Date: June 27, 2018
S&P Affirms U.S. Rating, Expects Last-Minute Debt Fixes to Continue
S&P Global Ratings affirmed the U.S.’s sovereign credit score at AA+, the assessor’s second-highest grade, citing the country’s “diversified and resilient economy” while noting the impact of ongoing political wrangling on public finances. S&P kept a stable outlook on the rating and said in a statement that it expects positive and negative factors to be “balanced” over the next two years. The current ranking already factors in the effect of American political divisions on the government’s ability to address public finance pressures, it said. “We expect that debates over funding the government and raising the debt ceiling will continue to be resolved at the last minute, as they have been in recent years,” S&P said. “We also expect the U.S.’s institutional checks and balances to contribute to stability and predictability in economic policies.” The ratings firm warned that while it assumed measures to address longer-term fiscal challenges will be enacted “over time,” a failure to do so could lead to a negative rating action. Conversely, it said the score could be raised if S&P sees “signs of more effective and proactive public policymaking.” S&P expects U.S. economic growth of about 3 percent this year and 2.5 percent in 2019. Treasuries were little changed after the S&P announcement Tuesday, with the 10-year yield holding steady at around 2.88 percent, while the dollar maintained its gains for the day versus major developed market peers. The U.S. has been rated AA+ since 2011, when S&P stripped the nation of its top AAA rating. The country currently carries top credit scores at both Moody’s Investors Service and Fitch Ratings.
U.S. Index Futures Tumble as U.S. Pledges Action Against Tariffs
U.S. stock index futures dropped along with European and Asian stocks amid deepening concerns over the impact of potential global trade restrictions as the U.S. vowed to take action against “unjustified tariffs”. Canada is said to be preparing new measures to prevent a potential flood of steel imports from global producers seeking to avoid U.S. tariffs. Futures on the S&P 500 sank 0.8 percent while contracts on the Dow Jones Industrial Average Index tumbled 0.9 percent and Nasdaq futures were down 1.2 percent. U.S. Trade Representative Robert Lighthizer said that “duties that have been announced on U.S. exports are completely without justification under international rules.” President Donald Trump signaled he may take a less confrontational path toward curbing Chinese investments in sensitive American technologies, potentially relying on a U.S. committee that scrutinizes foreign acquisitions for national security risks. China’s Ministry of Commerce said that it is paying close attention to developments and will evaluate the potential impact on Chinese companies, while Canada plans a combination of quotas and tariffs aimed at certain countries including China, following similar “safeguard” measures being considered by the European Union. In Europe, stocks reversed early gains, driven lower in part by the auto sector hitting its lowest level since September 2017 amid worries over trade tensions. Banks also fell as bond yields further slipped, with the U.S. 10-year yield hitting a one-week low of 2.85 percent.
Italian Consumer Confidence Rises, Manufacturing Morale Down
Italian consumer confidence jumped this month while manufacturing morale fell under the country’s new populist government. Household morale increased to 116.2 from a revised 113.9 last month. Prime Minister Giuseppe Conte’s coalition has promised tax cuts and spending increases that have appealed to ordinary Italians. The business gauge declined in June to 106.9 from a revised 107.6 the month before, statistics bureau Istat said on Wednesday in Rome. That was slightly below the median estimate of 107 in a Bloomberg survey of 13 analysts. “Domestic demand is likely to suffer less than other components such as exports from an economic slowdown in coming months,” said Andrea Montanino, chief economist at employers’ lobby Confindustria. That partly explains why consumers show more optimism than executives, he added. Confindustria will release later on Wednesday its new forecasts on economy and public finance this year and next. Istat’s confidence survey was conducted in the first half of this month. Italy’s new coalition government was sworn in to office on June 1, and has been seeking to square its populist rhetoric with the realities of a slow-growing economy and European Union rules. The economy expanded 0.3 percent in the first quarter of this year, the same as in the final three months of 2017. The country is forecast to turn in the worst growth pace among euro-area countries this year and next, according to the Brussels-based European Commission. The new Italian government and its most outspoken member, Interior Minister Matteo Salvini, have rattled financial markets with pledges to cut taxes on businesses and households while increasing income support for the poor. The yield on the Italian 10-year government bond has risen above 2.8 percent from 2.55 percent a week ago.
Asia Junk Bond Rout Divides Veterans on $121 Billion Market
Asian junk bonds have sold off amid defaults and concerns over refinancing risks, dividing veterans on where the $121 billion market is headed. Spreads on the region’s high-yield dollar notes have widened to the highest in nearly two years, according to a Bloomberg Barclays index. The threat of a trade war and rising interest rates have added to concerns after recent defaults by China Energy Reserve & Chemicals Group Co. and Hsin Chong Group Holdings Ltd. For investors like Lombard Odier (Singapore), the selloff has increased the securities’ appeal. “The yields on offer for Asia high-yield make them really attractive,” said Dhiraj Bajaj, portfolio manager at the firm. “When someone can get 7 to 8 percent in decent quality, it provides a strong proposition versus equities.” Lombard Odier expects default rates to stay low and has a stable outlook for Asian sovereigns, while good high-yield companies should be able to ride out the cycle, according to Bajaj. That sanguine view isn’t held by all. Australia & New Zealand Banking Group Ltd. expects Asia junk securities to trade at wider spreads as a wall of debt due for refinancing looms. The lack of a wide distribution for some of the bonds is also hurting the market, and there are few takers for small property companies or Chinese local government funding vehicles, according to Owen Gallimore, head of credit strategy at Australia & New Zealand Banking Group Ltd. “Unlike globally-sold investment grade bonds, Asia’s high-yield investor base remains very narrow and concentrated around Hong Kong,” said Gallimore.