the third leg of its quantitative easing bond-buying program this month. “People are acting like they’ve never seen this before. This is what happens when QE ends. All the warts and blemishes start to matter.” Indeed, there are warts and blemishes aplenty, even amid the wine and roses.

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Greece sparked the most recent euro zone worry when leaders there announced what amounts to a go-it-alone strategy—minus central bank assistance—in righting its ship.

Meanwhile, investors jump each time it appears the Ebola scare is spreading. And to top things off, the supposedly sacrosanct US, which is expected to rise above the global economic weakness, has problems of its own, particularly in terms of consumer strength as evidenced by September’s anemic retail sales numbers released Wednesday.

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Looking at the big picture, Boockvar believes that the downdraft in stocks is just getting started.

“This is not your standard 5 or 6 percent correction,” he said. “This is going to be the first 10 percent correction we’ve had in a long time—at least.”

But while equities get the most headlines, the reaction in the fixed income markets may be even more telling.

German bund yields slumped Wednesday prior to the US market open while Greek yields spiked. For its part, the benchmark US 10-year Treasury note briefly slid below 2 percent—where it has not closed since May 21, 2013—in what Boockvar called a pure safety play amid global turmoil.

“It’s the classic flight to safety,” Boockvar said. “When you’re in a flight-to-safety trade, people are more worried about safety than the smarts of it.”

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The massive decline comes the same week that a Bank for International Settlements official expressed fears over a “violent” market drop, particularly in bonds.

“If I had told you that there were heightened tensions in the Middle East and Eastern Europe, uncertainty about the turning point in US monetary policy, a succession of strong US job numbers, uncertainty about the future direction of policy in Europe and Japan, as well as increased concern about the strength of the Chinese economy, you would not be expecting that to make for a benign time in financial markets,” Guy Debelle of the BIS said, according to prepared remarks for the Australian and New Zealand Investment Conference on Tuesday. “But that is what we have seen for much of this year.”

Debelle’s fears over market stability stem not only from those factors but also from a lack of liquidity in the fixed income markets—remarks that mirrored those from the TABB Group’s Anthony Perrotta, who warned last week of a “doomsday” scenario shaping up in fixed income.

A “reason to suspect that the selloff might be violent is the starting point, namely zero nominal interest rates,” he said. “That is a point we haven’t started from before (with the possible exception of Japan). There are undoubtedly positions out there which are dependent on (close to) zero funding costs. When funding costs are no longer zero, those positions will blow up. Where are they? How large are they?

“I don’t really have a good answer to those questions. It appears more likely that they are held by real money investors than directly on the balance sheets of the core banking system, which is probably a good thing. But then if we think back to 2007, structured investment vehicles weren’t directly on the balance sheet of the core banking system either.”
The result: Financial markets faced with uncertainty that isn’t going away. The Europe slowdown is probably in the early innings, the Fed hasn’t even begun to raise interest rates yet, and geopolitical crises seem to pop up by the day.

Investors, then, may not want to sell into the weakness, but they for sure had better be paying attention.

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“It’s all occurring at a time when you have some expensive financial assets out there. That makes for a pretty volatile mix,” said Gary Pzegeo, managing director at Atlantic Trust Private Wealth Management. “If you get a new piece of information and you get a big seller, there are lots of people who are watching the market, see the prices and are quick to pull the trigger.”

Pzegeo believes the bull run that began 5½ years ago remains intact, but sees “a new and more challenging phase ahead” exacerbated by potential liquidity events the likes of which Debelle and others have cited.

“You have to be careful that liquidity events don’t turn into fundamental events,” he said. “You have to watch some of the markets that have been founded on very liquid (conditions) and make sure that they’re still functioning—that this does not spin into something worse.”

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Abnormal bond market move signals bears capitulating

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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A wild and historic move in the Treasury market Wednesday stunned traders and signaled capitulation by some investors who have been clinging to bearish positions.

The dramatic buying and big swing in rates coincided with a swift downdraft in stocks and was blamed on a combination of factors.

