As leaders of the Organization of the Petroleum Exporting Countries gathered today in Vienna, comments in the media suggested there is growing confidence among them that the worst is over for oil producers and that prices are starting to better reflect demand. To date Saudi Arabia, the de-facto leader of the group, has resisted calls from smaller member states to limit production more severely, a policy that seems likely to stand for now — a position Saudi Oil Minister Khalid Al-Falih firmly reiterated in public statements leading up to today’s meeting. In early market trading, front-month futures contracts for West Texas grade crude oil slipped below $49 per barrel.
OECD warns over Brexit. The Organization for Economic Cooperation and Development issued a report today that included a reduction in growth projections for the U.K. and warnings about the possibly dire impact of a U.K. departure from the European Union. The group now expects full-year GDP for 2016 to register at an annualized 1.7 percent versus a prior forecast for 2.1 percent. Separately, Markit purchasing-manager index data for the U.K. beat consensus forecasts with manufacturing activity returning to expansionary territory at 520.1 for May.
Abe to delay tax hike. Japanese Prime Minister Shinzo Abe announced that his administration would delay a sales-tax hike by more than two years and deploy a fresh stimulus package in the fall to augment the Bank of Japan’s quantitative-easing program. The sales-tax increase was initially conceived as part of a debt-reduction program designed to address a Japanese demographic shift, as aging baby boomers depleted savings.
Softbank to decrease Alibaba stake. Japanese telecom giant SoftBank Group today announced a divestiture of shares in Alibaba Group Holding in a move that will raise nearly $8 billion dollars. The transaction will reduce debt levels at Softbank, which has struggled with its U.S. business. The firm will remain Alibaba’s largest foreign shareholder.
Portfolio Perspective: The Best Start to Summer, Ever — Bryan Reynolds, New Albion Partners
The credit market is highly seasonal, so when time-tested rhythmic patterns are disrupted, it really grabs our attention. Such a thing happened yesterday, as the summer got off to its best start in history.
Normally, the day after a holiday is a slow one in the credit market. Issuers typically rush to market in the days leading up to a holiday, knowing that customers often take extra-long weekends. Additionally, the day after Memorial Day is usually especially slow, as it kicks off the unofficial start to summer, which sees a gradual seasonal slowdown that lasts through Labor Day. A normal day in a normal month would typically see $4 billion to $6 billion in issuance. The day after Memorial Day typically only sees about $2 billion.
Investors yesterday bought a stunning $17 billion of new corporate bonds as they returned from holiday. We know this is only a small, one-day sample size, but this is unlike anything we have ever seen in our 32-year career. We have already written that this May was the strongest such month ever. Yesterday’s action, though, pushed the monthly total so high that we had to redo the scale on our charts.
This action is even more stunning when you consider that just over three months ago, in the dark days of winter, many equity and macro investors had been tricked into thinking that another 2008-style disaster was right around the corner. However, we demonstrated to our clients that our nation’s public pensions were voting to put record amounts of fresh, new money into the credit market even during the January and February panics, giving us confidence that the credit boom would not only endure, but gain in strength.
As optimistic as we have been about the credit boom persisting and intensifying, this action is even stronger than we could have hoped. These credit flows should eventually lead to more buybacks and M&A designed to lift share prices. The only question to us is when.
Bryan Reynolds is the chief market strategist for New Albion Partners in New York.
