Corporate Credit Snapshot – 31 January, 2020

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  • Global fixed income returns were strongly led by sovereigns following a flight to quality that began mid-month after the outbreak of the Wuhan coronavirus
  • During the first half of the month, investors sensed a recovery in global growth; market sentiment rose on easing both trade tensions between the US and China and geopolitical tensions between the US and Iran
  • In the second half of the month, the rapid development of the coronavirus in China raised risk aversion and accelerated the fall in government bonds yields while leading to a global selloff in risk assets
  • China cut its reserve requirement ratio by 50bps, adding an estimated RMB800bn of liquidity into the system, while Purchasing Managers’ Index (PMI) data came in unchanged from December

US
US fixed income returns were mixed for the month with Treasuries and investment grade corporates outperforming high yield and loans. January can be described as a tale of two months – the first half very much risk-on and a continuation of a strong Q4 2019, while the second half of the month was risk-off/flight to quality given concerns about the spread of the coronavirus emanating from China. Although very few corporations outside of the banks (Goldman Sachs, JP Morgan and Bank of America) have reported earnings yet, the banks that have reported earnings were generally positive. Economic data was also generally positive – notably employment and PMIs (Purchasing Managers’ Index). China’s announcement that they were quarantining Wuhan (the epicenter of the virus) and surrounding cities during the New Year festival due to coronavirus led to fears about the virus’s spread and mortality rate. As China is one of the main drivers of global growth, investors feared what a shutdown of China might indicate for the global economy. What do several weeks of lost Chinese consumption and, to a lesser degree, (many factories already planned to close over New Year holiday) lost manufacturing mean? Oil traded significantly off on growth fears as did industries related to travel and leisure like airlines, hotels, cruises and casinos.

Europe
European fixed income returns were strongly led by sovereigns following a flight to quality that began mid-month after the outbreak of the Wuhan coronavirus. During the first half of the month, investors sensed a recovery in global growth; market sentiment rose on easing both trade tensions between the US and China and geopolitical tensions between the US and Iran. In the second half of the month, the rapid development of the coronavirus in China raised risk aversion and accelerated the fall in government bonds yields while leading to a global selloff in risk assets. Eurozone government bonds participated to the flight to quality despite slight improvement in the economic data, with the flash PMI (Purchasing Managers’ Index) confirming some recovery in the manufacturing sector. The flash composite remained stable, even as the service sector sent weaker signals, particularly in France and the non-core countries. In Italy, government bonds rallied after the League party was unable to unseat the current ruling party in critical regional elections, eliminating the risk of snap national elections and encouraging investors not to hold back from Italy’s government debt. The French economy averted the threat of US imposed export tariffs, only to feel the effects of the pension reform strikes and a decline in reported company inventories. In Germany, the economy experienced a tentative revival with the government raising its forecast for growth on the back of muted trade tensions. Britain departed the EU after 47 years of membership, ushering in a new era for the region.

EM
The year kicked off on a positive note for emerging market (EM) corporates, with the asset class benefiting from ongoing monetary policy easing, the ratification of the US/China phase 1 trade deal, and positive global economic data. However, sentiment turned more cautious towards the latter part of the month after the Chinese coronavirus outbreak and its unknown potential impact on the Chinese economy and the global economy, more broadly. Central banks continued their dovish stance with rate cuts from Turkey, Egypt, South Africa, Malaysia, and Argentina. Within the corporate universe, both the high yield and investment grade segments of the markets performed well. It was a record month in terms of primary EM issuance, with US$77bn coming to market, over half of which was from Asia. At the country level, Russian President, Vladimir Putin, proposed constitutional amendments and changes in leadership, appointing market-friendly Mikhail Mishustin as prime minister. Argentina continued negotiations with investors over its sovereign debt repayments, with President Fernandez announcing a deal would be reached by the end of March. China cut its reserve requirement ratio by 50bps, adding an estimated RMB800bn of liquidity into the system, while Purchasing Managers’ Index (PMI) data came in at 50.2, unchanged from December.