Leader Week in Review - August 14th, 2015
Economic Data Releases:
The yield curve ended the week mostly unchanged, although not without intra-week volatility caused by the People’s Bank of China devaluing the renminbi. Meanwhile, as oil prices have continued to fall, Credit spreads have drifted higher. The spread widening has been particularly acute in High Yield, as Energy comprises a higher portion of the High Yield market. Weighing on Investment Grade spreads has been corporate issuance, which is now 22% ahead of 2014’s record-setting pace. We expect this to continue right up until “lift-off” as companies try to squeeze in cheap financing before the Fed hikes rates later this year. Despite the negative supply dynamic, we see value in corporate credit as spreads are at multi-year highs. For example, BBB spreads are now higher than the average over the last 25 years (chart 1).
While the devaluation of the Chinese renminbi will most likely be a positive for Chinese exporters, the currency has not been a drag on exports (chart 2). Instead, we view this as another step closer to a free-floating currency which is on the IMF’s checklist to be included in the Special Drawing Rights (SDR) currency basket. Furthermore, cheaper Chinese exports will be a boon to the U.S. consumer, which makes up close to 70% of U.S. GDP.
Upcoming Economic Data Releases: