Thursday, 30 July 2015

Credit - Mack the Knife

"Oh the shark has pretty teeth dear,
And he shows them pearly white
Just a jack-knife has Macheath dear
And he keeps it out of sight." - The Threepenny Opera 1954

Watching with interest the on-going carnage in the commodity space in conjunction with the current sell-off in US High Yield in true "convexity" fashion seeing significant fall in cash prices at a rapid pace spelling the return of strong deflationary forces, we reminded ourselves of Mack the Knife, a song composed by Kurt Weill with lyrics by Berthold Brecht for their music drama known as "The Threepenny Opera". Mack the Knife is a "moritat", a murder ballad, from mori meaning "deadly" and tat meaning "deed".  In a "moritat", the lyrics form a narrative describing the events of a murder. In our case, we are witnessing the "murder" of the commodity sphere. The murderer is indeed "Mack the Knife" aka the King Dollar also known as the Greenback in conjunction with US real interest rates swinging in positive territory hence the pressure on gold prices marking the return of the Gibson paradox which we mused about in our October 2013 conversation:
"When real interest rates are below 2%, then you get bull market in gold, but when you get positive real interest rates, which has been the case with the rally we saw in the 10 year US government bond getting close to 3% before receding, then of course, gold prices went down as a consequence of the interest rate impact." - Macronomics
Of course what is happening in the commodity space as well as in the Emerging Markets space is of no surprise to us given we mused on Emerging Markets risks in our conversation "The Tourist trap" back in September 2013:
"Of course if Bernanke is serious about initiating his "tap dancing" following "twist", this might spell out the "last tango" for Emerging Markets, and as we posited in a previous conversation (Singin' in the Rain), we might get another "dollar" crisis on our hands:
"Back in November 2011, we shared our concerns relating to a particular type of rogue wave three sisters that sank the Big Fitz - SS Edmund Fitzgerald, an analogy used by Grant Williams in one of John Mauldin's Outside the Box letter:"In fact we could go further into the analogy relating to the "three sisters" rogue waves that sank SS Edmund Fitzgerald - Big Fitz, given we are witnessing three sisters rogue waves in our European crisis, namely: Wave number 1 - Financial crisis Wave number 2 - Sovereign crisis Wave number 3 - Currency crisisIf the Fed starts draining liquidity, some "big whales" might turn up belly up. Could it be Chinese banks defaulting? Emerging Markets countries defaulting as well due to lack of access to US dollars?"
It might not be a "last tango" but, it looks more and more to us as "Murder ballad" à la Mack the Knife. Therefore, in this week's conversation we will look at the significant ripple effect "Mack the Knife" aka King Dollar is having on the EM tourists and carry players alike in his murderous ballad.

  • The return of Gibson's paradox and our "macro osmosis" theory are playing out
  • Hypertonic surrounding in Emerging Markets prevents them from stemming capital outflows - the case of China
  • High Yield and the scary CCC credit canary
  • For High Yield, default matters particularly with contagion risk from commodity
  • EM credit spreads and oil prices are highly correlated
  • Final chart: Big gap between debt and equity

  • The return of Gibson's paradox and our "macro osmosis" theory are playing out
While we won't bother going into much the details of Alfred Herbert Gibson's 1923 theory of the negative correlation between gold prices and real interest rates, we will simply look at the relationship of the return of Gibson's paradox with an illustration provided by Barclays from their most recent Commodities Weekly note from the 27th of July entitled "The collapse continues":
"Gold as a currency: Macro headwinds
Gold can be viewed as a currency and its price is affected by three main factors: the real interest rate, US dollar strength, and safe-haven demand. We believe that the real interest rate is the most important macro factor for gold prices. Figure 1 shows that, empirically, the US real rate has been the main driver for gold prices moves in recent years; while academic papers (Barsky, Summers, 1988) have given theoretical support. 

We are near the beginning of the rate raising cycle and our economists expect the Federal Reserve to have first rate hike in September. The rate hike expectation is likely to continue weigh on gold prices.
Gold is unlikely to gain any support from the dollar or safe-haven demand either, in our view. Our FX team continues to think that the dollar will strengthen (Global FX Quarterly: In the dollar we trust , June 2015), which is negative for gold. Two main risk events, the Greek crisis and the Chinese stock rout, have entered a calmer phase, implying limited safe-haven demand.
Gold as a commodity: Where does the gold go?
Monday’s sell off follows lower-than-expected Chinese central bank purchases data, which turned people’s attention to the gold physical balance sheet. Figure 2 plots total fabrication demand against three main channels of physical gold supply: mine production, scrap, and central banks’ selling.

Global fabrication demand has declined the since mid 1990s and there is a sizable gap between physical supply and fabrication demand since 2000, even with central banks gradually becoming net buyers." - source Barclays
Real interest rate, US dollar strength have indeed been the "out-of sight" jack-knife of our Mack the Knife's murder of gold prices. That simple.

When it comes to the acceleration of flows out of Emerging Markets and growing pressure on their respective currencies, it is, we think a clear illustration of our "macro theory" of reverse osmosis playing as we have argued in our conversation "Osmotic pressure" back in August 2013:
"The effect of ZIRP has led to a "lower concentration of interest rates levels" in developed markets (negative interest rates). In an attempt to achieve higher yields, hot money rushed into Emerging Markets causing "swelling of returns" as the yield famine led investors seeking higher return, benefiting to that effect the nice high carry trade involved thanks to low bond volatility." - Macronomics, 24th of August 2013
The mechanical resonance of bond volatility in the bond market in 2013 (which accelerated again in 2015) started the biological process of the buildup in the "Osmotic pressure" we discussed at the time:
"In a normal "macro" osmosis process, the investors naturally move from an area of low solvency concentration (High Default Perceived Potential), through capital flows, to an area of high solvency concentration (Low Default Perceived Potential). The movement of the investor is driven to reduce the pressure from negative interest rates on returns by pouring capital on high yielding assets courtesy of low rates volatility and putting on significant carry trades, generating osmotic pressure and "positive asset correlations" in the process. Applying an external pressure to reverse the natural flow of capital with US rates moving back into positive real interest rates territory, thus, is reverse "macro" osmosis we think. Positive US real rates therefore lead to a hypertonic surrounding in our "macro" reverse osmosis process, therefore preventing Emerging Markets in stemming capital outflows at the moment." - Macronomics, August 2013.
More liquidity = greater economic instability once QE ends for Emerging Markets. If our theory is right and osmosis continues and becomes excessive the cell will eventually burst, in our case defaults for some over-exposed dollar debt corporates and sovereigns alike will spike.

