Monthly Review : May 2019

Monthly Review : May 2019



United States

Trade tensions resurfaced this month, with the US raising tariffs on USD 200bln worth of Chinese made goods. China retaliated by raising tariffs on USD 60bln of US items and the renewed pressure caused stock markets to sell off. Adding to the market worries, the US President issued an executive order banning any technology which poses a threat to national security. The move potentially bans US companies from using equipment made by the major Chinese technology company Huawei.


Euro area

Consumer confidence reached a 7 month high in May, continuing its modest upward trend and indicating consumer spending might continue to sustain modest GDP growth. Industrial production numbers released last month also showed that Germany’s industrial output rose in March, in contrast with rather pessimistic PMI survey numbers released earlier this year.


United Kingdom

The British Pound was considerably weaker this month as Theresa May faced the prospect another defeat in parliament and lost the support of her own MPs for failing to deliver Brexit which ultimately forced her to announce her resignation. Despite the political turmoil, the economy seems to remain stable with the unemployment rate continuing to fall, reaching its lowest rate since 1974, and inflation is slightly above the central bank’s target rate.



In its biannual outlook for the world economy, the OECD lowered its growth forecast for Switzerland for the next two years. After a strong 2018 in which the economy grew 2.5%, the Paris based institution estimates GDP will grow 1% in 2019 and 1.5% in 2020. The Swiss manufacturing Purchasing Managers Index fell to 48.5, the lowest in almost four years, and below the 50 level which usually indicates whether an economy is contracting or expanding.


Central banks:


Federal Reserve (next meeting: June 19th)

In a widely expected move, the Federal Reserve held interest rates steady in May. The statement emphasized again that the committee will be patient as it determines what future adjustments to the target range. Jerome Powell, who had been under strong criticism from Donald for not doing enough to support the US economy, said the current policy is “appropriate right now” and that the FOMC did not see a strong case to move rates in either direction.


European Central Bank (next meeting: June 6th)

Minutes for the European Central Bank’s April meeting revealed that inflation in the Eurozone “remained uncomfortably below the Governing Council’s inflation aim and market-based inflation expectations had receded, while the projected inflation convergence had been repeatedly delayed”. Minutes also showed that policy makers are somewhat less confident about their baseline scenario, which predicts a return to solid growth in H2 and that the range of other possible outcomes has now widened.


Bank of England (next meeting: June 20th)

Inflation climbed back to 2.1% last month, 0.1 percentage point above the Bank of England’s target. The upward move was due to high energy and transport prices. Earlier in the month, after the Monetary Policy Committee left interest rates unchanged, Mark Carney warned the market was probably underestimating the likelihood of a rate hike.


Swiss National Bank (next meeting: June 13th)

CHF strengthened in May, erasing most of April’s losses. The continued uncertainties around the trade war made the Swiss Franc attractive in the eyes of investors looking for a safe haven. SNB board members reiterated this month their willingness to intervene in the currency markets should the CHF reach high levels. A SEC filing by the SNB showed that its holdings of US stocks reached USD 91bln, with nearly 20% invested in the technology sector.


Market issues:


  • In response to the tightening of US economic sanctions last month, Iran threatened not to follow its commitments to the 2015 nuclear deal. This caused pressure to build up in the Gulf region as both sides ramped up their military capabilities.
  • Italian Government yields crept up as tensions mounted between the two ruling parties, fueling speculation that the fragile coalition could split.
  • Austria’s far-right Freedom Party (FPÖ), part of the governing coalition, was at the heart of a political scandal after a video emerged where Vice-Chancellor Heinz-Christian Strache was offering public contracts to a Russian campaign backer in 2017. The scandal resulted in Chancellor Sebastian Kurz being forced out of office by the main opposition parties.
  • Jamie’s Italian, a British restaurant chain, was the latest victim of the high street’s struggles. The chain owned by celebrity chef Jamie Oliver went into administration with 1’000 jobs being lost. The company closed a dozen of outlets last year and heavily restructured without success.
  • The outcome of the European elections saw the traditional parties lose ground as smaller, pro-Europe parties made large gains. Eurosceptic, far right nationalist formations advanced as well, but less than expected.
  • Boris Johnson is the frontrunner to succeed Theresa May as Prime Minister and leader of the Conservative Party according to odds makers. In the wake of the party’s disastrous performance in the European elections, candidates with a Eurosceptic stance are expected to appeal to its membership.  The former Brexit Secretary has already laid down his marker and the pound declined after he asserted “we will leave the EU on October 31, deal or no deal.  The way to get a good deal is to prepare for a no deal.”


Credit Markets:


  • Bristol Myers Squibb went ahead with a mammoth sale of USD 19bln of bonds. The deal was split across 9 tranches, with the longest maturity being a 30 year bond, and proceeds will be used to finance part of its USD 74bln Celgene acquisition.
  • A few days later IBM borrowed USD 20bln in what is the biggest corporate bond sale this year. The money raised will be used to fund its USD 34bln RedHat acquisition, its largest ever, which is expected to close in the second half of 2019.
  • High yield investor favorite Jaguar Land Rover’s credit spreads tightened last month as rumors emerged concerning a possible transaction between the British car maker and PSA, the French maker of Peugeot cars. The move was further reinforced by the company’s encouraging Q4 results.
  • Bonds issued by the troubled British travel company Thomas Cook plc tumbled after Citigroup reiterated its “sell” rating with a 0p price target, hence estimating its equity value to be zero. Moody’s downgraded its credit rating by another two notches to Caa2, fearing the liquidity position of the company might worsen in a challenging outlook for the 2019 summer season.
  • Lecta, the Spanish paper producer, missed earnings estimates and forecast its capex needs will increase dramatically as its mills need to be upgraded. Spreads widened significantly in the aftermath to reflect concerns that higher leverage will increase refinancing risks.
  • Rallye, the majority shareholder of French supermarket chain Casino, sought creditor protection in order to freeze its debt which stood at EUR 3.2bln and avoid bankruptcy for up to 18 months. S&P cut Casino’s rating from BB- to B, estimating the procedure creates significant event risks for Casino and its creditors.
  • Weatherford International, a US oilfield services provider, divulged it expected to file for Chapter 11. The company is seeking to restructure its debt burden which stands at USD 7.2bln.
  • PVH Corp, the owner of the Calvin Klein and Tommy Hilfiger brands, was upgraded to Baa3 and BBB- by Moody’s and Standard & Poor’s respectively to reflect its progress reducing debt, consistent operating performance and strong cash flow generation. Its bonds are now eligible to be held in investment grade mandates and ETFs.


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