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Futures Near Record High Shake Off Yellen Comments, Brace For Inflation Data

Futures Near Record High Shake Off Yellen Comments, Brace For Inflation Data

US equity futures rebounded from a mild dip in the overnight session, rising back to just shy of all time high at 4,228 as of 7:45 am on Monday, shaking off Yellen’s



Futures Near Record High Shake Off Yellen Comments, Brace For Inflation Data

US equity futures rebounded from a mild dip in the overnight session, rising back to just shy of all time high at 4,228 as of 7:45 am on Monday, shaking off Yellen's Sunday comments that the US Tsy Secretary welcomes higher rates (i.e., inflation) which would be "good for the Fed and US society."  World shares were range bound on Monday as markets digested Friday’s disappointing yet "Goldilock" jobs report and a global tax deal between the G7 group of countries, while also looking ahead to critical CPI data due Thursday. The dollar was steady while the 10-year rate added two basis points after Janet Yellen said on Sunday a slightly higher interest-rate environment would be "a plus" for society. WTI slipped after rising to $70 per barrel as short-term demand worries continued.

Yellen set the stage for Monday trading on Sunday when she said Biden should push forward with his spending plans even if they spark inflation that persists into next year. Meanwhile, the Group of Seven rich nations secured a landmark deal that could help countries collect more taxes from big firms and enable governments to impose levies on U.S. giants such as Inc. and Facebook Inc.


Investors were wary how shares of major tech firms would react to the G7’s agreement on a minimum global corporate tax rate of at least 15%, although securing approval not to mention enforcement from the whole G20 could be a tall order. So far, the reaction was muted with Nasdaq futures down 0.4%, highlighting investor concern that a pure growth narrative may no longer be enough to support stocks. Technology shares underperformed in Europe as well, with the benchmark gauge for the sector falling from the highest level since April.

“I would assume that it (the tax deal) is not helping the market in the sense that these Internet giants are going to be taxed has an impact on sentiment in equity markets, but the reality is it has already been priced in,” said Sebastien Galy, senior macro strategist at Nordea Asset Management. “So even though equity markets in the U.S. are under pressure on the futures side, I’d expect it not to last till the end of the day.”

Here are some of the biggest U.S. movers today:

  • Tesla shares fall 1.3% after the electric-vehicle maker called off plans to build a Model S Plaid+
  • AMC Entertainment (AMC) gained as much as 3.5% in premarket trading, halting two days of declines for the money-losing movie theater chain that’s become the new favorite of meme-stock investors.
  • Cryptocurrency-related stocks like Marathon Digital (MARA) and Riot Blockchain (RIOT) edge lower in U.S. premarkettrading following a dip for Bitcoin and other tokens over the weekend.
  • Evofem Biosciences (EVFM) shares rise 10% in premarket trading after Morgan Stanley reported a stake in the biotech and amid touts for the stock on Reddit
  • Liminal BioSciences (LMNL) soars 44%, extending a postmarket rally on Friday, after the U.S. FDA approved Ryplazim for the treatment of patients with plasminogen deficiency type 1 (hypoplasminogenia).
  • Meme stocks including Sundial (SNDL) and Naked Brand (NAKD) advance in premarket, while AMC shares edge higher, reversing earlier drop

While resurgent inflation has sparked a debate about when the Fed will start tapering monetary accommodation, Bloomberg notes that recent data including the May nonfarm payrolls report on Friday seemed to vindicate the central bank’s dovish stance. Investors are trying to strike a balance between preparing for higher rates and riding a risk-on rally supported by Fed stimulus and a $4 trillion spending plan by President Joe Biden, which however is facing significant headwinds and may end up being substantially diluted before it passes. Traders await the U.S. consumer-price index report Thursday for more clues.

“The slightly softer-than-expected rise in U.S. payroll employment in May probably won’t change the Fed’s thinking, but another pickup in CPI inflation likely to be reported on Thursday will further spur the taper talk,” Shane Oliver, head of investment strategy and chief economist at AMP Capital, wrote in a note.

MSCI’s All-Country World index traded just below record highs and was flat on the day after the start of European trading.

European shares opened lower, easing from all-time highs with commodity shares leading declines as sentiment soured after weaker-than-expected China trade data and worries about inflation. Autos was the best performing sub-group in Stoxx 600 benchmark YTD, along with banks (+31%). The Stoxx 600 Automobiles & Parts index was poised to hit a record high, rising as much as 0.9% on Monday and with the sub-index up 31% YTD. So far in 2021, German automaker Volkswagen (+57%) and its controlling shareholder Porsche SE (+78%), and Daimler (+38%) are the top performers in the index.

Here are some of the biggest European movers today:

  • Tessi SA shares rose as much as 35%, biggest intraday increase ever, after the business services company’s main shareholder said it planned an offer for the remaining stock at EU172 a share.
  • Edenred gained as much as 3.5% in Paris after Deutsche Bank upgraded the stock, saying the French employee voucher company’s earnings may be surprisingly strong as economies reopen.
  • S4 Capital jumped as much as 6.5% to a record after an AGM statement with Jefferies noting that the company raised its guidance again given accelerating growth so far in the second quarter.
  • UniCredit advanced as much as 3% after Jefferies upgraded the stock to buy from hold and said brighter loan volume trends can support revenue at southern European banks, as the Italian lender has stronger gearing to a lending recovery.
  • Elekta AB gained as much as 3.1% to the highest since November 2019 after the firm and Royal Philips agreed to deepen a strategic partnership.
  • IWG slumped as much as 18% to the lowest since late January after the company warned 2021 earnings would be “well below” the previous year’s.
  • Argenx fell as much as 9% after a Johnson & Johnson unit ended its collaboration and returned the rights to the anti-CD70 antibody cusatuzumab. The setback could shift sentiment on Argenx’s perfect track record of execution, KBC said in a note.
  • Kinnevik dropped as much as 5.7% after Pareto downgraded to sell from buy, saying a strong performance made the stock expensive.

Asian equities swung between gains and losses as Hong Kong’s Hang Seng Index slid on the first day of trading following the start of its biggest-ever overhaul, while stocks in Singapore climbed. MSCI’s broadest index of Asia-Pacific shares outside Japan slipped 0.05% and risked a fourth session of losses. Japan’s Nikkei edged up 0.3% and touched its highest in almost a month. Taiwan stocks lost 0.4% as a spike in COVID-19 cases hit three tech companies in northern Taiwan, including chip packager King Yuan Electronics.

