Monthly Archives: July 2012
We saw markets soar last week as the ECB indicated vigorous action, with Fed-like actions to support debt instruments. This was the kind of rhetoric the market was looking forward, to put a floor on the beta exposure. Stocks soared and are within spitting distance of their YTD highs. Credit markets also did quite well; IG18 representing the investment-grade markets shed some 6 bps to end up at 104. High Yield did even better and gained almost one point to end up at 97 (price level). This lends credence to our repeated assertions that macro news has been the main driver of the market. Corporate earnings have generally been on the softer side, although this indicates good fiscal management given that revenues are the main culprit. However, with cash hoards in the trillions across corporate America, it is safe to say that corporations are sanguine about medium term to long term prospects and are waiting for catalysts that will convince them to get into CAPEX mode from cash mode.
“Risk-off” may become the mantra, strategically more than tactically. Most markets are looking to shed risk after a flow of risk buying. Investment Grade corporates have enjoyed a tear and that looks suspicious when you notice that almost 40% of investment grade is in Financials; and a good chunk of those financials are in European financials. Investment grade may also totter from reports that senior debt holders in Europe may have to absorb some losses; senior debt holders are usually “sacred” but the scale of losses and financial medicine that has to be dished out may mean this sacred “sr unsec” realm may be breached. Meanwhile, Spanish 10 year yields are above 7% while the Euro drama continues. 5 yr investment grade spreads are at +110 bps over swaps, on average. High Yield has also been well subscribed to and the sector has been more high yield buying than the whole of last year! It is true that corporations are sitting on trillions of dollars of cash but it is interesting that they are not putting the cash to work as CAPEX until they see viable returns down the pipe that justify such risk positioning.