After nearly universal predictions for a tight race in Britain’s parliamentary elections, Prime Minister David Cameron’s Conservative Party is now projected to have defeated the Liberal Democrats by a wide margin, with the opposition Labor Party losing up to half of its seats. U.K. equities rallied sharply in the wake of the stunning result, and the British pound rose against the U.S. dollar by the biggest one-day margin since 2009. While investors have generally cheered the news, two major potential headwinds await pound-denominated assets. First, with the Conservatives poised to form a government without need for a coalition partner the referendum on European Union membership is likely to go forward. Meanwhile, Scottish nationalists were regionally dominant, making a new independence referendum likely. In the coming weeks markets are likely to focus on these unknowns.
U.S. unemployment rate drops. The Department of Labor Employment report for April was roughly in line with consensus forecasts with a 223,000 gain in non-farm payrolls and a contraction in the headline unemployment rate to 5.4 percent, the lowest level since spring 2008. Average hourly earnings grew 0.1 percent for the month while, critically, the participation rate moved up marginally to 62.8 percent. Revisions to March data were significant, with the already paltry 126,000 payroll expansion slashed to 85,000. The rebound in labor markets supports recent assertions by Federal Reserve policymakers that the slowdown in hiring during the first quarter was temporary.
Chinese exports slump. April trade data released today by China’s General Administration of Customs saw the surplus swing from $3 billion in March to $34 billion as exports were down by more than 6 percent versus the same month in 2014 and imports contracted by more than 16 percent. Although shipments to the U.S. increased marginally for the month, European bound exports fell sharply. This dramatic slide in international trade raises concerns about Beijing’s ability to achieve the government’s 7 percent GDP target and increases the likelihood of further easing actions by the People’s Bank of China in the near-term.
Syngenta rebuffs Monsanto offer. Basel-headquartered agrochemical giant Syngenta today rejected a $45 billion bid by U.S. rival Monsanto. Analysts anticipate that Monsanto may return with a higher offer taking advantage of the strong dollar. If merged, the two companies would generate an estimated $30 billion in annual revenues.
Uber makes move to acquire Here. In a bid valued at up to $3 billion, Uber Technologies has thrown its hat into the ring to acquire Nokia’s map service Here, competing against a consortium of German automotive companies. Finnish telecom hardware stalwart Nokia has been seeking a buyer for Here as part of a restructuring to improve its balance sheet.
Industrial production stumbles in Germany. March industrial production data for the EU’s largest economy were weaker than forecast, contracting 0.5 percent for the month after a flat reading in February. Gains in construction and other segments were unable to offset a drop in the manufacturing segment as external demand for durable goods remained soft during the month.
Greek creditors stand firm. Eurogroup president Jeroen Dijsselbloem addressed reporters today after a meeting with the Italian economic minister, stating that the finance ministers of the primary EU economies had not shifted their stance on Greek economic reforms required for a credit extension. These comments sit in contrast to a widely quoted interview from Thursday in which Dijsselbloem appeared to suggest that the Eurogroup was ready to concede to further Greek demands in order to secure a deal.
U.S. Restaurant IPO market picks up. Regional fast food restaurant Bojangles raised $150 million in an initial public offering on Thursday, initiating at the high end of the pricing range for shares to bring its total market capitalization to $680 million. This marks the third major IPO in the space in recent quarters after Habit Restaurants went public in November 2014 and casual dining chain Shake Shack began trading in January.
Portfolio Perspective: Yellen Could Lead to Sellin’ — Jeffrey Meli and Bradley Rogoff, Barclays
The creep higher in Treasury yields continued, as ten-year yields reached 2.24 percent Wednesday before declining ahead of today’s payroll data. Wednesday’s yield was equivalent to the March 6 highs of the year. The substantial move in Treasuries pales in comparison to the jump from 7 basis points to 59 basis points in ten-year German bunds in just three weeks. The sell-off in the bund has been supported by better macro data out of Europe that has also boosted the euro versus the dollar. U.S. corporations should be happy to at least see stabilization in exchange rates, as foreign exchange headwinds have been noticeable during the current earnings season. Other than that, earnings season has been mostly in line with recent trends. There are numerous ways to look at leverage trends, but regardless of the exact measure, we believe balance sheets remain reasonably solid.
When we discussed the rate move last week, we mentioned that high yield spreads had compressed as rates increased, but investment grade has struggled to do so in the face of elevated supply. The forecast of elevated supply in May has come true even faster than expected, with $45 billion in the first three days of the week. We still believe investment grade spreads are attractive but think it will be at least June before we can see any material tightening. In a week when risky assets generally sold off, high-yield spreads were little changed thanks to a boost from a rally in high beta energy credits, as oil remains above levels from the first four months of the year.
We continue to believe that the ex-energy part of the high-yield market is trading at fair value, but our concerns about outflows related to rising rates were exacerbated by Fed chair Janet Yellen’s comment this week at a conference on “Finance and Society.” Specifically, she mentioned elevated equity valuations, as well as “compression of spreads on high-yield debt, which certainly looks like a reach for yield type of behavior.” The chairwoman’s views on high yield were the catalyst for $14 billion of retail outflows last July following her comments that “in some sectors, such as lower-rated corporate debt, valuations appear stretched and issuance has been brisk.” Spreads are actually much wider today than they were when she made her comments last year, but we suspect our view about fair value will not matter in the near term, as outflows could pick up. As a result, we would be a bit more cautious on high yield this month as well.
Jeffrey Meli and Bradley Rogoff are fixed-income strategists for Barclays in New York.