Financials and internet giant Tencent were among the biggest drags on the MSCI Asia Pacific Index, while advances in consumer staples and healthcare shares cushioned the downside. The regional benchmark has traded sideways for the past few sessions after recovering back above its 100-day moving average. Traders continue to speculate that the U.S. recovery will be strong enough to prompt the Federal Reserve to taper asset purchases. Still, a weaker-than-expected American jobs report eased fears about the economy running too hot and lifted U.S. stocks Friday. “Last time the Fed decided to taper, in 2013, markets priced in tapering before it was certain,” SMBC Nikko strategists led by Masashi Akutsu wrote in a note. “Even if markets correct, we would not expect a sharp pullback since the May jobs report was not sufficient to force the Fed to pull future rate hikes forward.” Vietnam’s main equity benchmark tumbled more than 1%, as traders pointed to profit-taking after a recent strong rally. Markets in New Zealand and Malaysia were closed for holidays.

In key Asian eco data, China’s imports grew at their fastest pace in 10 years, although export growth missed expectations, customs data showed. China's exports rose 27.9% yoy in May, slightly below expectations. This implies a sequential decline of 6.4% in May vs. +9.4% in April. Imports rose 51.1% yoy in May, also a slight miss to expectations, though sequentially, it fell 6.8% sa non-annualized in May (vs. +2.0% in April). Monthly trade surplus edged up to $45.5bn in May.

In FX, the greenback was still trading in follow through of Friday's poor jobs report. While the 559,000 rise in May U.S. jobs missed forecasts it was still a relief after April’s shockingly weak report. The jobless rate at 5.8% showed there was a long way to go to reach the Federal Reserve’s goal of full employment. After Friday's dollar tumble, the Bloomberg dollar index was steady and most Group-of-10 currencies traded in tight ranges against the greenback.

“The data was perfect for a goldilocks type outlook for risk: not too hot to bring in fears of a faster Fed taper, and not too cold to worry about the outlook for the recovery,” said NatWest Markets strategist John Briggs. “This caused a weaker USD, better stocks, reinforced the earlier bid in commodities, and boosted emerging markets.” Briggs suspected Fed officials might open the door to talking about tapering at the June policy meeting, with the start coming in early 2022 and a rate hike not until 2024.

Elsewhere, the pound led declines among Group of 10 currencies as concerns over whether the U.K. will be able to fully reopen the economy weighed on sterling. U.K. Health Secretary Matt Hancock has said it’s too early to say whether a planned easing of coronavirus restrictions on June 21 can go ahead, as ministers continue to weigh the threat of a potential fresh wave of the pandemic. The Aussie was little changed while Australian sovereign bonds traded higher, tracking gains in Treasuries on Friday after U.S. payrolls data missed estimates; S&P Global Ratings raised the nation’s rating outlook to neutral from negative. The yen kept consolidating versus the dollar while Japan’s 30-year government bonds erased gains ahead of an auction on Tuesday; benchmark 10- year bonds weren’t traded.

In rates, Yields on U.S. 10-year notes were a fraction higher at 1.58%, after diving 7 basis points on Friday and back to the bottom of the trading range of the last three months. Treasuries futures were near lows of the day as U.S. session begins, amid focus on this week’s Treasury supply following Friday’s squeeze higher after jobs report. Treasury yields are cheaper by 2bp-3bp across long-end of the curve -- 10-year by 2.5bp at ~1.58% -- with 20-year sector underperforming; long-end-led losses steepen 5s30s by ~1bp. Both bunds and gilts outperform Treasuries slightly over early European session. IG credit issuance is expected to be heavy this week, adding to cheapening pressure on Treasury yields. May CPI report is ahead on June 10, and no Fed speakers are slated ahead of June 16 FOMC meeting.

In commodities, the pullback in the dollar helped gold steady at $1,885 an ounce, up from a low of $1,855 on Friday. Oil prices ran into profit-taking after Brent topped $72 a barrel for the first time since 2019 last week as OPEC+ supply discipline and recovering demand countered concerns about a patchy global COVID-19 vaccination rollout.  Brent slipped 0.4% to $71.61 a barrel, while WTI eased 0.4% to $69.31 after rising above $70 for the first time since October 2018. Bitcoin rebounded above $36,000 after a roller-coaster ride over the weekend.

On today's calendar there are no major events until 3pm ET when we get the April Consumer Credit report, est. $20.5b, prior $25.8bn. Attention will then turn to the U.S. consumer price report on Thursday where the risk is of another high number, though the Fed still argues the spike is transitory.  Investors are also watching the tussle over U.S. President Joe Biden’s proposed $1.7 trillion infrastructure plan with the White House rejecting the latest Republican offer. The European Central Bank will hold its policy meeting on Thursday and is widely expected to maintain its stimulus measures with tapering a distant prospect.

Market Snapshot

  • S&P 500 futures down 0.15% to 4,221.75
  • STOXX Europe 600 little changed at 452.96
  • MXAP little changed at 210.16
  • MXAPJ little changed at 704.68
  • Nikkei up 0.3% to 29,019.24
  • Topix little changed at 1,960.85
  • Hang Seng Index down 0.5% to 28,787.28
  • Shanghai Composite up 0.2% to 3,599.54
  • Sensex up 0.3% to 52,282.40
  • Australia S&P/ASX 200 down 0.2% to 7,281.89
  • Kospi up 0.4% to 3,252.12
  • Brent Futures down 0.82% to $71.30/bbl
  • Gold spot down 0.34% to $1,885.11
  • U.S. Dollar Index little changed at 90.173
  • German 10Y yield rose 1.3 bps to -0.200%
  • Euro down 0.06% to $1.2160

Top Overnight News from Bloomberg

  • Treasury Secretary Janet Yellen said President Joe Biden should push forward with his $4 trillion spending plans even if they trigger inflation that persists into next year and higher interest rates
  • Armin Laschet boosted his chances of succeeding Angela Merkelas German chancellor by helping secure a decisive victory for his Christian Democratic Union in the country’s poorest state
  • China’s exports continued to surge in May, although at a slower pace than the previous month, fueled by strong global demand as more economies around the world opened up. Imports soared, boosted by rising commodity prices.
  • German manufacturers unexpectedly saw demand decline in April, signaling that supply shortages and higher prices are undercutting the country’s economic recovery

Quick look at global markets courtesy of Newsquawk

Asian equity markets traded cautiously as the initial tailwinds from last week’s US jobs report eventually faded amid softer than expected Chinese trade data. ASX 200 (-0.2%) was choppy as the strength in tech and mining names was offset by underperformance in financials and with NAB among the worst performers as it faces an anti-money laundering investigation by AUSTRAC for potential serious and ongoing breaches. Nikkei 225 (+0.3%) rallied at the open and reclaimed the 29k level but then wiped out most of the gains amid the recent counterproductive moves in the local currency and broad cautious tone. Hang Seng (-0.5%) and Shanghai Comp. (+0.2%) were lacklustre as participants digested the latest Chinese trade data which mostly missed expectations and following punchy rhetoric from US officials on China including Secretary of State Blinken who said the Biden administration will get to the bottom regarding the origins of COVID-19 and that the US will hold China accountable, while US Trade Representative Tai commented that the US-China trade relationship has “significant imbalance” and that the Biden administration is committed to levelling it. The declines in Hong Kong were led by casino names after reports that Macau is to block non-residents entering from Guangdong beginning June 8th, although the world’s largest pork producer WH Group is at the other end of the spectrum with firm gains following the announcement of a USD 1.93bln share buyback. Finally, 10yr JGBs held on to Friday’s after-hour gains amid a surge in T-notes following the NFP miss but with further upside in Japanese bonds capped as Japanese stocks just about remained afloat and with the absence of the BoJ’s Rinban operations today, while the Aussie 10yr yield was lower by about 6bps after it tracked recent downside in global peers and with the RBA also conducting its regular QE operations.

