Blain’s Morning Porridge, August 2nd 2022 – Apple’s Bond was a critical moment: sell Euro, buy dollars!
“Yesterday the bird of night did sit, even at noon-day, upon the market place – hooting and shrieking.”
This morning: In bonds there is truth: Apple’s Jumbo $5.5 bln corporate bond deal hints of a firmer market to come. A clear divide between US Recovery and European Slowdown is increasingly apparent – a weaker Euro will further add to European problems.
Of all the signs and portents that drive the machinations of markets, perhaps the most significant yesterday was Apple tapping the corporate bond market for a 4 tranche $5.5 bln raise of AAA Bonds. In bonds there is truth….
It was a moment of tactical genius from the bookrunners, persuading Apple the time was ripe for a jumbo bond deal likely to set the whole market tone. The order book was over 4 times oversubscribed – hinting a large part of the bond market has a distinctly positive bull view on the US$ bonds and interest rates.
Yesterday I was commenting on how markets traditionally snooze through the summer and reopen in early September with a post-summer bond issue deluge – but that’s apparently moved forward! Apple was not the only name in the market. There is a growing US corporate bond calendar – Bloomberg say $30 bln set to issue this week! That will a great relief to US corporate treasurers who were beginning to panic over how they would refinance debt if the corporate debt market was closed due to rising interest rates.
The Apple deal shows the corporate bond market is very much open, and that’s a massively positive signal for the whole US economic outlook. (Remember it was a seizure in corporate short-term money markets and bonds that effectively triggered the liquidity crisis of 2007 that led to the GFC the following year!)
Apple has been quite open about using the proceeds to finance its stock buyback programme and dividends, which is basically what corporates will do when interest rates are so low its more effective to retire equity with debt and leverage up while not building new plant or hiring more workers. Many less sound, non-investment grade junk borrowers will be figuring out how to borrow more to push their stock price higher! (I hate stock buybacks! They distort the workings of capitalism.)
In early July – just before my summer break – I was warning about the risks of a poorer than expected US earnings season further denting business and market sentiment. Didn’t happen. Earnings came in better than expected.
I also warned how markets could turn from bear to bull very swiftly if the right set of circumstances concurred: a stronger than expected US economy, stronger earnings and a diminishing inflation threat. Sure enough, after the Fed hiked by 75 bp, the market took it as buy signal, reinforced by Jay Powell on the wires saying we were close to the natural interest rate… for which he took considerable stick.
What we now have is a very much decorrelated global economic outlook: a potentially resurgent US market and economy, more reasons to binge on the dollar versus an increasingly dismal European outlook. It will become a negative feedback loop for energy-strapped Europe – power will get progressively more expensive as the Euro continues to weaken, and further unwinds Europe’s incomplete union.
Markets are all about the narrative – and you can’t beat down a good story. In the second half of July, a US market recovery started to come together – the story selling itself as stocks staged their best month in years! The equity-punditry came out in force calling a new bull market and new highs before year end. Classic quote from a repressed bull: “When bad news is good news, and good news is rampant, time to buy”.
Over the last few days we’ve seen the US Bull narrative successively reinforced by:
- Economic numbers – from employment, manufacturing, to consumer spending – all come in stronger than expected, diminishing the likelihood the US is slipping into a real recession. (Technically 2 quarters of declining GDP means a recession is underway – but why look back! Officially it takes the National Bureau of Economic Research to say a recession is underway – and the market is too politically charged to accept that.)
- 10-year bond yields have fallen from 3.10 to 2.50%, on signs the inflation shock has been absorbed in manufacturing prices (the ISM report showed declining prices) and Fed comments hinting rate rises will be more constrained.
- An increasingly strong narrative that inflation resulting from short-term exogenous factors (energy, supply chains, etc), rather than economic fundamentals, should not be addressed solely by interest rate rises. The risks of higher interest rates trigger recession are too great.
Off course, and you knew there was a but coming… nothing is ever so simple. The bears point to thin summer markets reflected in low volumes and wild price swings. They say there are still risks still to be unwound from over-frothed markets, and a natural rate of interest is still be found after the years of ultra-low rate distortions.
The situation in Europe is far more… frightening..
The US faces the usual series of intangible market fears, wobbles and uncertainties. Normal stuff for any market watcher….. In contrast, there is nothing uncertain about the very real economic crisis facing Europe.
The economic GDP numbers in Europe have been more positive – but largely on the back of seasonal factors, and the fact Europeans know the Euro doesn’t go so far when they go abroad, thus it’s been a bumper holiday season in Spain, Italy and France. Consumer confidence is lower than during the worst of the Covid Crisis – when at least there was the illusion the European Union was united to find a solution. Now… not so much certainty Europe will still coalesce round a common solution.
When US manufacturing ISM prices are falling, hinting lower inflation, European PMIs (purchasing manager orders, a sign of anticipated demand) have crashed to peak pandemic levels hinting massive slowdown to come.
The very real issue is energy prices. As the Russian turn down supply – gas prices have spiked. Germany could tumble off a cliff. Energy security is in tatters. Energy cost hikes are scything through the whole economy. The economy has no idea how to cope with massive swinging cuts in power expected later this year. German retail sales have fallen nearly 9% y-o-y. Germans demand the heads of Central Bankers when inflation is low single digits – now its 8.5%!
Meanwhile… Italy is Italy. France is France. And S&P say: “Eurozone manufacturing is sinking into an increasingly steep slowdown, adding to the recession risk.”
Simple call… Sell Europe, Buy US. Oh.. you already did.
Five Things To Worry About This Morning:
Out of time, and back to the day job
Strategist – Shard Capital