China’s high-yield bond crisis continued last week, with yields on the ICE BofA index of Chinese high-yield US dollar bonds moving above 18% at one stage last week, the highest level in a decade. Further nervousness was caused by one real-estate issuer’s decision not to reimburse USD200 mn of offshore bonds–despite having USD4 bn in cash on its balance sheet. This suggests the company in question favours domestic investors and its own cash needs over its offshore creditors. Investors are now scrutinising other Chinese issuers with special attention to Evergrande, which is well through a 30-day grace period before its offshore investors can declare a default. Elsewhere in Asia, although subsequently batted away, hints from Japan’s new prime minister of a rise in capital-gains taxes rattled Japanese equities. Ratings agency Moody’s raised India’s credit rating from negative to stable, while the Polish, and Peruvian (as well as New Zealand) central banks joined a growing number of their peers that are raising interest rates. Rate tightening to fight inflation and protect their currencies together with higher yields mean we are positive on emerging-market currencies.
The US Senate voted last week to temporarily raise the federal debt limit until the beginning of December, thereby avoiding a government shutdown, to investors’ relief. Although the debt-ceiling issue could flare up again and although Friday’s US jobs report contained plenty of food for thought (job growth was weak for the second consecutive month and wage pressure grew), we do not expect the Federal Reserve to change its plans for tapering, which we believe will be formally announced in November. Meanwhile, freight costs from China to the US are finally showing signs of easing, with a halving of the spot rate between September and October. This holds out the hope that we have seen the peak in global transportation prices, helping to relieve some current global supply issues.
Nevertheless, energy supply problems, particularly supplies of natural gas, continue to fester. But here too, there were inklings of positive news. Comments from Vladimir Putin that Russia could boost its gas supplies in order to avoid an energy crisis (while at the same time putting Russia back at the centre of European geopolitics) helped relieve some pressure on European gas prices, while the Chinese authorities’ move to order more coal production could help deal with the energy rationing that has been affecting factories in the world’s second-biggest economy. Nevertheless, it may take time for the latest announcements to have an effect. The Q3 reporting season about to start will show how rising input prices and bottlenecks are impacting companies’ margins. While constructive in the medium term, we remain neutral on global equities as we wait for more clarity on the road ahead.
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