Top Asian News

  • Flipkart Is Said in Talks for $3 Billion From SoftBank, Others
  • Thailand Ramps Up Vaccine Rollout as Phuket Reopening Nears
  • Evergrande Slumps to One-Year Low as Regulators Tighten Grip
  • Saudi Wealth Fund, Early Alibaba Investor Back Jordanian Startup

European equities trade with no firm direction (Euro Stoxx 50 Unch.) having experienced a mild downside bias at the cash open, whilst APAC markets closed mixed after the broader NFP-induced optimism waned. US equity futures are also trundling lower with the YM (-0.1%) faring slightly better than its ES (-0.2%), NQ (-0.4%) and RTY (-0.4%) counterparts, whilst US Treasury Secretary Yellen over the weekend sounded more comfortable with the prospect of higher rates, stating that it would be a "positive" for the country. Nonetheless, the overall tone of the market is similar to tentativeness last week heading into the US open, with news flow also on the quiet side. Sectors in Europe are now mixed after opening largely in the red. Basic Resources are weighed on by the subdued base metal prices after Chinese trade data missed the mark. Autos and Banks are among the top performers whilst Tech resides among the laggards alongside Healthcare. Sectors overall do not portray a clear overarching theme. In terms of individual movers, Royal Mail (+2.6%) sits as one of the Stoxx 600 winners as the Co. takes steps to fend off competition by offering timed delivery slots from next year. Reckitt (-0.1%) failed to garner much traction despite reports that it entered an agreement to sell its infant formula and child nutrition businesses to Primavera Capital Group for an enterprise value of USD 2.2bln. IWG (-16%) meanwhile plumbs the depths after a downbeat trading update in which it now sees underlying EBITDA to be well below 2020 levels.

Top European News

  • Tesco and Carrefour to End Buying Alliance and Go It Alone
  • Merkel’s Heir Bolsters Bid for Chancellorship With State Win
  • Oman Hires Advisers Including Citi, HSBC for Islamic Bond Sale
  • Bankers Demand Clarity as Sweden Watchdog Balks at ESG Rules

In FX, a choppy start to the week for the broader Dollar and index, with the latter managing to remain above its 21 DMA (90.108) vs the 90.023 post-NFP low print. The index notched a current intraday high at 90.302, but news flow and catalysts have remained light as traders set sights on this week’s ECB and US CPI. On that note, ECB and Fed speakers also remain scarce for the week as officials observe their respective pre-meeting blackout periods.

  • AUD, NZD, CAD - All vary vs the Greenbank but with the breadth narrow. The Aussie narrowly outperforms amid a rise in Chinese imports and S&P affirming its rating but upgrading the Aussie outlook. Some tailwinds could also be derived from technical factors as the pair topped its 50 and 100 DMAs (0.7723 and 0.7726 respectively) as it eyes the 0.7750 marks, coinciding with the 21DMA. NZD/USD meanwhile probes 0.7200 having had traded on either side of the mark, but with upside contained as the AUD/NZD cross eyes 1.0750 to the upside. The Loonie, meanwhile, lags as oil prices pull back after WTI briefly notched USD 70/bbl.
  • EUR, GBP - Sterling sees slightly more pressure vs the EUR – possibly technical as EUR/GBP tops 0.8600, but with some tailwinds emanating from more noise surrounding the Northern Irish protocol between Britain and the EU bloc, with weekend reports suggesting that Brexit European leaders are drawing up plans to impose trade sanctions on Britain and accused UK PM Johnson of “taking them for fools” over the Northern Ireland protocol. Cable has dipped back below its 21 DMA (1.4141) from a high of 1.4170 with no follow-through from a slight beat in May Halifax House Prices, whilst EUR/USD trades on either side of 1.2150 after testing but failing to breach its 21 DMA at 1.2173.
  • JPY - USD/JPY remains caged on both sides of 109.50 but still north of its 21 and 50DMA at 109.28 and 109.19 respectively, with the pair also eyeing several sizeable OpEx north of 109.50, with USD 1.25bln rolling off at the half-number.

In commodities, WTI and Brent front month futures are subdued as sentiment remains indecisive after the post-NFP optimism seen on Wall Street on Friday waned. WTI Jul however printed USD 70/bbl for the first time since 2018 before giving up gains and some more as it trades around USD 69/bbl at the time of writing. Brent Aug meanwhile resides in the low-USD 71/bbl levels after hitting a session high of USD 72.27/bbl. Oil-specific news flow has been quiet, although this week sees the trio of monthly oil market reports – with focus likely to fall on the demand picture heading into summer and risks surrounding Iranian oil returning to the market. OPEC-related commentary (i.e. production figures) will likely be stale given the monthly meetings and set quotas through July. Elsewhere, precious metals are subdued but holding onto a lion’s share of its post-NFP gains, with spot gold in a USD 10/oz range around USD 1,880/oz and spot silver just north of USD 27.50/oz as yields and the Buck dictate price action, although the former sees its 21 DMA (1,873/oz) in the vicinity. Turning to base metals, LME copper remains sub-10,00/t as China's unwrought copper imports fell M/M in May on record-high prices, whilst BHP kicks off labour talks with workers from its largest Chilean mine, Escondida, with initial proposals for a new contract submitted on Friday – the Co. has 10 days from the receipt date to respond to the union.

US Event Calendar

  • 3pm: April Consumer Credit, est. $20.5b, prior $25.8b

DB's Jim Reid concludes the overnight wrap

The big event this week is undoubtedly Thursday’s US CPI release. Consensus estimates for May currently expect both the headline and core rate to rise +0.4% month-on-month which would lift the YoY rate to 4.7% and 3.4% respectively which will be the highest since late 2008 and 1993 which would be a pretty impressive feat especially on the core. This will undoubtedly be the most watched data release this year so far.

We will also pay close attention to the inflation expectations data in Friday's University of Michigan consumer sentiment survey (89.0 vs 82.9). To beat a well worn drum, our rates strategists feel that expectations are heading back to their 1998-2014 regime after 7 years of rock bottom levels likely due to the slump in the oil price around that time. In turn this should be worth 3% on 10 year Treasuries. Their 2.25% YE forecast reflects a probability, rather than certainty, of this happening. Last month the 5-10 year expectation rose to a revised 3.0% with the 1yr at 4.6%.