The weakness in Europe, worries Greece would exit its bailout, the possible breakdown of the AbbVie-Shire merger, Ebola concerns, and weak US retail sales data were all cited as factors for the jump in bond prices and slide in yields.

But one thing mentioned across the board was the end of the Fed’s quantitative easing bond buying program in the next several weeks. Of concern is its potential impact on risk assets, at a time when global growth is in question and market expectations for the Fed’s first rate hike are moving into the more distant future.

Traders said the market was pricing in a late 2015 rate hike, well past the midyear rate hike expected by many economists.

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The yield on the 10-year slid to 1.86 percent in a quick move down—its lowest level in intraday trading since May 2013—before later reversing to 2.1 percent in the biggest one day move since November 2008, according to Jefferies.

“We’ve had our shock and awe short-covering rally, and all that, but something has changed,” said David Ader, chief Treasury strategist at CRT Capital. He said the market will now look for a new lower range in 10 years, and will likely disappoint those who expected higher yields of 3 percent or higher this year.

“Today was the biggest volume day I’ve ever seen,” said Ader, noting it was more than 2.5 times the recent average.

The move was a shocker, with many in the market expecting rates to go higher, not lower. Jeff Gundlach, CEO of DoubleLine, told CNBC just this week that he expected a 10-year yield of 2.2 percent to be the bottom of the range.

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“I think we’re going to say this was one of those capitulative days and we’ll have to figure out what the new range should be in 10s. We have learned a lesson about what central banks can do, and what they can’t do, and I think that’s what risk assets are telling you…they simply outpaced the economic scenario,” Ader said.

The price move in the 30-year bond was also eye-popping, and a move unlike any since the 1980s, said Ader. “I don’t remember the last time the 30-year bond moved in a six point range,” he said. The low price was 102.95 and the high was 109.25, according to Reuters Tradeweb.

Some of the factors leading up to the move in Treasurys have been troubling markets for weeks but the market move was still a surprise.

“I think this day’s unique. Other days like this were during periods of a continuum misery,” said Ward McCarthy, chief financial economist at Jefferies. “It’s not really clear what this was all about. It was a combination of the stock market looking toppy. This all really started with a surge in the dollar and falling commodities prices. It whipped around the globe and left its imprint on all the markets. When these types of things happened in 2008, it was because the world was collapsing and the U.S. was part of the collapse, but that’s not the case right now.”

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Cliff Noreen, President of Babson Capital, said the move into Treasurys is also prompted by low yields elsewhere in the world, such as Japan, and Germany where the 10-year yield was as low as 0.724 percent Wednesday.

“I think people are shocked by the level of yields being this low but QE is going,” he said. “QE is old news and now we’re dealing with what’s going on (with rates) in Europe and Asia.” There have been new concerns that the European Central Bank will not be forceful enough in its own easing program.

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“That’s what’s driving yields along with global slowdown fears. The 10-year should be trading between 4 and 4.5 percent, but that’s not going to happen for a long time. We’re in a global economy, and that’s what you have to think about,” Noreen said. Quantitative easing is the Federal Reserve’s bond buying program which it has been tapering back since last year.

Noreen said the selloff in stocks was healthy. “What’s really healthy today was the Russell really outperformed the S&P 500 and the Dow, and high yield market which is another indication of risk was down but not that much. Those two indicators were really important for the health of the markets and to help the markets stabilize. Large caps are really catching up with small caps.”

Ader said he believes the Fed was the biggest reason behind the market moves.

“That retail sales number was not going to cause a 40-basis point move (in 10-year yield). This is a big positioning adjustment,” he said. The markets had adjusted to Fed purchases of longer dated Treasurys and mortgage securities.

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“If the Fed is not buying those securities any more, all the asset classes that benefited from it now will go the other way. I think that was what we are dealing with now. The unwind of five years of asset accumulation and outperformance is going to be painful and we all knew it was going to painful. There’s not a lot of liquidity out there and when you face that, it’s a big deal. It’s largely about the end of QE. It also tells you about positions. The positions were there for QE and are only now starting to come off,” Ader added.

