The situation in China is becoming bleaker by the day, it transpires that S&P have downgraded 13 Chinese companies this year and upgraded only one, the worst ratio since 2006. With over $22.6 billion of offshore bonds from the nation being rated one notch above junk there is undoubtedly a lot of pain to come and only a few defaults short of a catastrophe. Furthermore many more companies are going to be in the firing line and the market is preparing itself for a large number of additional downgrades. There is the beginnings of a “mini-panic” and as the fallen angels continue to present a major risk to investors this year it is well worth noting that over 40% of 2015’s downgrades on China credits came in the fourth quarter.
Deutsche Bank’s Jim Reid, had some interesting thoughts on the same subject across Europe, cautioning “just wait ‘til corporate bonds go negative too.” In the light of continued central bank easing and a rally in the regions corporate paper it is only a matter of time before yields on corporate bonds sold by “investment grade” European companies dip below zero. What is clear is that there is clear resistance currently however when the dam breaks there will be no stopping it.
Further to yesterdays’ dovish comments from Fed VP Stanley Fischer and as interest rates turn negative around the world, the Fed is asking banks to consider the possibility of the same happening in the US. In its annual stress test for 2016, the Fed will be assessing the resilience of banks to this environment and considering the current global environment if this is not a pre-cursor to action I do not know what is. The Fed was quick to dent that this action did not represent a forecast merely good practice in case the worst/inevitable happens.
Regardless of whether it is a pre-cursor to action or not it is clearly another indication that the Fed would not be entirely adverse to such action. Compounded by the fact that Switzerland, Japan, Sweden, the EU and many more have all nudged official lending rates below zero without causing dangerous dislocations in the money market. Mr Fischers words of yesterday are ringing a lot louder today, when commenting on foreign central banks that had resorted to negative rates, “It is working more than I can say I expected in 2012.”
More and more low oil prices are becoming a rather critical global issue, for once. Whilst for the last 75 years or so almost every economic crisis has been preceded by an oil price spike, the worry is that these low prices are pushing the global economy into a tail spin. While the idea is counter intuitive, a growing share of the worlds consumers and investors are in the very places that are getting hammered by the rout in commodities prices. Apple for example have blamed weaker sales on lower economic growth in oil rich countries. The global economy is far more reliant nowadays on emerging countries, and with the exception of China and India most big emerging countries are oil and commodities rich with such economies accountings for roughly forty percent of global GDP.
In the UK DC faces infighting as a number of his cabinet members prepare to defy him on the EU referendum by publicly speaking out against his deal which they are warning will fail to cut migration. The in-fighters are claiming that the concessions made on Tuesdays pledge by Mr Tusk offer only “watered down” terms. And will offer migrants “gradually increasing access” to benefits after they come to the UK as opposed to the outright ban that Mr Cameron had previously demanded. Despite the deal being dubbed pathetic and insubstantial Mr Cameron further reiterated his glee and like someone out of Glee added he “sure would” like to take the deal offered by Mr tusk. Perhaps pathetic is right after all. Speaking of which, George Osborne will not be in a position to be able to balance the books before the decade is out. As weaker tax receipts leave Britain facing another round of austerity the NIESR has warned. They shed further light on future monetary policy, predicting that it is unlikely and implausible that the BoE will be able to raise rates prior to the EU referendum in June.
Today is another very dull day on the data front, with UK PMI figures kicking of the morning followed by Eurozone retail sales late morning. A repeat performance this afternoon from the States with non-manufacturing PMI being the major number of the day. Tomorrow promises to be a little more exciting.
Have a great day