This follows May’s employment report missing expectations. The 559k gain headline payrolls (496k private) was characterised by Cleveland Fed President Mester as "solid" but still short of "substantial further progress". She also noted that the data are "not anywhere near a wage-price spiral". While there was some evidence in the report that labour shortages are resulting in upward pressure on wages – high demand in the leisure & hospitality sector being the most obvious - we are clearly along way from normality in the US labour market. However things might change very quickly as the economy fully opens up this year.

Note that our US economists will be hosting a webinar with William English, Professor in the Practice, Yale School of Management and former Director of the Division of Monetary Affairs at the Federal Reserve Board, tomorrow at 09:00 EST / 14:00 BST / 15:00 CET to discuss the outlook for Fed policy (See "The outlook for Fed policy: Taper timeline and beyond" to register for the event). This is all ahead of next week’s FOMC.

Outside of US CPI the other main event of the week will be Thursday’s ECB meeting, where much attention will be on what sort of pace the Governing Council decides on for the bank’s PEPP purchases. Given the dovish tilt in the Council’s latest commentary, our economists expect the ECB to maintain the faster pace of PEPP purchases for the time being. However, they expect that after June the market focus will be on PEPP exit, as it is a pandemic policy and we expect exit to be confirmed in September or December. See here for their full note. Otherwise, the other G20 central bank policy decisions will come from Canada on Wednesday and Russia on Friday. There are no Fed governors set to speak this week as Saturday marked the start of their blackout period ahead of next week’s FOMC meeting. The rest of the data week is in the day by day calendar at the end.

In Asia, markets have started the week on a mixed footing with the Nikkei (+0.32%) and Kospi (+0.36%) up while the Hang Seng (-0.77%) and Shanghai Comp (-0.21%) are down. Meanwhile, futures on the S&P 500 are down -0.10% while those on the Stoxx 50 are also down -0.07%. In terms of overnight data releases, China’s May exports came in at +27.9% yoy (vs. +32.1% yoy expected) while imports came in at +51.1% yoy (vs. +53.5% yoy expected).

In other interesting overnight news, US treasury secretary Janet Yellen said that President Joe Biden should push forward with his $4tn spending plans and added that “If we ended up with a slightly higher interest rate environment it would actually be a plus for society’s point of view and the Fed’s point of view.” She also said that Biden’s packages would add up to roughly $400bn in spending per year and contended that it’s not enough to cause an inflation over-run. Yields on 10y USTs are up +1.6bps this morning to 1.571%.

Ahead of this weekend’s G-7 meeting we saw an agreement in principle from the same seven countries for a minimum global corporation tax of “at least 15%” on overseas earnings. The focus will now shift to a meeting of G20 finance minister in July to see if we can get wider agreement and on long-running talks between about 140 countries at the OECD. Overall it’s been clear for the last couple of years, even before the pandemic, that a 40-year race to the bottom for corporate tax rates was coming to an end and was likely to reverse. The pandemic has accelerated this.

Turning to Germany’s state election now where Angela Merkel’s Christian Democrats are most likely to win in Saxony-Anhalt and fend off the AfD. According to projections from public broadcaster ARD, the CDU is on course to win 37%, an improvement over the 30% it received in 2016 in the state, while the far-right AfD, which was pushing for the lead in recent polls, is likely to be well back in second with 22% (24% five years ago). This was the final electoral contest before the national vote in September and will be a boost to the CDU’s Armin Laschet as he bids to succeed Merkel in the Chancellorship.

Now finally to review last week. Risk assets performed well for a second straight week with equities advancing to new highs in Europe, with the STOXX 600 up +0.80% to a new record. The S&P 500 was up +0.61% to close less than 0.1% away from its record closing high from early May. Large-cap tech did particularly well with the NYFANG index posting its third straight weekly gain (+0.99%) after falling for the previous four weeks.

With inflation expectations abating, sovereign bonds gained again last week, with yields on 10yr Treasuries down -4.1bps to 1.553%, with much of that drop coming on Friday (-7.2bps) following the weaker payrolls data. This was the 7th weekly decline in yields in the last 9 weeks. The decline on Friday was driven by lower real rates (-6.1bps) however the weekly drop in yields was more driven by the drop in inflation expectations (-2.7bps). In Europe, sovereign debt also performed well, with yields on 10yr bunds seeing a -3.0bps decline. Lastly, commodity prices rose to a new high as the Bloomberg commodity spot index rose +2.00%, led in part by oil prices reaching two year highs with Brent Crude (+3.25%) and WTI (+4.98%) seeing a strong week even as copper prices (-3.17%) sagged.

On the data front, the US job report showed +559k new jobs, less than the 675k expected, with no significant upward revision to last month’s historic miss.



Tyler Durden Mon, 06/07/2021 - 07:58

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EU Bars 10 Megabanks From Recovery Bond Sale Over Previous Market Manipulation

EU Bars 10 Megabanks From Recovery Bond Sale Over Previous Market Manipulation

In an unexpected move, the European Union has decided to shut out some of the world’s biggest banks from sales of bonds for the EU’s COVID recovery fund, expected.



EU Bars 10 Megabanks From Recovery Bond Sale Over Previous Market Manipulation

In an unexpected move, the European Union has decided to shut out some of the world's biggest banks from sales of bonds for the EU's COVID recovery fund, expected to be the largest supranational bond offering yet.

According to the FT, the EU excluded 10 banks - including JPMorgan, Citigroup, Bank of America and Barclays - from running bond sales as part of its €800 billion ($968.5 billion) recovery fund due to what the FT described as "historic breaches of antitrust rules". Specifically, the EU is seeking to punish the banks for their roles in the series of market-rigging scandals (which infamously started with rigging of the Libor before investigators moved on to currency and fixed income markets) that broke early in the last decade. The move is especially bold because many of the banks being shut out of the deal are some of the world's biggest players in international debt markets.

In other words, simply by shutting them out of this massive deal, the EU could shake up the league tables as the banks that win its business will undoubtedly be handsomely rewarded for their work. The borrowing spree - Brussels' biggest-ever - will begin Tuesday with the sale of a new 10-year eurobond to fund the NextGenerationEU pandemic program. 7 of the 10 banks excluded are among the biggest sellers' of European debt. Before they will be allowed to sell the bonds, the EU wants them to demonstrate that they have "taken remedial measures" to prevent this from happening again.

In other words, Brussels is serious about preventing banks from stuffing their pockets with public money.

Banks found to have breached EU competition rules “will not be invited to tender for individual syndicated transactions”, said a spokesman for the European Commission, which handles debt issuance on behalf of the EU. “The Commission implements a strict approach to ensuring that the entities with whom it works are fit to be a counterparty of the EU."

Banks found guilty of antitrust breaches will be required to show they have taken “remedial measures” to prevent them happening again before they will be allowed to bid for syndications, the spokesman added.

