US equity markets started the week sharply lower on Monday with the S&P and Nasdaq down 2.1% and 2.6% respectively. Fears of a possible 75bp Fed rate hike are back on the table with the focus now on Fed Chair Powell’s speech at Jackson Hole on Friday. Sectoral losses were led by Consumer Discretionary falling 1.7% and Information Technology down 1.5%. US 10Y Treasury yields were 3bp higher at 3.02%. European markets also declined – DAX, CAC and FTSE fell 2.3%, 1.8% and 0.2% respectively. Brazil’s Bovespa was down 0.9%. In the Middle East, UAE’s ADX ended lower 0.4% while Saudi TASI was flat. Asian markets have opened mixed – Shanghai was flat, HSI, Nikkei and STI down 0.4%, 1.2% and 0.6% respectively. US IG CDS spreads widened 3.5bp and US HY spreads were wider by 20.7bp. EU Main CDS spreads were 6.8bp wider and Crossover spreads widened 26.5bp. Asia ex-Japan IG CDS spreads were 10.2bp wider.
China cut its benchmark lending rate and mortgage reference rate to boost credit demand and revive a slowing economy. The PBOC lowered its 1Y Loan Prime Rate (LPR) by 5bp to 3.65% and its 5Y LPR by 15bp to 4.30%. Separately, Pakistan kept its benchmark rate unchanged at 15% as per market expectations. The central bank said that inflation was moving as per estimates and that moderate demand and its external position improvement prompted them to leave rates steady. The State Bank of Pakistan estimated forex reserves to rise to $16bn in FY2023 (from $8.3bn currently).
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New Bond Issues
Rabobank raised €750mn via a 10.25NC5.25 bond at a yield of 3.912%, 15bp inside initial guidance of MS+210bp area. The Tier 2 subordinated bonds have expected ratings of Baa1/BBB+/A-, and received orders over €1.14bn, 1.5x issue size. The bonds are callable from 30 August 2027 to the first reset date of 30 November 2027 and each interest payment date thereafter. If not called, the coupon rate will reset to 5Y Mid-Saps plus a spread of 195bp.
New Bonds Pipeline
- Aozora Bank hires for $ 3Y Green bond
- Tianjin Binhai New Area Construction & Investment hires for $ bond
- NH Investment hires for $ 3Y and/or 5Y Green bond
Rating Changes
- Moody’s upgrades Rothesay’s insurance financial strength rating to A2, stable outlook
- Bed Bath & Beyond Inc. Ratings Lowered To ‘CCC’ On Worsening Macro Conditions And Tightening Liquidity
- Brazilian Airline Gol Outlook Revised To Stable From Positive On Higher Financing Risks; ‘CCC+’ Ratings Affirmed
- Seazen Companies Downgraded To ‘BB’ From ‘BB+’ On Deteriorating Sales And Liquidity Buffer; Outlook Negative
Term of the Day
Put Option
A put option gives the buyer of the option the right but not the obligation to sell the underlying instrument at a particular price known as the strike price at expiration. Put options in bonds are in the hands of the bondholders unlike call options, which lie with the issuer. Exercising a put would require the issuer to redeem the bonds, leading to a cash outflow.
Talking Heads
On Pimco, Capital Group Saying Low-Inflation Era Is Gone for Good
Tiffany Wilding, North American economist at Pimco
“The last twenty years of the great moderation — that’s fully behind us now”
Ivailo Vesselinov, chief strategist at Emso Asset Management
“The view in the market that central banks will be in a position to cut rates in a number of countries will be challenged in due course”
Union Investment’s Michael Herzum, the head of macro and strategy
“Looking at growth and not just inflation is a very risky game because the structural trend we had since the mid-1980s — the disinflationary trend — is turning”
On JPMorgan Strategists Seeing Last Big Fed Rate Hike in September
JPMorgan Strategists
“We expect another outsized Fed hike in September, but post that we would look for the Fed not to surprise the markets on the hawkish side again”
Goldman Sachs Group Strategists
“Renewed fears about the prospect of a recession would almost surely unwind the recent rally”
UBS Global Wealth Management’s Mark Haefele
“We suggest investors use the rally in tech to reduce positioning in excess of recommended benchmarks and to lighten portfolio exposure to high beta names, rebalancing funds to our preferred areas of the market like value and quality income”
On Summers Urging the Fed to Deliver Stark Message on Economic Pain
Larry Summers, a Harvard University professor
“The reality is that it’s probably not so realistic to think” the Fed will “get inflation all the way down without unemployment up — and they don’t want to acknowledge that. That forces a certain confusion into all of their statements… It’s got to worry them that financial conditions are now materially looser than they were when the Fed last met. When, in the middle of a tightening cycle, financial conditions are substantially loosening, that has to make a central bank nervous.”
On a German recession increasingly likely – Bundesbank\
“Declining economic output in the winter months has become much more likely. The high degree of uncertainty over gas supplies this winter and the sharp price increases are likely to weigh heavily on households and companies… Overall, the inflation rate could reach 10% in autumn. The upside risk for inflation is high, in particular in the event of a complete stoppage of gas supplies from Russia.”
Top Gainers & Losers – 23-August-22*