McCarthy said the markets are also trying to adjust to the unknowns that come with the end of the Fed programs. While he had expected rate hikes at the end of next year, others had not.

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“I think there has been some confusion about how the Fed would move along the path of policy normalization,” he said, adding that the market is shifting its expectations out about six months. “The Fed is going to normalize on its own time frame. They’re not going to be in a rush.”

He said the commodities selloff is an indication of the weakness in the global economy, and the Fed will be driven by data. The Fed has also ballooned its balance sheet to more than $4 trillion with asset purchases since the financial crisis began.

“The Fed used to have one lever…Now they have two throttles. They have the balance sheet and the fed funds rate, and nobody has had experience of the interaction of the two at inflection points. The expectations that the Fed would go back to a neutral balance sheet and get back to normal had a lot to do with the dollar surge,” he said.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Who’s afraid of bond defaults?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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As yield-chasing investors move further out the risk spectrum, covenants on loans and bonds have loosened, but it isn`t clear whether investors need to worry.

Some are taking a “keep calm” approach.

“We are sympathetic to the worries surrounding the loosening of lending standards in the leveraged loan market. But we don`t think this will drive corporate defaults higher in the near-to-medium term,” Goldman Sachs said in a note last week.

For one thing, “covenant light” loans tend to fare better than “covenant heavy” ones, it said, citing data from SandP Capital IQ Leveraged Commentary and Data indicating that the cumulative default rate from 2008 to the present for “covenant-heavy” issuers is 19.0 percent compared with 10.3 percent for “covenant-light” ones. 

“With fewer covenants to violate, `covenant-lite` issuers were in a better position to weather the storm of the recession, which explains their outperformance in terms of defaults,” it said.

But not everyone is convinced.

“Over the last six years, there haven`t been many defaults, so you don`t have a lot of good data to go on right now,” said Steve Goldman, managing director at fixed income manager Kapstream Capital.

“The new deals don`t look like the old deals,” he said. “When things go bad, companies aren`t forced into austerity measures and that historically has led to more defaults.”

Default rates are currently in the low single digits, but that could change, he said, noting that many borrowers, especially in Asia, have floating-rate loans and could see their cost of capital rise sharply if interest rates rise. Currently, the U.S. speculative-grade default rate is around 1.5 percent, according to data from SandP, which expects it to rise to 2.7 percent by June 2015.

During the Global Financial Crisis, markets priced in default rates of as high as 20 percent, he noted, adding that Kapstream hasn`t really invested in the high-yield segment and is unlikely to change tack in the current environment.

If relying on historical default rates rings a bell, it might be from the Global Financial Crisis, when the creators of mortgage securities relied on historical data showing mortgage default rates were typically low — something that changed once lending standards deteriorated.

Indeed, data suggesting lower default rates for lower-covenant lending may be related to better-quality companies having more leverage in negotiations.

“In the US, lower-rated high-yield bonds normally have stronger covenant quality than higher-rated bonds, since investors demand more protection when lending to riskier credits,” said Jake Avayou, senior covenant analyst at Moody`s. But he noted covenant quality in North America has deteriorated “significantly” since 2013, although Asian protections have held up somewhat better.

But Avayou cited concerns over a recent issue from Geely Automobile, which had significantly weaker covenants than most Asian bonds.

It didn`t contain covenants related to asset sales, which would typically require a company to reinvest proceeds within a certain time period for a specific purpose, according to a recent Moody`s report. The issue also lacked a transactions-with-affiliates covenant which would require arm`s-length deals to prevent sweetheart deals with related parties, the report noted.

It isn`t clear whether the missing covenants are a one-off for this particular deal, Moody`s noted.

“These things tend to repeat themselves. You see a looser structure and people start repeating and that`s how weakness develops,” Avayou said.

-By CNBC.Com`s Leslie Shaffer; Follow her on Twitter @LeslieShaffer1

Copyright 2011 cnbc.com

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

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Google discloses Web encryption vulnerability

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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A Google Inc spokesman said on Tuesday that researchers with the company have uncovered a vulnerability in widely used SSL web encryption technology, finding a bug in the SSL 3.0 protocol.