  • Hypertonic surrounding in EM prevents them from stemming capital outflows - the case of China
A good illustration of our "reverse osmosis" and "hypertonic surrounding in our macro theory playing out in true Mack the Knife fashion has been China with the acceleration in capital outflows put forward by many pundits. 

Nota bene: Hypertonic
"Hypertonic refers to a greater concentration. In biology, a hypertonic solution is one with a higher concentration of solutes on the outside of the cell. When a cell is immersed into a hypertonic solution, the tendency is for water to flow out of the cell in order to balance the concentration of the solutes." - source Wikipedia
What we are seeing in true "biological" fashion is indeed tendency for capital outflows to flow out of an Emerging Market country in order to balance the concentration not of solutes, but in terms of "real interest rates" (US vs China). On that note we read with interest Bank of America Merrill Lynch's China in Focus note from the 29th of July entitled "Capital outflows: how to measure and what to watch":
"We estimate China’s capital outflows widened to US$92bn in 1H15 from US$30bn in 2014, and the pressure could continue in the near term. While some capital outflow is unlikely to harm China’s external position materially, careful liquidity management is required for growth and market stability. There is ample policy room for further RRR cuts and targeted liquidity injections, and we believe the PBoC will take necessary actions.
Capital outflows: how to measure and what to watch
Market concerns about China’s capital flight are on the rise. In our view, capital flow conditions are becoming more volatile in 2015, and outflow pressures could rise in 2H15. Externally, the likely Fed rate hike and continued USD strength could result in capital outflows from emerging economics including China. In China, relatively weak market confidence in CNY-denominated assets amid the recent stock market turmoil and talks of potential CNY-trade band widening may lead to bigger RMB depreciation expectations. Beyond the short term, with China’s more balanced but still positive current account and policymakers’ FX reform efforts towards a more flexible CNY and less FX intervention, a small deficit of capital and financial accounts could be the new norm for China.
Some capital outflow is unlikely to harm China’s external stability materially, due to China’s sustained current account surplus (~2.9% GDP in 2015), low foreign debt (15% 2015 GDP) and large FX reserves (US$3.7tn at end-2Q15).
However, it’s necessary for the PBoC to manage domestic liquidity condition carefully to avoid possible RMB liquidity drain when economic growth momentum is still soft. It has a big room to inject liquidity by cutting RRR, which is currently at around 18.0%, if capital outflow risks the stability of interbank liquidity and base money supply. Other measures may also be taken to improve liquidity and credit supply for the real economy such as medium term lending facility (MLF) and pledged supplementary lending (PSL). We expect the PBoC will continue opening up China’s capital account in a controlled and prudent manner to manage capital-flight risks.
Measuring capital outflows: US$92bn in 1H vs US$30bn in 2014
We estimate that capital outflow could be around US$102bn in 2Q. In 1H15, it could be US$92bn, widening from US$30bn in 2014. As such, the total capital outflow since the start of 2014 could be US$122bn, far lower than some of the popular estimates in the markets.
We take a simplified approach, described in “Estimating China’s capital flow and estimate”, 8 April 2014, to roughly estimate a “portfolio and other unexplained capital flow” to capture the “hot money” nature of some cross-border flows. In a nutshell, we take the change of the
FX purchase position and FX deposits as the aggregate inflow, deducting flows by trade surplus in both goods and services and net inflows of direct investment from the aggregate inflows, leaving the remainder as portfolio and unexplained capital flow. Moreover, we adjust for the impact of RMB international trade settlements.
Why some popular estimates exaggerate capital outflows
In comparison, a popular estimation method would be taking the difference of change in FX purchase position and current account balance and net FDI. However, as we pointed out in our previous reports, this measure could significantly exaggerate the magnitude of capital outflows when the market expects RMB depreciation. This is because: (1) it fails to take into account the impact of currency choices for trade settlement with RMB trade settlement facilities on FX purchase and FX reserves, which could in turn lead to overestimation of capital outflow. More foreign exporters would demand USD payment while foreign importers may pay for goods with RMB, resulting in lower FX purchases; and (2) it overlooks the increase in domestic banks and other institutions’ FX holdings, which will lead to a drop in FX purchases without capital flowing across the border.
Capital flow indications
To gauge capital flow momentum on a high-frequency basis, we could monitor the following two sets of data for some clues. First, we could track the trend of CNY/USD appreciation/depreciation expectations and USD strength. When CNY/USD depreciation expectation rises or USD strengthens, there will likely be more pressures on capital outflows if other macro factors remain relatively stable.
Second, RMB asset performances matter too. While a complete data set on cross-border portfolio investment is not available, we could watch net inflows/outflows under the Shanghai-HK stock connect for some indication of portfolio investment sentiment.
 - source Bank of America Merrill Lynch
Emerging Markets including China are in an hypertonic situation, therefore the tendency is for capital to flow out. In conjunction with capital outflows from exposed "macro tourists" playing the carry trade for too long, the recent price action in US High Yield and the convexity risk we warned about as well as the CCC bucket being the credit canary are all indicative of the murderous proficiency of "Mack the Knife" (King Dollar + positive real US interest rates).

  • High Yield and the scary CCC credit canary
Of course we were way in advance in sounding a warning on that subject in our conversation "The False Alarm" in October 2013 where we stated:
"If we take CCC Default Rate Cyclicality as an early indicative of a shorter credit cycle, then it is the rating bucket to watch going forward
Why the CCC bucket? Because there has been this time around a very high percentage of CCC rated issuers accessing the primary market in High Yield.
A rise in defaults would likely be the consequences of a deterioration in credit availability. Credit ratings are in fact a lagging indicator." - source Macronomics
We will re-iterate our 2013 advice for credit investors, watch CCC default rate going forward. Because it matters, more and more.

