* German 10yr yields turn negative for the first time…
German 10yr bond yields have turned negative and some European corporates are effectively "being paid to borrow". What are the implications for European equities? Although there has been a deepening of Global growth fears in recent weeks, economic surprise indicators and PMIs have not collapsed. Instead, risk aversion has risen sharply given event risk in June and in particular, the UK referendum. Bullish sentiment (US AAII) hit a 20 year low in the last few weeks
* Gap between European Credit yields and Equity yields at extreme levels…
Lower sovereign bond yields have driven the gap between equity and credit yields to new extremes. Credit spreads have widened somewhat, but this has not offset the fall in sovereign bond yields: in the last three weeks Eurozone corporate credit yields have fallen from 1.37% to 1.21% and at the same time the equity dividend yield has risen from 3.4% to 3.7%
* Where are the dividends and will they get paid?
We run a Heatmap looking at where the yield is by sector and by country: Energy, Financials and Utilities have the highest yields. Mapping the dividend yield against the pay-out ratio helps indicate potential stress in dividends. Energy appears the most extended on this measure, but we would highlight cash earnings have fallen far less than EPS, suggesting dividends may be under less pressure than first appears.
* Cyclicals vs Defensives close to 15yr lows…
The change in Bond yields has been a driver for the relative performance of Cyclicals vs Defensives. This is now back below the March 2009 levels (even ex-Banks). Despite the bounce since mid-February on sector rotation, when observed from a long-term perspective, even this has hardly moved the needle.