Will the Fed stick to its new script?
Focus turns to central bank’s first meeting since December’s market turmoil
Will the Fed keep markets on the up?
The US Federal Reserve will meet this week for the first time since stocks tumbled in December, as investors grew increasingly worried over the outlook for the US economy.
Since then, first-quarter earnings from corporate America have met expectations even if they are growing far more slowly than last year, when tax cuts turbocharged profits. Add to that a hangover from a record-breaking government shutdown, which ended on Friday, and there are expectations that the Fed will stick to its recent script, which reiterated that it will be patient as it assesses the state of the economy.
Kevin Logan, chief US economist for HSBC who reckons the Fed will hold off raising interest rates until September, says if policymakers uses the word “patient” this week it will send an important signal.
“If the word ‘patient’ were to be used in January and repeated in March, that would suggest no rate hikes at the May or June policy meetings,” Mr Logan said in a note to clients.
Investors will also be keeping a close eye on what Fed chair Jay Powell says about the pace at which the central bank is shrinking its multi-trillion dollar balance sheet. Richard Henderson
Should Hong Kong act on the perils of share pledging?
The collapse of shares in Chinese property developer Jiayuan International appeared to slot into an easy narrative. Investors have been wary of the heavily indebted sector for months, so rumours that Jiayuan might not repay a $350m bond due the same day seemed the likely culprit for the crashing stock.
But after the calamitous day’s trading on January 17, the property developer said it had repaid the bond. It was almost a week later when Jiayuan disclosed that, on the same day, a company controlled by its chairman had been forced to sell shares that were pledged as collateral for a bank loan.
The practice of executives or major shareholders pledging their stock in a company as collateral for a loan is not uncommon in China, where regulators have become increasingly concerned about its ability to exacerbate stock market declines. In Hong Kong, where Jiayuan is listed, share pledges are often not disclosed because banks, insurers and brokers are considered “qualified lenders” and are therefore exempt from revealing whether shares have been pledged.
But the case of Jiayuan should put more pressure on the Securities and Futures Commission, Hong Kong’s financial regulator, and the government to address the issue, according to corporate governance experts.
“This problem has been festering for over 20 years,” said David Webb, an independent investor and governance expert. “The latest wave of collapses increases the pressure on the SFC and the government to remove the disclosure exemption from the law and bring pledges into the daylight.” The SFC declined to comment. Emma Dunkley
Will traders continue warming to the pound?
Optimism continued to build in sterling markets after the currency broke above $1.30 on Wednesday following news that the opposition Labour party would probably back a proposal that could delay Brexit and prevent a no-deal exit.
The pound powered to a two-month high against both the euro and the dollar following news of support from Labour for the bill, which MPs will vote on next Tuesday. The Cooper-Boles amendment aims to rule out a no-deal Brexit and would give parliament a vote on extending Article 50 if Prime Minister Theresa May fails to win parliamentary approval of her deal by February 26.
Sterling has appreciated more than 2 per cent in January as investors continued to cut negative bets. The warming in sentiment towards the pound, of course, raises the risk of a sharp move lower if the UK were to crash out. Vasileios Gkionakis, global head of FX strategy at Swiss private bank Lombard Odier, said “all hell would break loose” in the event of a hard Brexit, with sterling potentially plummeting to as low as $1.10.
And some believe investors are neglecting that risk. “FX markets are grossly underestimating the chances of the UK exiting the EU on March 29th without a deal,” said Stephen Gallo, head of European FX strategy at BMO Capital Markets. Eva Szalay
How big is the leveraged loan market?
Comparisons with the 2008 crisis abound as concerns grow over the leveraged loan market. An analysis published by the Bank of England on Friday put the value of outstanding loans made to low-rated, already indebted companies at a heady $2.2tn worldwide, a far higher figure than the $1.3tn often cited.
“This makes the stock of leveraged loans in 2018 comparable to the stock of US subprime mortgages before the onset of the financial crisis, if measured relative to the size of the relevant credit market,” the BoE noted.
While there are fears that investors exposed to these loans will suffer when the next US recession hits, the BoE does not expect the debt burden will lead to a sequel to the financial crisis.
But risks in leveraged loans are stacking up. For example, these loans increasingly lack protections, leaving investors with fewer safeguards should corporate borrowers struggle.