Our cause for concerns has been validated recently given the on-going sell-off in the US High Yield bond markets. On that subject we read with interest UBS's take in their Global Credit Comment from the 27th of July entitled "The scary reality":
"High yield: The scary reality
The current sell-off in US high yield bond market appears controlled based on the consistent but moderate declines in daily cash bond index prices, but underneath the hood several participants are characterizing the price action as carnage. At an index level the average HY bond has fallen about 2 points week-over-week, but index data is notoriously stale and lagging; there are numerous examples of issues down 5, 7 or 10 points on light volumes despite no direct exposure to commodity prices and no material firm specific news. In our view, recent market behavior has exposed several hidden fragilities in the market ecosystem.
First, too many investors were overweight heading into the sell-off, in particular in the energy complex. The plunge in oil and commodity prices following the Iran deal and Chinese demand fears has intensified the potential fundamental stress in resource related sectors, and this outcome was not anticipated by the consensus. Anecdotally we've heard several credit funds have raised cash balances, but there are two problems with this thesis: one, the rise is arguably structural as outflow risks rise in an environment of tighter monetary policy, rising credit risks and lackluster performance. Two, many of those who raised cash we believe added beta to continue producing above-benchmark returns and limit tracking error. This strategy fails in a decompression scenario where low quality and illiquid credit underperforms.
Second, the sensitivity of energy firms to oil prices is not linear anymore- at depressed levels what would be considered 'normal' levels of commodity price volatility can have outsized effects on fundamentals and market prices. Simply put, the risk symmetry in stressed sectors is to the downside for bondholders. The rub is central bank quantitative easing drove traditional investors seeking mid-to-high single digit yields out of investment grade/ crossover credit into high yield, loan and emerging market debt to satisfy yield bogeys. The problem, however, is some of the tourists underappreciate the exponential loss and mark-to-market functions for low quality high yield assets. As we have noted previously when the credit cycle turns annual triple C default rates can surge from 5% to 30% while average triple C prices can fall into the $40 - $50 range (versus $83 currently) - especially given expected recoveries average in the $20 - $25 context. The scary reality is those investors in triple Cs are seeking high single digit returns when they are likely to end up with negative total returns over the next several years (if our view of the credit cycle proves correct).
Third, the perceived illiquidity in the marketplace at present is due not only to seasonal and month-end effects as well as regulation; the phenomenon also has its roots in uncertainty bred on information gaps and asymmetry. It is well known that the overall HY market has doubled in size; sectors that witnessed more buoyant issuance in recent years like energy and metals mining have seen debt outstanding triple or quadruple. And the number of new names and issues has grown a commensurate amount. The reality is that resources in many segments of the market have not kept up.
Simply put, the growth of the credit markets have not been matched by the addition of research resources (e.g., credit analysts) in many of the silos. Global banks are an obvious example, but a quick graph of employee growth across US banks, brokers, asset managers and rating agency types illustrates the reality that some investors have not added the resources necessary to do the fundamental credit work for today's bloated HY market (Figure 1).
Admittedly employee growth is not shown for the HY credit businesses specifically; however, anecdotes are plentiful enough. For example, high yield managers with one energy analyst responsible for covering 200bn in debt outstanding across 300 issues, or total return funds that bought energy in Q1 which have no dedicated credit research team- only a couple credit PMs/ generalist analyst types.
This would not be a problem if street and rating agency resources were adequate. But they are simply not. The overwhelming majority has been swimming in the opposite direction; nearly all sell side analysts have been asked to cover more names with less support, and the dynamic is similar at rating agencies. In our view, this is a problem as the smaller issues pose more significant credit risks. For example, splitting the overall HY index universe by issuer size (greater, less than 1bn in total debt) we find a considerably higher concentration of single B and triple Cs among the smaller issuers (Figures 2, 3).

And we observe a similar dynamic for the energy and metals/mining segments (Figure 4, 5).

Moreover, the small issuer cohort still accounts for one-quarter of the total HY index universe. In summary, the lowest of the junk rated bond market pose more elevated default risks- yet this cohort is where there is less research coverage, fewer banking relationships, limited trading volumes and very little liquidity. And when defaults start rising some of the tourists may not have the resources necessary to explain the losses in their portfolios when their proverbial shoulders get tapped." - source UBS
Indeed, not only have the macro tourists been "carried away" and are becoming easy preys for our "Mack the Knife" but, High Yield tourists, particularly in the CCC bucket will as well face at some point the jack-knife of our murderous "beta slaughterer", yet another unintended consequences of higher regulatory pressure and dwindling liquidity. Make no mistake, during the next credit downturn, you can expect much lower recovery values, making CDS 40% recovery value assumption for senior debt dubious at best. Negative convexity of callable High Yield bonds is enhanced during sell-off periods and not only does a bondholder suffers from mark-to-market loss but also has to contend with a higher duration investment in most cases as he reaches out for yield and seeks outperformance of his benchmark.

As a reminder, in the current low yield environment, both duration and convexity are higher, therefore the price movement lower will be larger. And, as per our "Blue Monday" conversation earlier in July, convexity has started to bite credit in earnest:
"Over the course of the summer we expect credit spreads to widen, particularly in the High Yield space" - Macronomics, 4th of July 2015

  • For High Yield, default matters particularly with contagion risk from commodity
When it comes to the murderous spirit of our "Mack the Knife it has been more akin to a serial killer working overtime when it comes to the significant price movement seen in the High Yield energy and basic material sectors. On the murderous impact of "Mack the Knife" on the sector, we have read with interest CITI's take in their note from the 30th of July entitled "What Credit to Buy if You're Bearish":
  • Overview — Bonds in the HY energy and basic materials sectors are down as much as 27 pts this month, but despite lower levels credit investors seem more biased to sell than buy. In this article we first outline fundamental and technical reasons to be bearish in the period ahead. Of course, most PMs have to hold something in these sectors, and in this regard we also introduce a framework for quantifying the risk / return profile of various issuers.

  • Fundamentals Prospects — Near-term, we are bearish on the fundamentals.

  • There are a number of factors that will weigh on underlying commodity market fundamentals, ranging from falling shale well costs to higher rig counts. Fundamentals for specific issuers in the energy and basic materials sectors face a variety of challenges, as evidenced by the fact that the stock price for 12% of our sample set now trades below $1.
  • Technicals Prospects — Flow and positioning data suggest that the technical backdrop could exacerbate any negative fundamental developments."

 - source CITI
When it comes to the High Yield energy sector and Basic Materials, "Mack the Knife" has indeed been very swift with his blade.