Bank of America, Natixis, Nomura, NatWest and UniCredit have been prevented from taking part due to a Commission antitrust ruling last month that they participated in a bond trading cartel during the eurozone debt crisis a decade ago.

Citigroup, JPMorgan and Barclays — in addition to NatWest — have also been barred due to a finding two years ago that they were involved in manipulating currency markets between 2007 and 2013, people familiar with the matter said. Deutsche Bank and Crédit Agricole are also excluded due to an April ruling that they were involved in a different bond trading cartel, the people said. All the banks declined to comment.

Despite this, Reuters reported earlier (citing a senior banker in charge of the deal) that the EU's first offering of €20 billion ($24.3 billion) in bonds was heavily oversubscribed. The popularity isn't that surprising, considering that Triple-A rated debt in the region can be hard to come by (since the ECB owns much of the market). And the EU bonds feature a slight yield premium to German bunds. Investors placed upwards of €140 billion in orders for the €20 billion of debt, according to bankers who spoke to Reuters.

The new EU bond, due July 4 2031, will price 2 basis points below the mid-swap rate, according to the lead manager. That is equivalent to a yield of around 0.06%, according to Reuters calculations, down from around one basis point over the mid-swap level when the sale started on Monday.

Since October, the EU has already issued 90 billion euros to help finance its unemployment support program SURE.

The EU is managing these bond sales like a national debt offering, which is appropriate since they will likely transform the bloc into the world’s biggest supranational debt issuer.

All ten banks are among the 39 approved "primary dealers" which have a responsibility to bid for bonds during government auctions. One anonymous source told the FT that the EU's decision to bar the top dealers could create unnecessary complications for the sales. "There’s a delicate equilibrium in the relationship between issuers and primary dealers, and this risks upsetting that,”" said a senior banker at one of the lenders barred from syndicated deals. "These issues they are bringing up are from a long time ago, and they have been settled."

The banks working on Tuesday’s inaugural recovery fund bond are BNP Paribas, DZ Bank, HSBC, Intesa Sanpaolo, Morgan Stanley, Danske Bank and Santander.

The EU is expected to sell two more syndicated bonds by the end of July.

Tyler Durden Tue, 06/15/2021 - 09:49

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Thinking Too Small And The Pitfalls Of The Inflation Narrative

It may be that the most-cited narrative of bitcoin is simply one of many aspects in this global technological adoption.



It may be that the most-cited narrative of bitcoin is simply one of many aspects in this global technological adoption.

The One Chart We Need To Study And Why Bitcoiners Need To Move Away From The 1970s-Style Inflation Thesis

The first chart plotted below is deceptively simply, and yet extremely important. I would even make the argument that it is the most important chart to fully internalize so far in 2021. This is the signal through the recent noise of messy economic data.

Chart #1 below visualizes Nominal Gross Domestic Product (Quarterly GDP in actual dollars, annualized), divided by the Employment to Population Ratio (most commonly defined as prime age workers aged 25-54 as percent of total population).

A historic shift:

Chart #1: Nominal GDP / Employment-to-Population Ratio

The Signal

What this chart is telling us is that already, a year after COVID brought the biggest employment shock in modern times, we have produced higher GDP in dollars relative labor employed. Ever.

Chart #2 plotted below is simply meant to emphasize where our employment levels currently stand in a historical context. It shows us how incredible the GDP growth is despite there still being approximately 15.35 million people filing unemployment claims in this country. That compares to about 1.6 million people filing claims prior to the COVID crisis, when GDP was $21.8 trillion.

Chart #2: Total Jobless claims including all pandemic-era Federal programs (blue) vs pre-pandemic continuing jobless claims (white)

Let us think about this for a minute. Currently, with GDP at a new high of $22.06 trillion, we have “accomplished” a 1.2% nominal GDP growth rate in defiance of a nearly 10x order of magnitude increase in the number of workers unemployed in that period!

I know many skeptics will argue that such a rate of GDP is not sustainable, and is driven by a temporary and synthetic demand from high transfer payments and the inflated personal income and spending that comes with such government programs. And while these facts are true, they miss the point. The point is that our economy can handle such demand at current levels of employment.

If Powell and the Fed are watching this, they must certainly be gnashing their teeth and wincing anxiously. If one’s goal is full employment, defined as getting job levels back to pre-pandemic levels, these facts are rather alarming.

The Emergence Of A New Debate: Deflation

Some signal-oriented thinkers like Jeff Booth have done an excellent job in delivering a message that frames the hurdles for a system of debt-based fiat. A system that necessitates higher inflation to propel it forward with an ever-increasing secular headwind of deflationary forces. Such forces result from the productivity fueled by exponential technological innovation and an increasingly digital world that simply does not require human labor at nearly the same scale as historically observed.

The Oversimplified Dichotomy Of Inflation Versus Deflation

It is my view that fellow Bitcoiners would be better served to stop broadcasting the inflation and hyperinflation narrative as the primary reason to migrate to the hardest, most decentralized money ever invented. Such a narrative has the unintended consequence of reducing bitcoin merely to digital gold alone. Such a reductionist conclusion is incredibly unfortunate as bitcoin is so much more than this, and is so much better suited for the epoch we have just recently begun. The other flaw in this inflation tale is that it could very likely not occur, at least not in the 1970s-era manner that many are expecting to unfold. The world is so utterly different from the decade of the 1970s today, that such a comparison is almost nostalgic in its oversimplified and stale rationales. However, before some bitcoiners explode at this statement in defensive recoil, let us pause and take a deep breath.

We don’t need this narrative at all. Let me repeat it. We don’t need this inflation narrative to unfold to be victorious. And when viewing the above charts, that is a good thing. Why give bitcoin opponents yet another Straw Man argument to burn at their alters? So let us shed this skin, so that these FUDsters are left without a flame to even fan in the first place.

The Forest For The Trees

This does not mean that inflation, in some phase state, is not occurring. But money is not necessarily inflating in the Keynesian textbook definition of more dollars chasing fewer goods and services. (Defined by such measures as the Consumer Price Index and other econometric inflation gauges that use average and aggregate prices based on baskets of ever-changing, and hedonically adjusted components). Alas, the circumstances are much more nuanced. Money is inflating, but is now doing so via Monetary Entropy, rather than by way of the superficial consumer and services headline aggregate inflation we typically use as our barometer. (For a deeper dive into the theoretical framework of monetary entropy, please see my essay linked above, titled B.I.T. Bitcoin Information Theory).

Currently, we are witnessing a lot of noisy post-pandemic reopening statistics, misleading base effects and short-term supply shocks after a year of lockdown and severe economic disruption. These strange times breed a tremendous degree of confusion, and overwhelm us in a cacophony of noisy data. Nevertheless, we must see the forest for the trees and not succumb to the yarns of the past. Memes such as “OMG look at lumber prices!!” are low hanging Inflationista fruit, an empty vessel of click bait. This is the noise. The signal is telling us that businesses have accelerated the shifts of productivity, automation, and digitization already well under way over the past 20 to 30 years. The ability to do more with less human labor. This is immensely more deflationary in the long run relative to any short-term commodity-driven disruptions.

