David Fuller and Eoin Treacy's Comment of the Day
Category - General

    Hawkish Jackson Hole Surprise Will Pop Credit's Summer Bubble

    This article from Bloomberg may be of interest to subscribers. Here it is in full:

    Any sign from this week’s Jackson Hole symposium of more aggressive rate hikes to come will whack credit markets, which have already started to give back summer gains. Misplaced optimism about the US inflation and economic outlook squeezed spreads to unsustainably tight levels, leaving debt vulnerable to a fall that will be exacerbated by dwindling liquidity.

    US high-grade bonds got overbought as fund inflows chased better returns, despite a barrage of issuance which will likely resume in September. The high-duration debt stands to lose most from a more hawkish Fed.

    Spreads have almost 25 bps to go before hitting the July wide at 160 bps, but investors are keeping powder dry for a move back to May 2020 levels above 180 bps. That would be a fairly extreme move for a market that tends to move in 1-2 bps daily increments, but pre-Labor Day lack of liquidity provides scope to gap out.

    Junk’s summer gains were led by the riskiest bonds, which would be battered most by a higher rates/lower growth environment. Some are waiting for a pummeling to 800 bps -- from 432 bps currently -- before buying in.

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    China Seeks to Stabilize Property Crisis as PBOC Urges Lending

    This article from Bloomberg may be of interest to subscribers. Here is a section:

    The special loans for developers would be the biggest financial commitment yet from Beijing to contain the crisis. The funds will be channeled through China Development Bank and Agricultural Development Bank of China, according to the people, who asked not be identified discussing private information.  

    The PBOC also cut its one-year loan prime rate on Monday, lowering it by a smaller-than-expected 5 basis points to 3.65%, the first decline since January. The drop in the LPRs followed the central bank’s surprise move last week to lower the rate on its one-year policy loans by 10 basis points.

    “We’ve already reached the point where the central government really needs to step in,” said Hyde Chen, head of strategy and asset management for Haitong International, in an interview with Bloomberg TV. With the housing market contributing around 20-30% of gross domestic product, it’s become an “elephant in the room.”

    “They really need to provide a backstop, to provide confidence that a housebuyer can say, ‘OK, the house I bought can be delivered’,” he added.

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    Email of the day on getting it wrong:

    With all due respect Albert Edwards has been bearish his whole career, he has made a career out of being wrong, so I struggle to believe much of what he writes. Make no mistake, I am very concerned about the economic backdrop and confess to find it challenging to distinguish between what is happening in the U.K. (a complete mess) to what is happening in the States. We only have to go back a few months though to your view (a view I shared at the time), that the Fed would be "one and done", because they had little to no precedent of being anything other than dovish. The government's balance sheet has enormous liabilities and as discussed by you months ago, they can ill afford to roll this over at much higher rates. That dynamic has not changed.

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    Larry Summers on Inflation and 'the New McCarthyism'

    This interview has some interesting nuggets. Here is a section on male employment:

    We have a large number of people who are estranged from our economy. In 1960, 5% of men were not working between the ages of 25 and 54. Today it’s more like 15%. If 15% of men are not working at any point in time, then a quarter of the people will have been out of work for a year or more over a four or five-year period. That’s destructive to the economy's productive potential. It’s destructive to their families. It’s destructive to the areas in which they live. It’s destructive to the moral fabric of our national life.

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    Gazprom to Halt Nord Stream Gas Link for Three Days for Works

    This article from Bloomberg may be of interest to subscribers. Here is a section:

    “Upon completion of the work and the absence of technical malfunctions of the unit, gas transport will be restored to the level of 33 million cubic meters per day,” Gazprom said.

    The gas flow after works is equivalent to 20% of capacity. The pipeline can normally carry about 167 million cubic meters per day.

    The Portovaya compressor in Russia, where the pipeline begins, is designed to operate six major and two smaller turbines. While one turbine is stranded in Germany after its maintenance in Canada, others that are still in Russia need repairs either in Canada or at the venue.

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    Email of the day on bear market rallies or a sustainable low

    Eoin, why do you believe that we are seeing no more than a continuation of a short covering rally. Surely you must concede from a pure technical perspective that the charts in the US in particular look very encouraging. The high valuation names largely stopped falling in May, and trended sideways for the better part of two months, and since then have seen a succession of higher lows and higher highs in a fairly consistent pattern.

    The Nasdaq, S&P and Dow bottomed later but have very similar looking chart patterns, and all of these broke through their 50 day moving averages, and then successfully tested them before marching higher.

    They have all retraced approximately 50% of their losses now. Inflation looks to have peaked, and while that does not suggest it goes straight back down again, surely does the market more good than harm.

    Having sat on my hands when this last deep correction came and went, I am impatiently biding my time to get involved again, but I am starting to doubt whether the opportunity will come.

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    Layoffs Are in the Works at Half of Companies, PwC Survey Shows

    This article from Bloomberg may be of interest to subscribers. Here is a section: 

    That’s a key finding from a survey released Thursday by consultant PwC, which last month polled more than 700 US executives and board members across a range of industries. Half of respondents said they’re reducing headcount or plan to, and 52% have implemented hiring freezes. More than four in ten are rescinding job offers, and a similar amount are reducing or eliminating the sign-on bonuses that had become common to attract talent in a tight job market. 

    At the same time, though, about two-thirds of firms are boosting pay or expanding mental-health benefits. The most common move: making remote work permanent for more people.

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