Cracks start to emerge in US corporate bonds
Money managers fearful of deeper sell-off as loan prices slide
Will the chill in equities spread to corporate bonds?
After bouncing for much of the week, US stocks ended Friday on the back foot as a sharp rise in US government bond yields unsettled investors.
For much of October, the US corporate debt market failed to blink at the turbulence in equities but cracks are beginning to emerge, with bond and loan prices sliding.
Investors still expect another interest rate increase from the Federal Reserve next month and the potential for a further tightening in financial conditions threatens credit markets.
Money began to flow out of US bond funds in October, after a long streak of inflows. Investors have also increased short positions against a popular loan exchange-traded fund. It is a sign that money managers are beginning to pull money from the market, fearful that the sell-off could deepen.
The stakes are high because US corporate bond issuance has topped $1tn every year since 2009, as companies have taken advantage of low interest rates.
But not everyone is convinced the October chill for credit markets will worsen this month. Corporate earnings have remained robust for the third quarter and interest rates, at least by historical standards, are still low.
Will the pound regain its poise?
On recent form, probably not.
The UK currency has just come through a rough week that has illustrated its intense sensitivity to the Brexit talks. On Tuesday, it took a heavy blow after rating agency Standard & Poor’s warned that a no-deal divorce was now a likely enough proposition for it to take seriously. Such an outcome would spark a lengthy recession, it noted. To some this is a statement of the obvious. The pound fell anyway.
The very next day, the Brexit secretary Dominic Raab suggested that a deal was in fact in sight for later this month. Cue a pick-up in the pound. Further talk of an agreement on UK services that would protect the crucial financial sector gave it a further kick higher. The apparent rumour was later denied.
Most of this is political noise, or “nonsense” as UBS Wealth chief economist Paul Donovan put it. But the recent ups and downs show it has the power to move the pound, which is delicately poised to either rally or sink when the final destination of these divorce talks finally comes into view.
Can the oil price rediscover its mojo?
Oil bulls have had a torrid month, with prices having dropped by almost 17 per cent since hitting a four-year high of $86 a barrel on October 3.
Things got particularly ugly in the past few days, with Brent dropping below $73 a barrel and breaking below the 200-day moving average — a key technical indicator — for the first time in more than a year. So will prices keep falling?
For the moment, many traders are betting they will. The dramatic shift in the oil market has come about because of Iran. Washington has succeeded in pressuring Saudi Arabia and other producers to add significant amounts of additional crude to the market ahead of US sanctions taking effect against Iran’s oil exports next week.
At the same time Washington has announced it will give waivers to eight countries that buy Iranian crude, damping fears of a severe shortage emerging in the market. That should keep the pressure on oil in the coming sessions.
How important are the US midterm elections for investors?
While stocks have tended to rally strongly in the period after midterm elections, the volatility of recent weeks makes forecasting market reactions particularly treacherous.
If Republicans keep hold of both the House of Representatives and the Senate, the chances for further economic stimulus rise. Strategists say that may add fresh momentum to the stock market, but may also concern investors in US government bonds who are already looking at a rising budget deficit.
Lori Calvasina, head of US equity strategy at RBC Capital Markets, says that most investors have “viewed a Republican sweep as a bullish event for the [stock] market, and a Democratic sweep as bearish event”.
However, the base case for many investors is a split Congress in which Democrats retake the House and Republicans hold the Senate. It is an outcome that most view as broadly neutral for equities.
Any other outcome is likely to provoke a bigger market reaction.
“For US equities, we expect the impact would be negative if Democrats surprise on the upside, and positive for stocks if they underperform,” said Anna Stupnytska, Global Economist at Fidelity International, noting that the effect on Treasuries would be the other way round.