How Central Bankers Think About Wealth Creation

“Since we decided a few weeks ago to adopt the leaf as legal tender, we have, of course, all become immensely rich.” -Douglas Adams, The Hitchhiker’s Guide to the Galaxy

Quantitative Easing (QE) is indeed insidious money printing, but not in the way characterized by most financial analysts and pundits. The real nuanced mechanism is actually much more problematic for fiat as it is significantly more financially destabilizing. This is because rather than injecting fresh capital into the real economy in the form of fractional bank reserves that enter monetary circulation through the extension of credit, such avenues are circumvented in favor of a speculative asset vector. However, given speculative assets ideally have free market pricing mechanisms that can make real-time agile adjustments, financial markets will constantly test the political resolve to support them. Such is a very important distinction relative to the behavior of the more deliberate real economy that lives outside of the domain of financialization, a domain that is shrinking by the day. In 2011, rock star venture capitalist Marc Andreessen famously opined that “software is eating the world”. But well before 2011, financial assets were already eating the world and in much larger quantities. Financial markets crave certainty in order to establish equilibrium fair value prices and confidence. Over time, when such tests are repeatedly iterated, history has proven a desire on the part of policy makers to maintain market confidence at all costs. Such a dynamic also adds to “short-termism”, as the incentive structure for the typical politician, technocrat and bureaucrat is etched along a very short time horizon and becomes matched by a new equally short time horizon for financial markets. This realization becomes ingrained as a pattern of moral hazard, and begins to dictate policy decisions to a greater extent. Once the government itself becomes reliant on QE to finance its own spending plans, it is game over. These counterproductive incentives become too difficult to overcome. This is why moral hazard is so dangerous. Such bridges, once crossed, become very difficult to retrogress.

Stocks And Bonds As The Embodiment Of Fiat Currency

Money Supply relative to economic activity (measured via the M2 $ / GDP $ ratio) is now 60% below its peak ratio in 1974 and has been in consistent but sharp decline ever since the financialization of our economy began in earnest in the early 1980s. Meanwhile, the stock market’s market capitalization relative to GDP has gone from about 40% of GDP in the 1970s to well over 200% today, an all time high. This is perhaps one of the more stunning facts to internalize out of everything I’ve said thus far.


Because this demonstrates how Money Supply (measured primarily as M0, M1 and M2 growth) is not required as the only mechanism to pump new money into the system. Keynesians and monetarist macroeconomists have defended QE as not actually being money printing, but bank reserve creation instead and thus non-inflationary. This is true, but only in a semantic and academic sense, using their own pre-defined measures of inflation. Measures that carry little relevance in modern reality. Talk about circular logic!

But the bigger problem with such definitions is they entirely miss the point. Why print more actual dollars, if banks are regulated into holding higher excess reserves, and are not going to turn them into credit anyway? Credit is the actual mechanism for money printing in our system. And money velocity (the residual multiplier effect on base money) has plummeted. In 1997, the velocity of money peaked at 2.2x and is currently dramatically down 50%, now sitting near an all-time low at 1.1x. That means that every $1 dollar of money in the system in 1997 was recycled over two times but now is not recycled at all. The Fed sees this declining velocity and becomes alarmed. In order to reach their goals they must therefore print 2x as many dollars as they previously did in order to have the same effect on broad money circulation. The timing of this peak is also interesting. This occurred right when the gears of moral hazard were really beginning to churn intently. Events such as the bailout of Long Term Capital Management and the concept of the “Fed Put” entered the economic zeitgeist, then the Asian Financial Crisis, topped off by the bubble all occurred within a few years of this peak in money velocity. It is also no coincidence that policies of financialization also began to accelerate during this period. In 1996 the Federal Reserve reinterpreted the Glass-Steagall Act to allow for more collaboration between money-center and investment banks. In 1996, Nasdaq futures began trading on the Chicago Mercantile Exchange. In 1997, the long term capital gains tax was reduced from 30% to 20%. In 1997, e-mini S&P 500 futures contracts also began trading. Then in 1999, right before the crisis, the Glass-Steagall Act was fully repealed and money center banks became fully entrenched in capital markets once again. In 2000, the Commodity Futures Modernization Act was passed, deregulating the financial derivatives market. This helped set the stage for the next crisis in 2008. The chart below shows a strong relationship between the growth in the quantity of money (M2 growth) and traditional measures of goods & services inflation (PCE Index) from 1970 all the way until about 1997, when these two paths diverged. Instead, money supply began to correlate much more with financial assets like the stock market.

Chart #3: Money Supply Growth, 4yr moving average (yellow); Consumer Price Index, 4yr moving average (blue); The S&P 500, 4yr moving average (white)

Such policies and events as those listed above represented an intentional and aggressive shift in money creation. A more potent economic policy ideology was realized to induce the inflation of asset prices via deregulation, lower capital gains taxes, leveraged financial product innovations, and passive investment vehicles such as exchange traded funds (ETFs). ETFs for example, can be thought of through the Silicon Valley lens as a technological innovation enabling a better user experience for individual investors, stimulating greater equity market adoption and fungibility for the public. Adoption and fungibility are the key attributes here. Since the era, more such ‘innovations’ were then developed, such as creative derivative instruments housed within a new shadow banking architecture to better propagate household debt and earn large fees in the process. I am of course referring to the period leading up to the real estate bubble and the financial crisis of 2008.

Chart #4: Ratio of Household Net Worth / Nominal amount of wages & salary in the US. Current ratio as of Q1 2021 is 13.8x, a record by a mile. Pre Great Financial (GFC) crisis average was ~8x. Post GFC, but prior to COVID it was ~ 11.5x. Where is this heading in the next 5 years?

Inflation Is An Alchemist’s Time Machine And The Cat Burglar Of Our Future

A recent iteration has been the gargantuan issuance of corporate debt, at its most base level, designed to boost equity returns in the post-2008 era up and through today. This has gone hand in hand with stock market inflation, similarly fueled by perennially subdued interest rates. So the themes of the past decade have been corporate and government debt proliferation and dramatically lower nominal interest rates. Wall Street froths at the mouth at such lower rates, using convoluted descriptions to describe this situation as an improved “discount rate environment”, justifying a “lower equity risk premium”. What they really mean is that such circumstances make the stock market number go up. This is because for long duration financial assets that have high projected future cash flows (such as the growth stocks that dominate the stock market today), analysts tend to determine the present value of these future cash flows using “discounted cash flow” (DCF) models that take a prevailing discount rate (usually the risk free rate like the long term treasury yield, plus some risk spread) to deflate those future earnings so as to arrive at an intrinsic value today. The lower the discount rate, the higher the present value. Ta da! If this sounds a bit like alchemy to those readers not employed in finance, that is because it basically is. A lower discount rate essentially is just a theft of future value by the present. Historically, in freer times, interest rates fluctuate based on market dynamics and the prevailing equilibrium time preferences. Consequently, any DCF model historically was just an oscillating cycle of value being extracted from the future by the present as rates declined, and then returned back to the future once rates moved higher again. But with rates now continuously suppressed out of necessity by the Fed, this has become a PERMANENT theft. This is why we tend to witness more “winner take all” businesses, and more dispersion of success between those with access to capital and those without access. And just in case there are any delusions that the current policy is not indeed permanent, let it be reminded that the Federal Reserve as of the end of 2020, now holds more U.S. Treasury securities than all foreign central banks combined. Last year, the Fed’s treasury holdings increased 95%. In comparison, during the 2008 Great Financial Crisis this level of holdings only increased 25%. Apparently, each crisis gets “greater” than the last. In this case, the degree of “greatness” was nearly 4x that of the previous crisis just ten years prior.

