By Yoruk Bahceli, Matt Tracy and Emma-Victoria Farr
(Reuters) – A tumultuous sell-off in financial markets this month has done little to undermine global financing conditions, but the risk of further volatility means borrowers are not yet out of the woods.
Stock and corporate bond markets have recovered some of the losses incurred earlier in August on fears of a US recession and the expiration of a popular carry trade in the yen.
However, they remain noticeably weaker than a month ago, with the broad US stock index still 5% below its July peak after an initial plunge of almost 10%. European stocks have taken a similar hit.
Corporate bonds with a higher and lower rating have already had to give up a large part of the decline in the risk premium they pay compared to government bonds this year.
But financing conditions – the ease with which borrowers can obtain financing – have not tightened enough, even at the height of the sell-off, to raise concerns about a sharper economic slowdown that could hasten central banks’ interest rate cuts.
“We simply haven’t seen enough steps yet to materially change financing conditions for businesses and households,” said Chris Jeffrey, head of macro strategy at Legal & General Investment Management.
A closely watched gauge of U.S. financial conditions compiled by Goldman Sachs shows that while conditions have tightened sharply since mid-July, conditions remain historically accommodative and more accommodative than during much of last year .
For example, global stock prices are still up almost 10% this year and credit spreads are lower than in 2023.
Goldman estimates that any potential further 10% sell-off in stocks would reduce US economic growth by just under half a percentage point over the next year, while the related moves in other markets if stocks were to slump would be a total hit of just under a half percentage point. percentage point could mean. .
With US growth still above 2%, it would therefore take a much larger stock market decline to cause significant economic pain that spreads globally.
RATE REDUCTIONS
With the US Federal Reserve soon to start cutting interest rates and other central banks already doing so, the main takeaway from the recent market turmoil is a decline in borrowing costs.
have fallen by more than 50 basis points since early July, while UK and German government bond yields have each fallen by more than 30 basis points as investors bet on sharper rate cuts.
That bodes well for borrowers. Yields on US investment-grade corporate bonds have also fallen by 50 basis points since the beginning of July.
Highly rated companies raised $45 billion from US bond sales last week, according to LSEG’s IFR – at the high end of analyst expectations and a sign of confidence amid the sell-off.
There were also more bond sales in Europe than a year ago, while the US market started this week strongly.
“It doesn’t seem like access to credit is much of an issue right now,” said Idanna Appio, portfolio manager at First Eagle Investments.
“Indeed, lower Treasury yields open the door for companies to come to the market,” said Appio, a former Fed economist.
Even junk bond yields have fallen 37 basis points since early July, meaning conditions have become more favorable for lower-rated companies, which raised $7.2 billion from US bond sales last week.
WEAK BAGS?
Nevertheless, the expectation that volatility will remain high creates uncertainty for borrowers.
Wall St.’s “fear gauge” fell below 20 points this week, to its lowest level this month, but remains much higher than the January to July average.
And with August typically being quiet for IPOs, the impact on equity fundraising – which typically takes a hit when volatility increases – remains to be seen.
Dealmakers say they are optimistic as long as markets remain calm, but are taking into account future uncertainty.
Javier Rodriguez, global head of value creation at KPMG, does not rule out that IPO deals in the pipeline will slow down or stop.
“There is no certainty as to what the final picture might look like, but there may be a cooled market compared to the last 18 months,” he said.
Credit markets saw money flowing into investment-grade bonds last week, but BofA said there was an outflow of junk bonds, signaling caution toward weaker borrowers.
With global high-yield bond sales reaching the highest first half of the year since 2021, LSEG says the outflows are unlikely to worry borrowers yet.
But some were significant. According to JPMorgan, outflows from US leveraged loans, whose investors take a hit when rates fall, were the largest since the height of the COVID pandemic in March 2020. The impact of the carry trade on liquidity conditions also remains a risk to to keep an eye on.
“As soon as carry trades plummet, funds flee countries and assets where they finance economic activity,” said Mathieu Savary, chief European strategist at BCA Research. “As a result, liquidity conditions are tightening where growth is generated, hurting global economic activity.”
(This story has been refiled to change the fund manager’s name to First Eagle Investments, in paragraph 16)
