Sunday, 22 July 2018

On market contagion

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Anthony Peters sees equities sneezing on everything.

Quarter end draws closer and in most markets today will be the last trading day of the period. Hopes for a calm market with an underlying, index related bid with which some of us went into Monday were rapidly shot to pieces and by the end of the day, while speaking to the chief investment strategist at a London firm, we were left wondering where any significant bid was going to be coming from.

European equity indices broadly – there are always exceptions – lost 2-2½% on Monday. The S&P 500 followed suit at -2.57% with the Dow doing a tad better at -1.92% but that was offset by the Nasdaq at -3.04%. As we came into the office in London this morning, the main Asian markets were following through in spades with the Nikkei off by nearly 700 points or just under 4%, the Hang Seng off by 3¼% and Oz by 3½%. Ironically, though in the red, the Chinese mainland indices are not doing so badly with losses of less than 2%.

There remains a chance that equities might still catch that technical bid but there seems to simply be a dearth of fundamental buyers.

Market morale has been more than just a bit patchy of late and thanks to “Moff” of J Palmer & Sons in Melbourne whom I shall be calling on next week for pointing out the speeches yesterday of San Francisco Federal Reserve President John Williams and New York Fed President William Dudley who happily contrived to make things worse by both freely expressing their views but who, in doing so, demonstrated no sense of urgency when it came to calming very edgy markets. I guess that, in the age of Twitter, discretion being the greater part of valour no longer counts for anything, not even at FOMC level.

To say that credit markets were in free-fall might be a bit strong as volumes were too low to talk of anything falling but it was clear that dealers were happy to bid to miss. We are still in the midst of the roll from the iTraxx S23s into S24s but I shall briefly stick with the S23 as a reference point. The Xover widened a very chunky 27bp to 389¾bp. In context, that is over 100bp wider in its six months as benchmark. As recently as mid-July, it was still trading at 260 bp.

High yield credit is on the rack. Bond investors have used it as a proxy to get long the equity market – they’ll tell you that’s not the case but, even if they don’t see it themselves, it is – and as equity markets sneeze, high yield catches a cold.

Glecore gore

Talking of racks, my old sparring partner, Glencore, had a horrid, horrid day. My dislike for the idea of the old Marc Rich traders at Glencore taking over Xstrata is no secret and I never understood the initial enthusiasm although it’s clear that the fee pool on offer from the IPO if Glencore and then its merger with Xstrata would have had M&A bankers sell their own children and throw in the granny for free, if needed. I saw no more merit in the trade than I would see in an estate agent (realtor) taking over a property developer or a car dealership buying an automaker.

Anyhow, Glencore stock and bonds got flattened; that’s what happens when you try to sell a dog with flees into a market which wouldn’t even step up to embrace a Crufts champion. So bonds dropped between nine and thirteen points with the 16s closing 85/95 and the 42s at 62/65 forming an elegantly inverted credit curve. We all know what that means but just in case you don’t, that indicates that the market is beginning to price in a probability rather than a possibility of default. The stock closed at 68.62p, down from 97.22p on Friday and from 126.00p the Friday before.

Late in the European day I exchanged notes with a Bloomberg stringer in New York who had referred to Glencore as being run by the billionaire Ivan Glasenberg and pointed out to him that I wasn’t all that sure that Glasenberg still is a billionaire. He later changed his wording. What he did add though, is that the Qatar Fund, a significant shareholder in both Glencore and VW, has taken a US$5.9bn bath on the two holdings in just 10 days.

Glencore will now be struggling to refinance itself and although it has assets it can sell, many potential buyers might hold off in the hope that they will be able to acquire those assets at a more favourable price from the liquidators. The vultures are circling. That said, a rapid de-consolidation – that means a splitting of the Xstrata assets from the Glencore business – might save the day. Infamy, infamy, they’ve got it in for me!

Prospects for today aren’t great. The good news which a strong Case-Shiller might bring us when the US could easily be swamped by the grim sentiment although investors are by nature optimistic creatures and bottom fishers are already sharpening their pencils. A Dax below 9,500 points, a FTSE below 6,000 points and a Dow teetering at 16,000 points might just prove irresistible.

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