There is something profound about this realization of permanent time theft once we zoom out and try to absorb its myriad implications. In theory, the potential future supply of capital is infinite as long as time does not end and as long as we continue to have faith that the world improves over time and creates ever more abundance and affluence. For now, these two key assumptions remain intact. Out of desperation we have synthesized ways of funnelling this capital with an alchemist’s time machine back into the present. The implications are that we now can create a theoretically limitless amount of money in the present by convincing one another of the prospects for a brighter tomorrow in one breath, while stealing from that future conviction before even exhaling. This is an inflation of epic proportions.

Financial Assets Are Now Fiat Stores Of Value

In a recent interview, legendary investor Stanley Druckenmiller noted that corporate debtors were net borrowers of $1 Trillion in 2020. I work in this industry and witnessed this insanity first-hand. And as Druckenmiller noted, we have never in history seen private debt go up in a recession prior to last year. Typically in downturns, private debt collapses by as much as $500 Billion in today’s dollars, so we’re talking about a 3x increase in leverage in this recession relative to the normal pattern.

We’ve slowly been encouraged for over 30 years now to hold assets as a perceived store of value, including equities, debt and real estate. Yes, real estate has always been a store of value throughout human history, but not the equity portion of a leveraged real estate investment that underlies our current form of ownership. Even in the early days of fiat, loan to value (LTV) ratios were ~ 50%. Most other countries still have LTVs this conservative. But in the US we have gone from 50% to a bottom near 0%-10% in ’07, and back to a slightly less emphatic 20% norm today. But this is still debt, not actual real estate. It is basically “fractional real estate”, a claim on it. A way to promote greater adoption without having to address thorny issues of valuation and affordability. Perhaps a new Bitcoiner meme should be “Not your lien, not your house”.

So the implicit and subconscious narrative over the past quarter century is “Why hold cash? Instead, hold the assets that are inflating via implicit guarantee behind that cash”. How then are financial assets any different than fiat as a bearer instrument? Moral hazard therefore is how you print money today. Extend the risk-free addressable market. Stimulate adoption with both carrot (moral hazard) and stick (stealth debasement of cash and savings without damaging the fiat’s reputation and status), and provide easy on-ramps. Voila! This outcome is what QE has been most advantageous in realizing.

The Opportunity Cost Of A Hundred Years

Rather than focusing on the impending inflation decade, what we should be focused on is how much deflation we could be achieving if we were to stop hopelessly fighting it. We cannot battle the progress of innovation and technology. We cannot put the rabbit back in the proverbial hat when it comes to the tsunami of compounding innovations of the recent past and near future, and what they imply for human labor. What levels of deflationary abundance would we have already accomplished after a century and a half of accelerating technological innovations, most of which occurred during regimes of increasing centralized coordination over economic activity and an eroding ethos of the liberal doctrine.

“Liberalism had to rely largely on the gradual increase of wealth which freedom brought about, it had constantly to fight proposals which threatened this progress. It came to be regarded as a “negative” creed because it could offer to particular individuals little more than a share in the common progress—a progress which came to be taken more and more for granted and was no longer recognized as the result of the policy of freedom...It is important not to confuse opposition against this kind of planning with a dogmatic laissez faire attitude. The liberal argument is in favor of making the best possible use of the forces of competition as a means of coordinating human efforts, not an argument for leaving things just as they are. It is based on the conviction that, where effective competition can be created, it is a better way of guiding individual efforts than any other.” ― Friedrich A. Hayek, The Road to Serfdom

An impartial and inquisitive society should be conducting a fair and honest inquiry into the question of whether we have truly ever experienced a free-market and Liberal society. And if money is one of humankind’s oldest instruments of freedom, can a centralized and fiat-evolved monetary system contain the necessary ingredients for a genuinely free society? If the answer to these questions is indeed a resounding “NO”, then one must then ask how the bounty of innovations humanity has achieved in the modern era could have led to an even greater degree of progress and wealth creation had they inhabited a better system all along? And further, how could those achievements have compounded over time to arrive at a completely different place than where we find ourselves today? The opportunity cost of having not followed this path is near incalculable. Alas, we cannot alter the past, but we can certainly aspire to avoid such pitfalls in the future.

"..Not that the system of free enterprise for profit has failed in this generation, but that it has not yet been tried..." - Franklin D. Roosevelt

The Story We Should Be Telling

The current fiat system, and the monetary and fiscal policies that have evolved to sustain it, will not necessarily lead to 1970s-style headline inflation figures because our world is drastically different. But these policies and the behaviors they invoke will continue to lead to prodigious economic damage.

The trajectory of the current system is spreading a cancer that is slowly eating away at our free market institutions and our future prospects, with a laundry list of destructive characteristics: moral hazard, extremely misaligned allocation of capital, a vulnerability to cronyism, populism, and ‘Cantillionaire’ creation, greater amplitudes of wealth inequality, abject financial instability and fragility, greater centralized planning, and more censorship to maintain control over this increasingly volatile foundation. Finally, yes, even pockets of traditionally defined inflation from effects such as Baumol’s Cost Disease (most notably in healthcare and education, two essential and inelastic services).

The trajectory of the current system also importantly requires more debt in a mounting negative feedback loop. The debt is not just a function of trying to solve a problem with the completely wrong solution, but also a requirement of the resultant government debt burden and its intractable servicing costs. QE and fiscal policy have become so intertwined that differentiating our current political economy from ideologies such as Modern Monetary Theory has become a truly Herculean task requiring skilled academic gymnastics to deflect. The end game ever and always in these cycles is a subsidy of government borrowing. In the world of macroeconomics we refer to such behavior as financial repression. With a growing level of unemployment without a commensurate decline in the cost of living, our current system will require greater and greater piles of social spending to compensate. This means more debt, which crowds out ever more new capital and further damages the system in a spiraling degeneration.