But, for High Yield valuations default risk matters and matters a lot. High Yield is a more default sensitive asset and given the "murderous" impact of Mack the Knife on the commodity sphere, there is indeed a default risk spillover in the High Yield sector according to UBS from their 30th of July Global Credit Comment entitled "Credit contagion: why commodity defaults could spread":
"Credit contagion: why commodity defaults could spreadIn the wake of the commodity price swoon one of the recurring questions is will the stress in commodity markets spillover to other sectors? We have already noted some tentative signs that the selloff is beginning to spread as HY energy contributed less to the overall HY market widening last week (12% vs 53% from Jun 3 - Jul 20). However, a few weeks does not make a trend. To answer this question we revisit our outlook for potential defaults in the commodity sectors and discuss the primary channels of plausible contagion to the broader market.
First, regular readers will recall our HY energy default forecast of 10-15% through mid-2016. Simply framed, the commodity related industries total 22.8% of the overall HY market index on a par-weighted basis. In our view, sectors most at-risk for defaults (defined as failure to pay, bankruptcy and distressed restructurings) total 18.2% of the index and include the oil/gas producer (10.6%), metals/mining (4.7%), and oil service/equipment (2.9%) industries. Within these three B/CCC exposure in these industries comprise 10.2% of the index (6%, 3% and 1.2%, respectively). In our view, defaults in the B/CCC categories would be severe at current commodity prices; roughly 25% default rates annually for this cohort seems reasonable given past precedent and a sanity check from our single name specialists. A few investors have suggested our projections may prove conservative as distress could reach some of the higher-quality (BB) issuers in the at-risk sectors given structural/cyclical headwinds.

With that said, how large are contagion risks to the broader HY market? And what are the transmission channels? Historically, investors in the limited contagion camp would probably point to the early 1980s. In this cycle commodity price defaults spiked with the drop in oil prices yet average default rates (IG & HY) increased only moderately amidst a favorable economic environment. In our view, however, the parallels in terms of the credit and asset price cycles are a stretch versus the current context. In the last three cycles, commodity price defaults have either led or coincided with a broader rise in corporate default rates (Figure 2).

More broadly, we find high degrees of correlation between industries with above and below average default rates (e.g., the 25th and 75th percentiles) since the early 1990s (Figure 3).
And, not surprisingly, associations between HY spreads in the lower and upper quartiles also appear quite robust (Figure 4).
But why should there be contagion from commodity sectors to other segments?
Academic literature offers up a host of plausible theories. There is a clear pattern of default correlation dependent on fluctuations in national or international economic trends. Commodity price weakness is symptomatic of weak economic growth in China and emerging markets – with possible spillover risks for commodity related sovereigns (oil exporters) and corporates.
In addition, distress in one sector affects the perceived creditworthiness as well as profits and investment of related firms in the production process. For example, exploration and production firm defaults could negatively affect suppliers and customers which would include oil equipment and service, metals, pipeline, infrastructure, and engineering firms.
Furthermore, related literature points to the significance of the supply/demand balance for distressed debt; our theory is that there is a relatively finite pool of capital for distressed assets, implying greater supply of distressed paper pushes down valuations of like assets. Unfortunately, a rise in the supply of stressed bonds typically coincides with a decline in demand for such assets. This self-reinforcing dynamic historically leads to a re-pricing in lower quality segments. Moreover, regulation and market structure increase the risk that investors will absorb fund outflows and mark-to-market losses by selling similar assets if liquidity in stressed issues dries up. And finally, one of the looming technical risks for HY credit markets, in our view, is fallen angels; there is about $400bn of BBB- and $400bn of BBB rated debt outstanding in US high grade indices, of which 30-35% is energy related and much of it is longer duration. In summary, we believe the evidence argues strongly in support of the thesis that commodity defaults could cause broader HY default and spread contagion. So for those in the decoupling camp, you've gotta ask yourself one question: "Do I feel lucky?"" - source UBS
When it comes to High Yield, it looks indeed that Mack the Knife's jack-knife blade while still
out of sight is ready to strike our "credit/macro" tourist in earnest...but we ramble again...

Not only US High Yield and Investment Grade in commodity sectors are at risk but EM credit spreads are also in the target line given the correlation between EM credit spreads and oil.

  • EM credit spreads and oil prices are highly correlated
Given the exposure of some sovereigns and quasi sovereigns to the oil sector it doesn't come as a surprise to see additional pressure not only in the FX sphere but as well on EM credit spreads to the evolution of oil prices. This relationship is clearly highlighted in CITI's EM Strategy report from the 29th of July 2015: 
"EM credit spreads and oil prices are highly correlated — Given the renewed collapse in Brent to levels below $54, broad EM corporate spreads should widen a further 10-30bps on top of the 10bps of widening over the past three weeks. Obviously, credits directly involved in the oil business should experience greater widening. Tight market technicals and poor liquidity may prevent this from being fully materialized.
Commodities bite EM again, while Brazil gets kicked around a bit more
The week began with another leg down in commodity prices, combined with heightened anxiety about Brazil’s status as an investment grade credit. We see the two dynamics as being interrelated, as Brazil, while diversified across its commodity basket, very much remains a commodity dependent economy and is highly subject to the polar vortex hitting markets at the end of the commodity super cycle.
We maintain that oil prices are the most important commodity driving EM credit, given that oil is the largest sector by issuance after financials, and it is the bellwether commodity in the world. For EM specifically, iron ore and copper are also important commodities. In figures 3-12, we update and expand the charts we published on July 6 in our Oil tumble a bigger concern than Greece report. In that report we recommended to buy on weakness if Brent prices fell below $60 and broad EM spreads widened by 20-40bps. 
They have widened by only 10bps, so we see another 10-30bps of widening needed to abide by our original recommendation before buying should commence. Given the greater than anticipated drop in oil, as well as the negative ratings actions in Brazil, we believe the wide side of this range should be reached at the least." - source CITI.
Of course when it comes to correlation with oil prices and as shown in CITI's report EM currencies have been first in the line when comes to feeling the heat from falling oil prices:
"EM currencies remain highly correlated to oil
EM currencies are much more liquid than hard currency debt, and therefore reflect price movements fairly quickly. We can see this in figures 11-12. 

