With the number of recent leaks, the Trump Administration and Apple Inc could both seemingly give Thames Water a run for their money. The suspicion within the White house has now gone so far as to persuade Vice President Mike Pence to offer undergoing a lie detector test to prove he’s not the author of the anonymous New York Times piece. The scathing op-ed highlighted the “adults in the room” making a “quiet resistance” against Trump’s “amorality” and lack of “any discernible first principles that guide his decision making”; it publicised “the internal workings of a chaotic and divided administration and to defend the choice to nevertheless work within it” to further the “bright spots” of the administration’s accomplishments in “deregulation, historic tax reform”... The hype is almost enough for one to forget Trump faces the threat of Special Counsel Mueller’s investigation.
Last week Amazon.com Inc. came to the market with a USD16bn multi-tranche bond deal; proceeds of which are said to be used to fund the USD13.7bn Whole Foods Market Inc acquisition. Demand came in at USD 48bn (3x oversubscribed), just shy of Belarus’ nominal GDP! Appetite for such a deal was no surprise to the market as Amazon is afterall a household name and its stock is worth five times as much as it was just over 5 years ago; while the S&P has barely doubled. However, despite the apparent appeal of lending to the e-commerce giant, the bonds did not make it to our portfolios due to the relative unattractiveness at issue.
As eyes are on the US Fed minutes release later today, spare a thought for the Bank of England quietly celebrating (if you can call it that) a decade of dovishness. It may not feel like it has been that long but today marks a decade since the last interest rate rise for the UK. The 12 months prior to this (between 2006 and 2007) saw 5 hikes to a peak of 5.75% on the 5th July 2007. It wasn’t long before the subprime mortgage crisis contaminated global markets with the Bank of England cutting rates 3 times to settle at 5% for a while, only to see an international banking crisis ensue, plunging rates across the world.
Given the recent spat between Qatar and other Gulf states we’ve summarised some of our analysis of recent and ongoing events within a broader economic and geopolitical context. We continue to monitor the developments but signs increasingly point towards constructive dialogue between the states. Also motivations for a peaceful resolution exist on all sides including Western countries with vested energy and military interests in the region. Moreover, it’s important to consider the country’s risks both on a stand-alone basis but also relative to the market’s pricing - where it continues to offer stand-out value. Qatar’s 30-year bonds yield in excess of 4.4% for AA rated credit from what is the wealthiest country in the world; which according to our models are as much as 5 notches cheap.
This morning Moody’s downgraded China’s rating one notch from Aa3 to A1. This is still a high investment grade rating with Moody’s affirming, in their report, that China still has ‘very high’ ‘economic strength’ and ‘fiscal strength’ which in turn give the country a ‘high economic resiliency’ and ‘government financial strength’. The downgrade puts China’s rating in-line with Japan’s and aligns Moody’s assessment with Fitch’s (where China has never exceeded the current A+ level).
South Korea has been captained by a conservative president and government for a decade but that looks almost certain to change next week as those on the tip of the Korean Peninsular exercise their suffrage and demonstrate their displeasure with the recent scandals within the ‘Liberty Korea Party’. Even those who have recently lost faith in polls can reasonably expect Moon Jae-in of the ‘Democratic Party of Korea’ as a shoo-in next Tuesday; he now leads in the polls by double digits (44% vs closest rivals Ahn (23%) and Hong (13%)).
Yesterday, markets continued to move more in favour of risk-off assets in response to rising geopolitical worries and perhaps declining market optimism. At time of writing, yields are at 2017 lows for US Treasuries beyond 7-year maturities. Likewise gold returned to $1,275 nearing November pre-Trump election levels, the Japanese yen dipped back below 110 to the US dollar, and Brent crude furthered its rally to the $56 level having hovered at for most of the first quarter of 2017.
As regular readers are aware we favour investment grade bonds which we deem are ‘undervalued’; thus providing attractive risk-adjusted expected returns and sufficient credit notch cushion; against any unforeseen events. We also tend to favour quasi-sovereign holdings, which are broadly state-owned, thus strategically important to the government, and trade on spreads much wider than the sovereign curve. To this effect our current exposure to sovereign and quasi-sovereign across our portfolios stands at ~80% and above.
Earlier this week Al-Qabas newspaper reported that Kuwait is looking to abolish public subsidies on, for example, water, electricity and fuel by 2020. It is estimated that these subsidies along with fiscal support account for ~USD3bn, so roughly 5% of forecasted spending in the current fiscal budget. In September the government partially lifted subsidies, with some fuel prices pushed up by as much at 83%; regular gas is still at a lowly USD 0.28 per litre!
The summer markets are still with us as focus moves on to Friday's US non-farm payroll (NFP) release; now that Janet Yellen’s Jackson Hole testimony is behind us. Following her comments at the back-end of last week, the market is divided on the timing of the next Fed rate hike. The probability of a hike at the next meeting on September 21st has risen from almost zero following the Brexit vote to 36% today, down from 42% on Friday afternoon following, what some might call, more hawkish comments from the Fed chair. In the run up to Friday’s NFP data a further 5 Fed members are speaking which could add some volatility in the summer time’s less liquid market.
Taking advantage of record low borrowing costs, Microsoft launched one of the largest corporate bond deals on record; the seven tranche issue was worth USD19.75bn. Raised to fund its USD26bn acquisition of LinkedIn, the deal was over 2.5 times oversubscribed as investors continue their hunt for yield. The 10-year tranche for example was issued at 90bps above the benchmark UST, at 2.24%.
The AAA rated bonds offered “attractive” yields above USTs, especially at the long-end; so much so that the announcement of the deal actually moved Treasury yields higher on Monday, from the multi-week low levels on Friday. Microsoft is one of only two US non-financial companies which rating agency Standard and Poor’s rates triple A; the other being Johnson and Johnson.
After two years of El Nino drought, the India Meteorological Department (IMD) has predicted that this year’s monsoon will be fruitful, saying last week that precipitation between June and September will be ~106% of the long-term average. However, over the last 20 years, the IMD have only successfully predicted the chance of rainfall on 5 occasions. With over half of the labour force employed within the the agriculture sector and around 60% of the nation’s farmland reliant on rainfall, these predictions are hugely important. Poor rainfall and extended drought have devastating effects on agricultural production and thus a disproportionate effect on the poor.
After a couple weeks of hawkish comments from Fed members, Fed Chair Yellen stepped out for the first time since the last FOMC meeting mid-month and remained true to herself; maintaining her dovish credentials. A cautious approach in adjusting policy was the theme of her speech which she delivered at the Economic Club of New York yesterday. She highlighted that a cautious stance is “warranted because, with the federal funds rate so low, the FOMC's ability to use conventional monetary policy to respond to economic disturbances is asymmetric”. Like us, she noted that domestic inflation is “somewhat more uncertain” adding that although there have been signs of pick-up, US economic indicators remain “somewhat mixed”. With increasing global uncertainty, Yellen even discussed the central bank’s “considerable scope” to ease if the economy falters, “we used them effectively to strengthen the recovery from the Great Recession” and would do so again, adding that “only a modest degree of additional stimulus” can be provided.
With the British Government's continuing inability to make a decision on airport expansion in the south-east of England, Manchester Airport has not been slow to see this as a window of opportunity. Being one of only two British airports with 2 runways, the other being Heathrow, and with a catchment of 22 million people within 2 hours travel time (which equates to a third of the UK population), the airport achieved a rolling 12-month passenger tally above 23 million for the first time in its 77-year history. Its Managing Director Ken O’Toole said in statement “With no new runway capacity coming into the southeast in the next 15 years, if ever, Manchester is now the focus for growth,” adding “We’ll reach 25 million passengers in the short term, and we think the airport has the potential to get into the mid 30 million by the late 2020s or early 2030s.”