The laundry list of problems just stated are all existential issues for our fiat system, but none of them require a dramatic realized rise in any aggregate inflation gauges to have disastrous consequences and lead to continued debasement of fiat currencies. So if we use existing aggregate inflation gauges as our barometer, then loyalists of the current system will continue to get away with dismissing the skeptics and confidently reassuring the masses that all is well in the world of fiat.

But all is not well. We sense it, we smell it, and we taste it. As mentioned above, the fiat system has devolved, backed into a corner, surrendering to a life of crime and stealing from our future selves. The problem with such theft is multifaceted. First, not everyone is a thief, but every future self gets robbed. Consequently, a Prisoner’s Dilemma Culture is constituted that incentivizes everyone to participate in this robbery so as not to get left out in the cold, holding the proverbial bag. Unfortunately, not everyone can participate in such a game, especially those who are not even aware of what game is being played. A second problem is that this dynamic breeds instability and fragility. The more we chip away at our future’s building blocks the more we must hope for new blocks to be constructed to replace those missing from the edifice, lest the foundations begin to crumble and decay. If we lose faith in the future, the entire illusion evaporates. We are then pressured by an imperative to constantly sell our present selves increasingly seductive visions of future prosperity no matter how vague and unsubstantiated they might be, and no matter how much our current behavior reduces the probability of such a fate materializing. No wonder we live in the age of the pump and dump, the story stock, the SPAC (blank check companies that literally derive their value from the ability to sell a story about a potential future asset that does not yet exist), and many other examples of our escalating abuse of the future.

Taking Our Hands Out Of The Cookie Jar

The types of inflations unearthed above should worry us to a much greater extent than any 1970s-esque overt cyclical inflation that generates uncomfortably higher gas, food, and electricity bills. The reason is that the above types of inflation are insidious and shockingly easy to obfuscate, while the second type is obvious and relatively easier to address if the political and public will exists. This is the story that bitcoiners should be reporting and exposing.

I will conclude with one more related point. By focusing our attention only on the shorter term goods and services type of inflation we’ve been instructed to fix our gaze upon, we unwittingly deemphasize consistent but low headline inflation. We refashion something unacceptable into something mundane. Policy makers and government officials have told us over and over again that such inflation is not only innocuous, but actually desirable. But by decrying 4-5% inflation as a sign of impending monetary ruin, we minimize the degradation caused by a quarter century of compounding 2% targeted annual inflation. We are acquiescing to a 50% erosion of our purchasing power every 20 years as a matter of course! I am reminded here of Goodhart’s Law, observing that when a measure becomes the target, it ceases to be a good measure. Low but steady inflation can be gamed by the owners of capital within such a system. Low perceived inflation also fuels greater moral hazard simply because of its assumed predictability. The more predictable the target is, the more risk one can take in gaming and outmaneuvering that target. So financial leverage and indebtedness inevitably rise, capital misallocation increases, and a false sense of permanence and stability entices us to reach deeper and deeper into the cookie jar of the future, hoping that nobody notices there are almost no sugary treats left to pilfer.

All of this may sound dire for the economic prospects of our children. But this is also why bitcoin is such a beacon of hope for many of us, and why its transcendent power is often so intensely appreciated once these challenges are fully comprehended. Bitcoin puts the cookie jar back in the cobwebbed upper reaches of the kitchen cupboard, liberating us from the temptation to reach for that glutinous midnight snack.

This is a guest post by Aaron Segal. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.

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Spread & Containment

Market weekly – Corporate bonds: Resilience amid rising inflation (read or listen)

Thanks to central bank largesse, corporate bond markets weathered the depth of the Covid crisis well. Risks to credit markets today appear low with gradually improving fundamentals, neutral central bank policy and no major supply-demand imbalances. Listen



Thanks to central bank largesse, corporate bond markets weathered the depth of the Covid crisis well. Risks to credit markets today appear low with gradually improving fundamentals, neutral central bank policy and no major supply-demand imbalances. Listen to the podcast with Victoria Whitehead, portfolio manager on the global credit team, or read the article below.

Are investors worried about the impact of rising interest rates and inflation expectations?

Inflation itself is not so much a problem for corporate bond markets nor are higher rates. Historically, these market have reacted more to the volatility associated with rate rises rather than the actual rate rises themselves, causing credit spreads to widen (see exhibit 1). Looking at correlations – of what moves credit markets and spreads – the main factor is economic growth. Rate rises for a positive reason – more growth – are positive for credit markets and we tend to see spreads narrowing.
Accordingly, as the macroeconomic situation improves on the back of lockdowns being wound down, economies improving and company earnings showing rising momentum, we have seen credit markets outperform other fixed income segments such as government bond markets substantially this year. We have had low credit spread volatility recently. We have two central bank meetings this month that could conceivably surprise: the ECB and the US Federal Reserve. However, on 10 June, the ECB signalled no change to its bond purchases. While it is possible that this week the Fed may ‘think aloud’ about tapering its asset purchases, we view the risks to credit markets as low. As a result, big moves in credit are unlikely: market positioning is shorter than at the time of previous tapers, and corporate cash buffers are higher.

How have corporate bond issuers been managing the Covid crisis?

They managed what initially was a very turbulent period relatively well. We were in uncharted territory. Bond spreads widened significantly last March, but it did not take long before central banks stepped in. The Fed started buying high-quality high-yield ‘crossover’ bonds to signal its support for corporates to the market. In Europe and the UK, central banks quickly stepped up their quantitative easing programmes. In addition, companies issued enormous amounts of debt to shore up their balance sheets and liquidity, in part as they worried about the impact of the crisis on their credit ratings. As a result, we have seen no major rise in rating downgrades. What downgrades there were involved companies that were on the cusp of falling into the high-yield category anyway and the pandemic just brought forward the rating action. Now, we are seeing issuers – the so-called rising stars – coming back into the investment-grade category on the back of the economic recovery. Corporate cash holdings remain at high levels with both liquidity ratios and coverage ratios close to all-time highs and notably stronger than at previous QE tapering points. This renders corporate defaults not only remote, but means supply pressures are low.

Are ESG considerations becoming more important in the credit market as well?

We have seen huge growth in the green bond market. To date, USD 180 billion worth has been issued globally – that is the equivalent of the full-year total in 2020 and also in 2019. Green bonds, which are being issued specifically to fund green projects, now make up 20% of the issuance. Encouragingly, they are coming onto the radar of central banks and their asset purchase programmes. Interest in this still relatively small segment in general and the huge inflows mean that green bonds are being priced at a slight premium to existing corporate bonds. That is attracting more issuers. Next to green bonds, there is growing interest in sustainability-linked bonds whose coupon is connected to specific indicators. The bond’s annual pay-out rises when the issuer fails to deliver on sustainability targets, creating an incentive for the issuer to meet environmental, social and governance (ESG) goals.
Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk. Writen by Victoria Whitehead. The post Market weekly – Corporate bonds: Resilience amid rising inflation (read or listen) appeared first on Investors' Corner - The official blog of BNP Paribas Asset Management, the sustainable investor for a changing world.

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