SSL 3.0 is nearly 15 years old, but it is still widely used, Google said, in a Tuesday evening blog post. Even browsers that use newer protocols will retry failed connections with older protocol versions, including SSL 3.0.

“Because a network attacker can cause connection failures, they can trigger the use of SSL 3.0 and then exploit this issue,” Google said, in the statement. The immediate fix to the problem will “break some sites, and those sites will need to be updated quickly.”

“In the coming months, we hope to remove support for SSL 3.0 completely from our client products,” Google said.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Fund manager sentiment most bearish in 2 years

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Four most worrying drags on global markets

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The global stock rout appears to have come out of nowhere, but Capital Economics highlights four key weights dragging on markets.

Signs of a renewed downturn in Europe, particularly Germany, are the most worrying drag on markets, Julian Jessop, an economist at Capital Economics, said in a note Tuesday.

Read More: Can banks, tech earnings halt Wall Street’s carnage?

“It is hard to see any solution that does not involve additional easing by the ECB (European Central Bank) and further euro weakness in the coming months,” he said.

Last week’s manufacturing data from European growth driver Germany disappointed, with industrial output slowing by 4 percent on-month. The country’s economy contracted 0.2 percent on-quarter in the second quarter, with the potential to fall into a recession in the third quarter. In the euro zone as a whole, gross domestic product was flat in the second quarter, lower than expected.

Read More: The Dow’s correction has more room to move

European shares were resilient in Monday trade, with the FTSE 100 ending up 0.4 percent and the Xetra Dax adding 0.3 percent, but since the beginning of September, they are down 6.6 percent and 6.9 percent respectively. In the U.S., stocks tanked Monday, with the S&P 500 falling 1.7 percent for a total 7 percent drop from its bull-market high.

Oil Prices

The second drag on markets is the collapse in oil prices, but that is less worrying, Jessop said. The price of WTI crude oil has fallen more than 18 percent from its mid-year high, trading around USD 85 a barrel.

Read More: Cheap oil is here to stay, at least for a few months

“The collapse in oil prices overstates the weakness of world economy,” he said, attributing the decline to weak demand from Europe and China as well as increased supply, dollar strength and some panic selling. “Whatever the reasons for the fall, lower energy costs should actually help to kick-start global growth,” he added, noting he expects oil prices to recover a bit toward USD 93 a barrel by year-end.

Metals

The next nagging concern is “essentially old news:” the slowdown in the major emerging markets, Jessop said, noting most that of that took place in 2010-2012 and was expressed as a decline in industrial metal prices.

“A lot of the bad news for commodity prices – especially metals – is now surely priced in,” he said, adding that while growth in the largest emerging economy, China, may have fallen below 7 percent in the third quarter, it would still be a decent and likely healthier pace.

Geopolitics

The final major concern comes under the big geopolitical risk umbrella, including Ebola fears, Jessop said.

“The bulk of these worries are overdone, but again it could be Europe that provides the biggest shocks,” he said, citing the rise of euro-skeptic party UKIP and the potential for a referendum on the UK’s membership in the EU.

Jessop isn’t alone in pointing to Europe as the biggest market concern.

Potential deflation there is a major worry, Matthew Hegarty, an equities analyst at Perennial Investment Partners, told CNBC.

Read More: Stocks to rally after 10% correction: Pro

“The outlook for Europe now really is contingent on pretty decisive action from the ECB,” Hegarty said, but he noted that the ECB is following the Federal Reserve’s lead and seeking unconventional policy tools, which should help support stocks.

To be sure, Capital Economics noted that even if these fears fade soon, markets’ focus will likely return to the looming prospect of policy tightening from the Federal Reserve.
“This should see Treasury yields resume their upward trend and keep market volatility generally high,” Jessop said.

—By CNBC.Com’s Leslie Shaffer; Follow her on Twitter @LeslieShaffer1

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow