Date: July 3, 2018
Investment-Grade Bond Investors Brace for a Rising Tide of M&A
The U.S. corporate bond market is bracing for a flood of supply from mergers and acquisitions in the second half of the year. Borrowers will have to pay up after a first-half deluge helped wreck spreads. Sales of investment-grade bonds tied to M&A surged by 50 percent to $154 billion in the first half compared with the same period last year, driven by a slew of deals that included CVS Health Corp., Walmart Inc. and Bayer AG, according to data compiled by Bloomberg. That pickup in supply helped push spreads in the secondary market to the highest level in a year and a half. The trend could continue for the next six months. There’s more than $1 trillion in pending M&A deals, according to Bloomberg Intelligence. Walt Disney Co. is said to be readying a $36 billion bridge loan to potentially buy Twenty-First Century Fox Inc. Conagra Brands Inc. agreed to buy Pinnacle Foods Inc., Microsoft Corp. is buying GitHub Inc., and the list goes on. “There are some deals in the pipeline that people are watching very closely and that could certainly be impactful for the market,” said Jim Caron, a senior fixed-income portfolio manager at Morgan Stanley Investment Management. “Supply has been sort of the reason why spreads have been widening. That could be something that people get a little bit concerned about.” Companies started showing more interest in M&A in June when AT&T won an antitrust ruling allowing the takeover of Time Warner Inc. Within a week, Bayer came forward with a $15 billion bond deal to finance its acquisition of Monsanto and two days later Walmart sold $16 billion to fund a stake in Flipkart. The supply helped boost the benchmark index of high-grade corporate bond spreads to the highest level since December 2016. Even if more M&A adds to supply in the second half, there’s still a chance it won’t top the first half and add as much upward pressure on spreads.
Trade War Hangs Over U.S. Job Market Set for More Gains in June
President Donald Trump’s global trade war is posing a growing risk to the kind of robust job gains that the U.S. probably enjoyed again in June. Data due Friday from the Labor Department cover the first weeks since the U.S. imposed steel and aluminum tariffs on some of its largest trading partners, with financial markets whipsawing on the latest trade developments and likely becoming more sensitive to disappointing economic figures. What’s more, companies including motorcycle maker Harley-Davidson Inc. and auto manufacturer General Motors Co. have warned of potential U.S. job losses due to Trump’s trade policies or retaliatory levies. While analysts say June is too early to see significant fallout from trade tensions in the employment data, such forces are starting to emerge as a possible counterweight to the tax cuts buoying corporate investment and consumer spending — and boosting a labor market that’s shown little sign of slowing. Yet anecdotal worries are mounting, with a U.S. factory survey on Monday showing executives “overwhelmingly concerned” about tariffs and two regional Federal Reserve presidents warning last week that a trade war is increasingly weighing on businesses and adding risks to the outlook. “For now, the underlying fundamentals are strong enough and the stimulus the economy is receiving from fiscal policy is large enough to outweigh the uncertainty from protectionism,” said Michael Gapen, chief U.S. economist at Barclays Plc in New York. If there’s a marked slowdown in employment, particularly in manufacturing jobs, it would indicate that “the business sector may have gone on hold with its investment and hiring plans given the noise around protectionism.” Even so, Gapen said he expects any such impact to show in July at the earliest.
U.K. Manufacturing Growth Holds Up in June After Subdued Quarter
U.K. manufacturing growth held steady in June, providing some modestly good news at the end of the worst quarter for the sector since the end of 2016. IHS Markit’s Purchasing Managers Index for the industry stood at 54.4 in June, up from a revised 54.3 in May and beating economists’ estimates for a drop. The average reading for the second quarter as a whole was 54.2. The survey showed business optimism dropped to a seven-month low last month, amid concerns about possible trade tariffs, the exchange rate and Brexit. Firms also flagged an increase in input costs and raw material shortages, which may jeopardize growth further. The pound stayed weaker after the release Monday, trading 0.3 percent lower at $1.3173 as of 9:56 a.m. London time. “With industry potentially stuck in the doldrums, the U.K. economy will need to look to other sectors if GDP growth is to match expectations in the latter half of the year,” said Rob Dobson, director at IHS Markit. The quarterly average suggests that U.K. growth may not see a significant bounce-back from the first quarter, when the economy expanded at a sluggish 0.2 percent. Such an outcome would complicate the case for Bank of England policy makers, who say that more interest-rate hikes are needed to control inflation. Officials voted 6-3 to hold rates last month, with most content to see how data evolved before increasing borrowing costs again. Investors, who are currently pricing in about a 65 percent chance of a BOE increase in August, will get more information on the health of the economy later this week, when Markit publishes similar indexes for the U.K.’s construction and dominant services sector. July’s readings will then be released in the week of the BOE’s decision.
China’s Stocks Stabilize With Yuan Amid Signs of Intervention
China’s stocks clawed back losses in the last hour of trading and the yuan erased its drop after sinking through a key level, with unexpected comments on the currency from the central bank stoking speculation the authorities are stepping up efforts to stem a rout in the market. The Shanghai Composite Index added 0.4 percent at the close after earlier plunging as much as 1.9 percent. The yuan climbed 0.3 percent after earlier sliding through 6.7 per dollar, where traders and analysts had expected intervention from the central bank. Banks and insurers led the equity rebound in Shanghai, which came after shares plumbed a new two-year low to approach levels last seen during panic selling in early 2016. “It looks like national team buying,” said Steven Leung, Uob Kay Hian (Hong Kong) Ltd. executive director in Hong Kong, referring to state-backed funds. “Also, the declines were too much, so there should be some bargain hunting.” The national team have previously stepped in to stabilize the market during routs, or to lift sentiment ahead of important political events. Such fund buying had appeared absent as the Shanghai gauge fell into a bear market last month. People’s Bank of China Governor Yi Gang also helped to soothe rattled nerves on Tuesday, reiterating that China will keep the currency stable at an equilibrium level. That, and comments by another PBOC official earlier in the day, are the first clear statement on the currency by the central bank since the yuan slump intensified. Worries that a trade dispute with the U.S. will damage an economy already struggling with the effects of a government deleveraging campaign have sent Chinese markets into a tailspin, helping erase $2 trillion from the value of stocks since a January peak. The yuan’s weakness since mid-June, a period in which it’s been the world’s worst-performing major currency, intensified the selloff, which weighed on developing nation assets globally.