Monthly Review : September 2019

Monthly Review : September 2019



United States

The US trade deficit narrowed to USD 54 billion in July, from USD 55.5 billion in June.  However it was higher than a year earlier and the deficit in the first seven months of 2019 climbed to a record USD 374 billion.  There was a modest improvement in its terms of trade with China – the deficit fell to USD 29.6 billion.  Whilst the 2-10 year curve inversion and lower long bond yields historically flash warning signs of recession, the benefits for the housing market are strong.  The average 30-year fixed mortgage rate at Freddie Mac has dropped to 3.6%, from a peak of 4.9% last November, and pending new home sales rose 1.6% in August.


Euro area

German manufacturing activity slumped to its weakest level since 2009 according to IHS Markit.  The PMI for manufacturing fell to 41.4 in September, pointing to a deep contraction and amplified concerns that Germany is in a technical recession.  On a brighter note, Eurozone wages increased at their fastest rate in decade.  Nominal wages across the region rose 2.7% in the second quarter, led by a 3.2% increase in Germany.  Tighter labour markets, the unemployment rate has fallen to 7.5%, is forcing companies to offer higher salaries to attract workers.



United Kingdom

Wage growth in the UK accelerated at the fastest pace in more than a decade according to the Office for National Statistics.  Average weekly earnings in the three months to July grew 4% versus the same period a year earlier and in real terms, once adjusted for inflation, they exceeded 2% for this first time in almost four years.  Despite the increased spending power, and the number of people in work at a record high 32.8 million, consumers have been hesitant to spend.  The volume of retail sales fell 0.2% in August from a month earlier with traditional bricks and mortar outlets faring the worst – department stores sales fell 1.3%.




Swiss GDP grew 0.3% in the second quarter, down from 0.4% in Q1 2019.  Global trade tensions and the economic slump in neighbouring Germany held back investment in capital goods and safe haven flows pushed the franc to a two-year high versus the euro, hurting the price competitiveness of exports.  This was reflected in its August manufacturing PMI which moved higher from July to 47.2 but still pointed to contraction.  Annual inflation in August was unchanged at 0.3%, the lowest level since July 2017, and the seasonally adjusted unemployment rate also held steady at 2.3%.



Central banks:


Federal Reserve (next meeting November 30th)

The Federal Reserve, as expected, cut interest rates by 25 basis points.  However, the decision to cut for a second time this year was not unanimous – two members of the FOMC voted against a cut and another wanted a larger one.   Policymakers are walking a tightrope.  On one hand, unemployment is at its lowest in five decades and consumer spending, which makes up more than two-thirds of the economy, is robust. On the other, the outlook is clouded by the trade war.  The decision drew the ire of President Trump who fired a broadside via Twitter – “Jay Powell and the Federal Reserve Fail Again. No ‘guts,’ no sense, no vision!”



European Central Bank (next meeting: November 24th)

The ECB announced a fresh package of stimulus at Mario Draghi’s last meeting in charge in a bid to revive the economy and generate some upward inflationary pressures.  It cut the deposit rate further into negative territory and restarted its asset purchase programme – EUR 20 billion of bonds every month for an indefinite period.  Mario Draghi, however, acknowledged that there are diminishing returns to the emergency monetary policy measures and stressed “now is the time for fiscal policy to take charge” via tax cuts and more spending.



Bank of England (next meeting November 7th)

The Monetary Policy Committee voted unanimously to leave the base rate unchanged at 0.75% in September.  Its hands are tied for now by the uncertainty over Brexit and the MPC reiterated in a no-deal scenario, interest rate changes “would not be automatic and could be in either direction”.  The search for a new Governor continues and no clear frontrunner has emerged.  Should an election be held before the end of the year, it is thought the incumbent Mark Carney will be asked to extend his term beyond 31 January to give the new government time to make the appointment.



Swiss National Bank (next meeting: December 12th)

The SNB held its policy rate unchanged at -0.75% in September but revised both its GDP and inflation forecasts significantly lower due to  weaker growth prospects abroad and the “highly valued” Swiss Franc.  The dovish revisions, however, suggest more accommodative policy is not far away.  The SNB also offered an olive branch to the Swiss Bankers Association who argue negative interest rates will “result in bubbles and damage the competitiveness of the Swiss economy.”  It will adjust its tiering system to exempt more deposits from negative rates.