The point we are making here is that weaker currencies can offset some of the commodity price pressures oil and mining credits are experiencing. In several past reports that focused on Brazilian and Russian corporates, the main commodity producers in EM, we showed through our scenario analysis that weaker currencies tended to benefit the export sector. PETBRA, as usual, was the exception, given its BRL priced gasoline policy.
Our Broad Recommendations
We believe broad EM corporate credits spreads will cheapen out another 10-30bps because of the price oil until we would come in and buy. For Brazil, we anticipate its corporates will be negatively impacted by any potential downgrade and anticipate 50-75bps of relative spread widening as they converge with Russia. We do not believe this move is fully price in despite recent weakness. Russian corporates have lagged the move down in Brent while the RUB has done much to offset the decline in commodities and have kept the country competitive. We doubt this can be sustained, and if Brazil overshoots Russian spreads, we believe Russian corporates may re-correct back to Brazil. Of single name credits, PETBRA bears mentioning as being at risk of downgrade by S&P as the agency has already stated PETBRA remains IG due to implied sovereign support. As we mentioned last week, we believe Brazil’s subordinated bank debt from BANBRA, BRADES and ITAU is subject to a ratings downgrade. We continue to dislike iron ore as a sector." - source CITI
Looks like Mack the Knife has indeed a little more to carve-out from the already wounded EM crowd and its macro tourists cohort....

Whereas credit and in particular High Yield has been weakening, there is indeed a growing disconnect between equities and debt markets.
  • Final chart: Big gap between debt and equity
Whereas last week we pointed out the growing disconnect in terms of flows in both asset classes, there is a well a growing disconnect between high grade credit spreads and equity volatility which continues to be subdued. This has been clearly pointed out by Bank of America Merrill Lynch in their Situation Room report from the 28th of July entitled "Equity meet debt, debt meet equity":
 "Equity meet debt, debt meet equityGiven the large disconnect between the two markets we thought we should make the introduction. Over the past roughly three months (since April 22st) high grade credit spreads from our bond index have widened 23bps, or about 18%, while equity volatility has declined 1 percentage point, or approximately 6% (Figure 1). 

While already a sizable gap notice that the underlying pricing in bond indices tends to be rather stale – thus we point out that a basket of spreads for a limited number of liquid 10-year non-financial, non-energy, nonmaterials bond spreads we track has widened 39% over the same period of time. While from a theoretical perspective credit spreads and equity volatilities are comparative measures of risk associated with a given company when capital structures are constant, clearly they are now sending vastly different messages. This difference in perspectives measured from different parts of the capital structures may reflect a number of factors including differences in sector composition of the two markets, different horizons, changing correlations, expected re-leveraging associated with the acceleration of the M&A cycle, etc.
However, clearly most of the difference between the messages sent by the debt and equity sides results as the former asset class has begun to price in the coming Fed rate hiking cycle. As we discussed in our weekly piece (see: Policy matters) that re-pricing took place in part as issuers accelerated supply ahead of Fed liftoff, and as deteriorating returns significantly reduced retail demand. That leaves HG credit spreads around the cheapest level relative to equity vol we have seen outside the financial crisis (Figure 2). 
Obviously either market could be correct – although clearly we are biased given our underweight stance on credit. It is also fair to expect that credit will be more adversely affected by the tightening monetary policy that equity. However, at the very least it is worth noting that standing just six weeks prior to expected Fed liftoff HG credit spreads are 9.5bps per percentage point of equity vol, or twice the 4.7bps/% we saw six weeks prior to the 2004-06 rate hiking cycle." - source Bank of America Merrill Lynch
Are equities priced for perfection or is credit already reflecting the tightening stance of the Fed? The jury is out there...

"A sword never kills anybody; it is a tool in the killer's hand." - Lucius Annaeus Seneca
Stay tuned!

Friday, 24 July 2015

Macro - Ominous Decade

"Fascism is capitalism in decay." - Vladimir Lenin
Following Greek's submission and the acceptance by French Constitutional court of the controversial surveillance law aimed at broadening eavesdropping of terrorism suspects, despite protests from privacy advocates with France seeing at the same time a "farming revolt", in conjunction with Spain's new public security law introduced in July limiting freedom of speech and curbing the right to peacefully protest with the introduction of fines ranging between €100 ($111) and €600,000, we reminded ourselves of the "Ominous Decade" (Década Ominosa) when it came to choosing this week's analogy. 

The "Ominous Decade" was the traditional term used for the last 10 years of the reign of King Ferdinand VII of Spain dating from the abolition of the Spanish Constitution of 1812, from the 1st of October 1823 to his death on the 29th of September 1833. Following the liberation of Spain from Napoleonic domination, King Ferdinand VII first act on his return was the dissolution of the two chambers of the Spanish Parliament which marked the period of the "Ominous Decade" which saw harsh censorship re-established and the complete suppression of the liberal opposition (which fled the country). This "Ominous Decade" saw an endless series of riots and attempts of "revolutions", such as that of Torrijos, funded by English liberals on the 11th of December 1831. Given the turn taken by recent events in Europe and with European Commission president Jean-Claude Juncker quote in February this year: 
"There can be no democratic choice against the European treaties." - Jean-Claude Juncker
We are indeed wondering if, Europe has not entered its own "Ominous Decade" hence our chosen title. 

We are also wondering if, after all, Vladimir Lenin's quote was not correct, and we could opine in the light of recent laws passed in various countries that indeed, Joseph Schumpeter seminal 1942 book "Capitalism, Socialism and Democracy" was indeed right when assuming that the decay in capitalism is indeed somewhat leading to some new form of "fascism". Schumpeter argued that capitalism's collapse from within will come about as majorities vote for the creation of a welfare state and place restrictions upon entrepreneurship that will burden and eventually destroy the capitalist structure but we ramble again...

When it comes to forward returns and current valuations levels and the "rosy tainted" environment painted by some sell-side pundits, in this week's conversation we will discuss into further details the return of the deflationary forces (hence our recent return in taking a long US duration exposure partly via ETF ZROZ) and "Zemblanity", (Zemblanity being defined as the inexorable discovery of what we don't want to know). Back in September 2012 we asked ourselves at the time the following question:
"Does the end (lowering unemployment levels) justify the means (increasing M) or do the means justify the end (deflationary bust)?" - Macronomics, September 2012.
  • Some "Zemblanity" facts in the transportation market
  • Forget Greece, China is sending a weak global growth message
  • If China is stalling then it makes sense to "short" exposed European car makers 
  • Final chart: Credit and Equities parting ways

  • Some "Zemblanity" facts in the transportation market
For those who have been following our musings, you will not be surprised that we view the transportation market, particularly shipping as a leading deflationary indicator as well as a credit indicator (lower shipping = credit tightening = deflationary trend). When it comes to the "real economy" and "Ominous Decade" risk, in true "Zemblanity" fashion, transportation is telling us that the much vaunted recovery story remains illusive and marks the return of the deflationary forces we think.

