Weekly Markets Round-up
Charlie's Chocolate Factory
According to J. Fred Rippy, the 1920s saw an explosion in the emerging market bond issues. If recent sovereign bond issues are anything to go by, there will be similar eruptions in the developed market bond issuance. Most notable is the Austrian government’s decision to float a century bond.
Capitalising on the ECB’s Covid stimulus plan, Vienna’s mandarins raised €2bn at a yield of 0.88%. Equities are at boiling point and, as Alpit Kale has argued this week, there is likely a bubble here. How responsible Robinhood’s guerillas are for this remains to be seen but James Montier of Boston’s asset manager, Grantham, Mayo, Van Otterloo and Co has made a very convincing argument that we are amid a bubble.
Institutional investors are now moving away from an equities slot machine to a giant poker table with a twist. Austria’s issue will surely be followed by other Eurozone members; indeed Ireland and Belgium have already issued century bonds in private markets. These bonds have ‘high convexity’, meaning they are extremely responsive to interest rate changes. Further rate decreases will cause huge price increases with the bonus; assuming a low coupon, prices rise more when yields fall, than they decline when yields increase.
Such bonds are like finding a golden ticket in Charlie’s Chocolate Factory as they make a portfolio more likely to outperform the market. Indeed, the bond issuers seem to be having just as good a time as any. In the first week of June, the Irish government’s 10-year bond issue raised €6bn, twice as much as expected. Similar news came out of Spain, as its 10-year issue of €10bn attracted €53bn worth of interest which bumped yields up to 0.5%. Even Greece managed to raise €3bn on its 10-year bond.
The market is certainly bullish on sovereign debt; the crux of the matter is how much debt can these economies support in a post-Covid world. Take Ireland, it has the third highest Debt per Capital ratio in the world. In the event of a rebound, as has happened in China, the economy will be able to cope as the government has been actively elongating its debt profile.
Nonetheless, this prudence will be meaningless in the event of a second surge. Given the already struggling economy with employment at 26%, such a debt burden will come frighteningly close to bankruptcy if Covid mutates and comes back even a little stronger.
If such a situation is replicated across the developed world, the golden ticket will not be much use if the chocolate factory falls down.
By Robert Tolan - University of Dublin, Trinity College
This Week in Markets: 22/06 to the 26/06
It was another choppy and uncertain week for markets as investors tried to decipher the ongoing effects of COVID-19. However, the rising caseload in the US ultimately led to a bearish finish for major indices.
The week began with gains in the US indices, which was led by tech stocks. Other indices across the world mimicked these moves. This began to reverse on Wednesday due to negative news regarding the spread of COVID-19 in several US states.
Thursday's announcement to loosen aspects of the Volcker rule which gave banks more scope to invest in vehicles like hedge funds, caused the major US indices to close up for the day as bank stocks rallied heavily. This bullishness was reflected in the APAC markets early Friday morning, causing the Hang Seng and the Nikkei 225 to close up for the week. The ASX All Ordinaries Index also rallied and closed only slightly down for the week.
EMEA markets followed this bullishness early in the session, but this was later reversed by more news from the US. The fall in the EURO STOXX was led by banks. While in the UK, stocks also rallied early Friday morning partly in response to the Chancellor of the Exchequer Rishi Sunak, who indicated that more stimulus would be outlined next month.
AMER markets finished the week with a negative move, which also affected the close of EMEA indices. The post market announcement by the Federal Reserve on Thursday, stating the suspension of all stock buybacks and the capping of dividends for the 34 largest US banks until the end of September, caused a reversal. This bearishness was further propelled by the worsening number of COVID-19 cases in the US, as the biggest daily increase in cases was recorded on Friday. The Governors of Texas and Florida were forced to reverse the opening of certain businesses, like bars. This makes a swift v-shaped recovery look less and less likely.
Estimates suggest that 33 US states have R Rates that remain over one. This implies that the spread will continue, causing further turbulence in markets over the coming weeks. Despite the economic damage, Dr Antony Fauci, a leading figure in the US response to COVID-19 has suggested that new shelter in place orders may be needed if figures continue to worsen. This may cause another sell-off in markets if states are forced to take drastic action.
While the week began relatively bullish, the markets were snapped back into reality as the crisis worsened in the US. The choppiness of the past few weeks will probably continue as markets react to positive and negative news. In the US, markets may continue to fall next week if cases continue to rise, unless further Fed intervention or fiscal stimulus is announced to propel the market upwards once again. Other international markets will probably continue to be driven by the movements in the US.
By Charles Heighton - VP of Trading at King’s Global Markets
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