Market issues:


  • The fog of Brexit thickened. The UK Supreme Court ruled the prorogation of Parliament was unlawful and opposition parties voted against holding an early general election.  The government reiterated its determination for the UK to leave the EU on 31st October, with or without a deal, but MPs passed a bill which requires Prime Minister Boris Johnson to ask for an extension of the Brexit deadline to 31st January 2020 should a deal be elusive.  UK assets, especially the pound, remain in thrall to the saga.
  • Brent crude prices posted the biggest one day percentage gain since the Iraqi invasion of Kuwait in 1990 after missiles and drones attacked Saudi Arabia’s oil industry. The world’s largest oil processing facility at Abqaiq and the Khurais oil field were hit, taking out more than half of the kingdom’s production.  Prices eased off afterwards as state oil producer Saudi Aramco tapped inventories and ramped up production elsewhere to cover the outage.
  • Argentina, on the verge of another default, imposed capital controls in an effort to halt the rout of its foreign currency reserves and the peso. Institutions now require authorization from the central bank to buy Dollars and individuals are restricted to purchases of USD 10,000 a month.  The controls prompted MSCI to demote Argentina from emerging to frontier market status.  President Macri also asked creditors, including the IMF and foreign investors, for more time to pay more than USD 100 billion of debts but formal negotiations are on hold until after October’s elections.  Macri lost heavily to Peronist candidate Alberto Fernandez in the primary polls and there is no indication the gap has narrowed.


Credit Markets:


  • Thomas Cook, the travel company founded in 1841, ceased trading after its creditors and shareholders failed to reach an agreement on a rescue package. Thomas Cook had secured a GBP 900 million deal led by China’s Fosun in August but could not raise an additional GBP 200 million demanded by its banks – a last minute plea for funds from the UK government was turned down.  Around 600,000 of its customers were overseas at the time of collapse and more than 20,000 jobs worldwide are at risk.  Its bonds now trade at around 5 per cent of face value.
  • Ford’s credit rating was downgraded to junk (Ba1) by Moody’s on concerns that cash flow and profit margins will remain weak over the next two years despite the deep rooted overhaul pledged by new CEO Jim Hackett. It has struggled in China where it lost USD 1.5 billion last year, mainly due to a lack of new products to refresh its vehicle range, and globally it faces headwinds from the trend towards electrification, autonomous driving and stricter emission regulations.
  • AB InBev had another go at the Hong Kong IPO of a minority stake in its Asia-Pacific business, Budweiser APAC, just two months after its first attempt failed. This time, a smaller share sale and lower price helped to fill the order book.  The IPO, the world’s second largest this year after Uber, raised USD 5 billion and is another step forward in cutting its debt pile which surged beyond USD 100 billion post the acquisition of SABMiller in 2016.  AB InBev also raised USD 11 billion by selling its Australian beer business to Japan’s Asahi in August.
  • Uber Technologies sold USD 1.2 billion of 8-year bonds in its first debt offering as a public company to part fund its USD 3.1 billion purchase of Careem, a rival ride-hailing app operating in the Middle East, North Africa and South Asia. Uber had initially planned to raise USD 750 million from the sale but upsized the deal due to strong investor interest.  The new bonds are rated B3 and CCC+ by Moody’s and Standard & Poor’s respectively, and were priced at a yield of 7.5%.  Uber is also expected to issue convertible bonds early next year to raise additional funds for the acquisition.
  • Petróleos Mexicanos bonds gained after the government injected USD 5 billion into the state oil company to help it avoid another downgrade to junk – Pemex has a negative outlook at the three major credit rating agencies. The intervention came ahead of a USD 7.5 billion sale of bonds, which attracted orders of more than USD 37 billion, and proceeds will be used to buy back a number of short-dated bonds.
  • Chesapeake Energy’s issuer rating was cut from B+ to SD (selective default) by Standard & Poor’s after it exchanged some of its bonds and convertible preferred stock for equity at a discount to face value. The transaction, which represents 15% of its equity, will reduce annual interest and preferred dividend payments by around USD 35 million.  S&P also warned that due to significant near-term bond maturities and high debt levels, Chesapeake will outspend operating cash flows over at least the next two years.
  • Metro Bank, the UK challenger bank, pulled a GBP 200 million bond sale, triggering a 20 per cent fall in its share price. The bank was seeking to issue loss-absorbing senior non-preferred bonds to meet regulatory requirements but the offer of a 7.5% yield was not enough to attract sufficient demand from investors.  Some may have been deterred by a disclosure in the prospectus revealing that the FCA is investigating some senior managers for their role in an accounting error which substantially under reported the risk of its loan book.


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