On that point we agree with Bank of America Merrill Lynch's take from their Cause and Effect note from the 13th of July entitled "Who do you believe?":
"Some inconvenient facts
The transportation market, which is more closely linked to the world economy, does not share this optimism. Global shipping freight rates, down 40% so far this year, are showing no signs of recovery. Our latest trucking survey shows sentiment at the year-low. Rail traffic remains very weak and rail stocks are down nearly 20% year to-date.
The million dollar question is whether what appears to be increasing growth optimism among rates investors is justified. The transportation market, which is much more closely linked to the global economy, apparently does not think so:
Global container freight rates, which have been falling this year, are showing few signs of stabilization, let alone recovery. The bellwether China export containerized freight index is down 40% so far this year (Chart 7) and is now below the trough associated with the height of the Eurozone crisis in 2012:
Falling freight rates seem to reflect more weak demand than excess capacity. World trade volume growth, which in Q1 contracted at the fastest pace since the end of the financial crisis, recovered weakly in April (Chart 8).

Inbound loaded containers into the Port of Los Angeles and Long Beach, having surged in March following the end of the strike, was down in April and flat in May (Chart 9).
Trucking is also faring poorly. The latest BofA Merrill Lynch proprietary biweekly Truck Shipper Survey shows shippers’ 3 month outlook falling below 60 for only the second time in 2015 (Truck Shipper Survey #78, 9 July). An increasing number of the respondents are citing weak demand.

If shipping and trucking are not doing well, rail is not doing much better. US rail traffic for intermodal units, which picked up in the spring after the end of the port strikes, is slowing again (Chart 10). 

Meanwhile, total carloads are contracting at an annualized rate of 10%. US rail stocks, already down 18% year-to-date, continue to underperform the broader index (Chart 11).
In sum, what the transportation market is telling us is that global trade growth is weak. This is consistent with the fact that in the June manufacturing PMI surveys released last week, new export orders were either declining or below 50 for most of the major economies (Chart 12). 

If global trade in manufactured goods is weak, it seems reasonable to think that global manufacturing is weak. Indeed, the new orders component of world manufacturing PMI has fallen in June to the lowest level in two years (Chart 13).
 - source Bank of America Merrill Lynch
To illustrate further the "illusory" recovery in 2015 we would like to add additional data, this time around coming from Deutsche Bank Freight Tracker note from the 21st of July. Truck Supply/Demand in 2015 is in fact weaker in 2015 than in 2014:
"Below we have illustrated the recent trends in TL dry van load-to-truck ratios (Figure 4 below) as well as dry van spot rates (Figure 5 below) in each of the past two years based on TransCore data.
 - source Deutsche Bank

If the economy is improving in 2015 compared to 2014, which would justify a "normalization" policy from the Fed, then we struggle in understanding the "dynamic" improvements so much vaunted by the "recovery" pundits...

This is leading us to our second point, namely that one should indeed focus less on Greece (a sideshow) but much more on the weaker global growth signs coming out of China.

  • Forget Greece, China is sending a weak global growth message
Whereas the Greek soap opera has been gathering much of all the attention in recent weeks, the global growth seems to be heading like the proverbial bull in a China store. The preliminary PMI from Caixin Media and Markit Economics was at 48.2 for July from 49.4 the previous month, the lowest in 15 months, regardless of China's "engineered" 7% GDP growth.

Once again, shipping is leading us to some interesting indications when it comes to gauging the strength of the Chinese economy and the trajectory for world growth. If we look at the Shanghai-US Container Rates Overview from Deutsche Bank Freight Tracker note, one can clearly acknowledge the weaker tone in Chinese exports:
"SCFI spot rates declined 10.9% w/w as rates continued to fall across the board."

- source Deutsche Bank
Whereas we are talking West Coast Ports or East Coast Ports, the year on year change points to a clear weaker tone in exports towards the United States.

What we find of interest is the recent fall in consumer confidence which we think is indicative of the fragility of this much vaunted "recovery".  For instance, Consumer confidence in July dropped four points month-over-month to 45.2%, a low for 2015 but still higher than the 13 month low reported back in October (41.0%). But, "Confidence" among Small Business Owners is off as well at 53.8% (from 55.0% in June) which doesn't look great from an "employment" perspective.

As we pointed out in our 15th of August conversation "The link between consumer spending, housing , credit and shipping":
"Containerized traffic is dominated by the shipment of consumer products. A resurgence in international container volumes will be dependent on the housing markets improving. Furniture and appliances are some of the top freight categories imported into the U.S. and euro zone from Asia in containers. Furniture demand collapsed with the housing market." - source Bloomberg
The link between freight shipments and changes in housing start can be seen in the below graph coming from Deutsche Bank's most recent Freight Tracker report:
"Cass Freight Shipment Index Declines 3.4% Y/Y In June (+0.2% M/M). Last week, Cass Information Systems reported that the Cass Freight Shipment Index declined 3.4% y/y in June, which was an acceleration from down 1.3% y/y in May. Sequentially, the index was essentially flat (+0.2% m/m), which was worse than normal seasonality (June’s trailing five- and ten-year average m/m changes are up 1.8% and up 2.4%, respectively)."
 - source Deutsche Bank
Whereas housing starts have jumped in the U.S. in June to the second-highest level since November 2007 to  9.8 percent to a 1.17 million annualized rate from a revised 1.07 million in May, consumer confidence and shipping are yet to reflect this improvement so far. This is indeed depicting a conflicting picture when it comes to US growth particularly with the lack of acceleration in wages.

Moving back to China, not only does shipping and PMI points towards a slowdown but so does credit growth and passenger vehicle sales year on year as shown by Bank of America Merrill Lynch in their Cause and Effect note from the 13th of July entitled "Who do you believe?"
"The transfer of wealth from the people on the street to the wealthy who cashed out when the market was still going up is likely to hurt consumption. It is important to take note of the fact that in June, before the equity correction began, passenger vehicle sales fell for the first time since 2012 (Chart 16)."
It seems reasonable to think that a further moderation of Chinese growth will have global repercussions. On a Purchasing Power Parity basis, China is now the largest economy in the world, accounting for 16% of global GDP. More importantly, the IMF estimates that China accounted for one third of global GDP growth over the past three years (Chart 17).
A sharp Chinese slowdown in H2 (not the central scenario of our China economics team) would easily send world GDP growth to the lowest level since the recovery began.
That said, the impact of a Chinese slowdown on the rest of the world will be uneven. Countries like Korea and Australia whose exports to China account for a large share of their GDP will be especially vulnerable (Chart 18). 

