A summary of the seven major events that we must consider in relation to the current credit cycle, especially as it pertains to the Cash credit markets, are:
- Escalation of the Trade War with China On August 1, 2019 citing a lack of progress on trade talks, the United States announced that it would impose tariffs covering all imports from China by the end of the year. The United States also labeled China a “currency manipulator,” and later in the month President Trump “ordered” US companies to “start looking for an alternative to China.”
- Weakening Economic Data Real-time economic indicators such as global purchasing manager’s indices (PMIs) and trade data indicate that global growth is likely to decelerate further from its 2018 level. Global manufacturing is now in recession.
- Government Bond Yields Plummet Trade war escalation and weakening macroeconomic data prints triggered a precipitous drop in US Treasury bond (and global government bond) yields, further inverting the US yield curve at various tenors and stirring concerns about yield curve signals as it pertains to a possible recession.
- Global Central Banks Respond to Slower Growth Nineteen global central banks have eased policy since the fourth quarter of 2018 and it is widely expected that this number will grow.
- Repo Chaos In mid-September the US repurchase agreement (repo) markets were exceptionally volatile as a combination of factors reduced the amount of cash available to fund securities positions, prompting the Federal Reserve (Fed) to inject liquidity via open market operations on successive days.
- Oil Price Spike Also in mid-September, following an attack on critical oil infrastructure in Saudi Arabia, oil prices spiked (+15% one day price jump for WTI).
- Record US Investment Grade Bond Issuance Despite a general increase in global and/or US recession fears, during the first two weeks of September a record amount of investment grade bonds were issued. Money is pouring into the investment grade market and issuers/companies are happy to take it.