China’s situation forces them to the front of macro considerations as their post covid restrictions rebound has not materialised and there is speculation about the potential for exported deflation.
Their overheated property sector, 25% of the economy, is starting to look increasingly precarious and Evergrande (the biggest Chinese property developer who defaulted on $300Bn of debt), filing for bankruptcy in the US coincided with Country Garden (the second biggest Chinese property developer) suspending payments on 13 bonds, putting their $150bn debt pile in jeopardy. The Chinese Central Bank’s response has been to tinker with rates in a meaningless way which will not resolve the situation. We remain thankful that these debt obligations are largely held internally.
With Jackson Hole nearly upon us we might get some clarity on future movements in US rates but either way with the US economy continuing to maintain momentum, and higher for longer is the most likely case. 2 year US treasuries joined the 5% yield club and overall rates volatility remains high, exacerbated by thin summer liquidity and the prospect of higher issuance, which also presumably prompted the downgrade from AAA by Fitch. US 30 year fixed mortgage rates hit 7.3%, the highest since 2000.
Eurozone PMIs were weak but despite this the ECB looks likely to continue their hiking cycle, they delivered a 25bp hike to a 22 year high of 3.75%, with longer dated Bunds heading for 3% for the first time since the GFC. The Eurozone economy remains asymmetrically reversed as the olive oil economies still have solid growth while Germany flounders.
UK PMI’s were even worse, prompting recessionary commentary. Inflation is yet to moderate enough to put the Bank on hold, who hiked another 25bp, but hope remains that we could see a swift fall. The picture was clouded for a while by a rally in energy prices (largely prompted by industrial action in Australia and US oil inventory data) but these have since fallen back.
The Sterling primary market has been unusually busy as a few foreign issuers took advantage of favourable cross currency swap rates to issue into GBP and some high coupons have printed. We even saw some non-financial issuance from quality issuers such as Caterpillar; very well received with healthy order books and strong performance in the secondary market.
EUR credit spreads saw some volatility as the iTraxx Main traded out from its end July tights of 66 to 78 but only returning the index to early July levels. Sterling credit spreads were an oasis of calm in comparison, well supported before widening a touch, still offering tremendous all-in yields.
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