Even Japan and Germany that have significant exposures to China will not be able to escape the implications of a sustained Chinese slowdown.
What about the US? US export exposure to China is modest, both in absolute and in relative terms. However, long-term Treasury yields have been more correlated with global growth outlook than US growth outlook over the past few years (Chart 19).
Moreover, further USD appreciation as other countries would be hurt more by the Chinese slowdown, by tightening US financial conditions, is likely to lead the Fed to go more slowly in the tightening cycle. The first batch of June data suggests that the momentum behind the US economy observed in late spring seems to be slowing. Aggregate payrolls in Q2 grew at the lowest rate in six quarters (Chart 20)."
- source Bank of America Merrill Lynch
 So if indeed China is slowing, then it makes sense to look at "shorting" the European Autos Sector (SXAP). This brings us to our third point namely never ending overoptimism from equity analysts...

  • If China is stalling then it makes sense to short exposed European car makers 
If you buy into the story of an "Ominous Decade" and poor forward returns thanks to lofty valuations, Chinese slowdown and waning global demand (hence like us, sitting nicely in the "deflationary" camp), then we believe, it makes sense to look at over-exposed European car makers and to make a case for a "short" perspective we think.

On the subject of "deceleration" and cars in China, we read with interest Société Générale's note on Automobile and Components from the 15th of July:
"We see a margin issue in the Chinese premium car market: The market is crowded, not only on the roadway, where the number of premium cars has been growing fast, but also by the number of carmakers, who long for share in this formerly high-margin market. The “German big three” has 70-80% of the market, and the remainder is divided up among the Europeans, Japanese and Americans. Since H2 2014, these carmakers have started to see volume pressure owing to the economy’s slowdown, competition from local rivals, limits on car registrations in big cities, and pressure from a legitimized parallel premium car market. Official price cutting took place but turned out to be ineffective. Margin pressure was further aggravated by the rally in the A-share market in May that absorbed money from people who had delayed their car purchases. Despite these headwinds, we still see potential in the Chinese premium car market based on a growing middle class population because although the economy is slowing, the growth rate is still relatively high. Indeed, China’s economy historically has grown in the double-digits, but the market is now expected to experience a structural transition period where automobile financing (still low less than 20% in China vs. 50% in developed countries which reserves room for development) and electric cars (strong support from the government due to environmental concerns) could be a new growth impetus." - source Société Générale
While we agree from a long term perspective, there is further room for growth in the Chinese car market, the on-going pressure on the market is of particular interest as highlighted in Société Génerale's note:
"Premium carmakers have been forced to step into a tough price war since H2 2014, against the backdrop of China’s economic slowdown. Given the choice between market share and margins, carmakers chose to sacrifice margins temporarily in order to win and keep market share. Tier 1 premium brands have started to lower prices or decrease production in China. Audi is selling its two popular models, the A4L and A6L, at a 20-25% discount. BMW China’s CEO said that the group had already decreased its production in China as well as the supply to dealers (Source: Bloomberg 20 April). Going into the second quarter of 2015, new car sales have continued to shrink. The situation got even worse with the euphoria in the A-share market which absorbed the car budgets from a large number of people who were holding back on buying big-ticket items.
In our view, the other factors that are prompting a slowdown in premium car sales growth include but are not limited to: limits on new car registrations in big cities, pressure from a legitimized parallel car market, competition from local car brands, the government’s antiextravagance policies, consumption behaviour transformation (more mature customers) in the tier1 and tier 2 cities, an explosive second-hand car trade volume (9m units in 2014, over 10m expected in 2015), and a technology-driven growth model, which can be summarized as the Chinese automotive market’s “New Normal”.
In order to maintain margins and market share, we expect carmakers to cut costs, which
passes on pricing pressure to upstream auto parts makers and raw material providers. Thus, we believe the “German Big Three”, accounting for 70-80% of the premium car market, will leverage their negotiating power to lower production costs and save margins.
We expect a moderate premium car sales expansion in 2015, with a growth rate slightly higher than our forecasted 8% of passenger vehicle sales growth rate. The China Automobile Association forecasts that in 2015, the volume of sedans will increase slightly by 1% to 12.5m, SUVs will increase by 25% to 5.1m, MPVs will increase by 35% to 2.6m, and crossovers will decrease by 20% to 1.1m, which together represent passenger vehicle sales of 21.2m units and a 7.8% growth rate.
We expect three trends in the Chinese premium car market in 2015
1) The import growth rate to slow to the single-digits when premium carmakers focus on localisation: the high tax rate imposed on imported cars is one reason for customers’ move to localised cars, especially against the backdrop of the economic slowdown and customers’ high cost/performance preference. We expect more import models to be localised in the coming year.
2) SUVs to continue to be popular: the Chinese prefer large-sized cars and have a tendency to favour popular models, thus we expect premium carmakers to take action and make profits in this segment with new localised models." - source Société Générale
So the only way for the German Big Three to maintain further their margin will be to either force more deflationary pressure on their suppliers impacting furthermore the "commodity" sector in the process or to localize even more the production of cars in China to lessen the high tax rate imposed in imported cars which have been impacted by the bloodbath in the A-share market as of late.

What goes up must come down:
As per the conclusion of our "Ephedrine" conversation focusing on China in May this year, where we pointed out correctly that Dr Copper, the metal with the economics Ph.D was still in a bear market, we believe that European car makers in particular the German Big Three will soon have to adapt to the "new normal". This is clearly illustrated in Société Générale's note:
"The market for premium cars in China has expanded at an impressive rate of 36% per year over the past decade. Multinationals dominate China’s premium car market, with German carmakers accounting for 70-80% of market share.
Premium segment development is part of the change in passenger vehicle sales. From 2000 to 2010, the average passenger vehicle sales growth rate was 24%, and from 2010 to 2014, the growth rate slowed to 7%, which indicates that China’s automotive industry has stepped into a new growth period." - source Société Générale
The "goldilocks" period for the German Big Three, from a "short" perspective, seems to us an attractive proposal given their significant exposure to China. On that "short" interest, we agree with Louis Capital Markets recent take on this "trade idea" in their recent Cross Asset Strategy note from the 15th of July:
"The European Autos sector (SXAP) is fully driven by the German carmakers as Daimler, Volkswagen and BMW make more than 50% of the sector index. These global companies have a significant exposure to non-European markets and particularly, to China. The chart below shows the amazing increase of the profitability of the European Autos sector since the great crisis.
Despite a sluggish European economic environment, these European companies have benefited from their global exposure to record all-time high profits. In relative terms (below chart) the diagnosis is even more impressive and this explains why this sector has been a strong market leader since 2009.
The sector has been weak recently (2nd worst performer behind basic resources over the past 3 months). This is an interesting message as the profit dynamic seems intact. The direct consequence is that analysts have seen the recent correction as a buying opportunity given their unchanged earnings forecasts over the period. According to them, nothing has changed except the upside potential that is restored thanks to the decline of share prices. This differs from banks on which analysts remain cautious and do not expect a significant share price recovery.
We do not wish to treat analysts with disdain but there is clearly a risk that, once again, their expectations fall short of the reality. We do not see the latest correction as another opportunity but rather we see this correction as a warning for the sector similar to what banks experienced in the summer 2007.
The story of the Autos sector during the past decade looks like a “super cycle” and because we believe in cycles (i.e. ups and downs) we suspect that the nicest part of the story is far behind us and that difficulties can arise faster than expected.
We are beginning to see less positive stories coming from China regarding the Autos sector (price discount to revive sales, subsidies to affiliates) but these less positive aspects seem to have gone largely unnoticed by market commentators. It is typical to see some denial at the early stage of a new trend. The charts below shows the strong fundamentals of the “big three” – the 3 biggest components of the SXAP Autos sector – that have enjoyed a super-cycle over the past 5 years (average sales growth of 11.7% against average of 2.6% during the 2002-2007 cycle).

Also, perhaps the most impressive achievement is to see the structural improvement of margins since 2009. On the below chart we plot on the Y-axis the quarterly EBIT margin and on the X-axis the quarterly sales growth for the Big3. The blue dots represent the 2002-2008 cycle whilst the grey dots represent the 2010-21015 cycle. The message is crystal-clear here: despite some volatility of the business activity, the EBIT margin has remained resilient around 7%. This is a real performance that was flagged by analysts and this could explain why some investors play the “change of status of the sector” due to its new “growth status” (luxury goods + pricing power).

Its a nice story but too good to be true in our opinion and reminds us of our discussion with Banks’ analysts back in 2007 (see our European Equity Note No241 – 25 June 2007 – “The Valuation Principle”, CA Cheuvreux) when we told them that the specific risk premium that was emerging on financial stocks was worrying and that these stocks were expensive. We want to say the same thing today: despite apparent low valuation ratios, European carmakers are expensive because profits should revert soon and will reveal therefore that the profit trend growth of these companies is lower than expected.
We show on the following chart Global car sales growth and that of the Big 3. Obviously the correlation is strong between the two series but we see the significant outperformance of these winners in the aftermath of the Great crisis thanks to their Chinese exposure and their above-average pricing power.
However, talking about the past will not help us in forecasting the market behaviour of these names in the coming weeks so the latest data are more interesting and they show a very significant slowdown of the sales dynamic. In China, June was a negative month, for the first time since 2013. The 3-month moving average is at 0.5%, the lowest level since Q1 2012 which was at that moment only temporary.
We think that the current weakness will not be transitory and reflects the start of the down cycle for the European car makers exposed to China. The rationale is simple: generating growth is a tough task as for a carmaker it implies selling more cars each year. The strong growth rate achieved by the European carmakers in China was the result of the concurrency of several factors: low base effect (low starting equipment rate), strong growth of income and strong growth of the potential client base (emergence of the middle class). Today these factors have not disappeared but have strongly diminished. The number of cars in use compared to the size of the urban middle/upper class in China is no longer extreme. The catch-up process from this point of view is over and now, the demand for cars should be driven by more classic factors like the vehicle age (implicitly the average life expectancy of cars) and the size of the middle class.
In the short term, the excesses have to be clear and this implies a decline in units sold in China by the European leaders of the car industry. Thus, the investment risk is very high for the Big 3 as investors are not ready for this outcome. They will be reluctant to sell them because of some sentiment towards stocks that have done so well in their portfolios in this cycle. We understand that but investors have to set aside “affect” and be pragmatic as downs follow ups and China will not be an exception." - source Louis Capital Markets
Of course from a long term perspective China and Asia will continue to be important drivers for European car makers but, we do have to agree with LCM's tactical view on this interesting "short" contrarian proposal, which we think is enticing.

China, it’s still a critical driver of German carmakers’ earnings and the current trend is quite disturbing, therefore we think shorting the German Big Three from a valuation perspective could be an interesting proposal should China worries persist.

German exports and Chinese PMI are still showing a disconnect which we think is not justified. Car sales in Europe during the first six months of 2015 are down 14% compared with the same period in 2007. In Germany, car sales are up by only 3% in the same period whereas Italy is down by a cool 38% and Spain is down 35% back to 90s levels (for more on cars sales and trends see our 21st of April conversation "The European Clunker - European car sales, a clear indicator of deflation").
So even the mighty German can't really look West to find some Chinese solace...

Does a Chinese slowdown spell an "Ominous Decade" for German car makers? We wonder...

  • Final chart: Credit and Equities parting ways
Whereas in 2014 the much vaunted story of  the "Great Rotation" from "Bonds3 to "Equities" failed to materialize, in 2015 it seems indeed there has been some rotation at least in European towards equities as depicted by Bank of America Merrill Lynch in their Follow The Flow note from the 17th of July entitled "June'15 Flows: biggest outflow for fixed income funds since the tape tantrum":
"Credit and equities: parting ways
Flows remain on the negative side for both high-grade and high-yield funds, despite strong risk-on sentiment. Outflows from high-grade credit funds were the third largest this year, at $2.1bn, and ~$10bn has departed from the asset class in the past six weeks. Outflows from high-yield credit funds were marginal, however, marking the sixth consecutive week of withdrawals from the asset class.
On the other side of the fixed income world, government bond funds followed an opposite course from credit: the asset class recorded an inflow of +$1.4bn during the last week, the first in seven weeks and the highest in 18 weeks, dating back to the pre-bundshock period. Money market fund flows went back to negative territory.
But the picture is different in the equity land. European equity funds have seen inflows doubling that of the previous week, getting very close to $3bn. Equities have now had a nine week streak of positive inflows, against six weeks of consecutive outflows from high-grade and high-yield credit funds combined.
 - source Bank of America Merrill Lynch
"Where wealth accumulates, men decay." - Oliver Goldsmith, Irish poet

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