(New York)

Credit rating agency Moody’s has just put out a broad and scary warning to investors: when the economy turns around, we have may have a junk bond crisis on our hands. Moody’s says that there will be widespread junk bond defaults in the next recession stemming from huge issuance and heavy indebtedness. With rates so low following the Crisis, indebted companies issued hugely risky and burdensome debt that was eagerly gobbled up by investors. According to Moody’s “The record number of highly leveraged companies has set the stage for a particularly large wave of defaults when the next period of broad economic stress eventually arrives”.

FINSUM: All that issuance was always going to come back to bite. Credit-worthiness was low and investors gave up a lot of safeguards. It seems inevitable the bill will come due.

(New York)

As if higher rates and Europe weren’t enough, there are plenty of other dangers currently weighing on the stock market. The two big ones are a potential trade war—sparked by Trump’s proposed tariffs on metals and beyond—which could lead to a bitter battle between the US and Europe or the US and China. The other big risk is FAANG, or big tech, regulation. Tech stocks have become such a stalwart of the market, that regulations reigning them in could prompt major losses.

FINSUM: The market does appear ripe for some regulation of tech stocks. GDPR just passed in Europe and the political climate seems ready for some regulation, but we believe it is still more likely that nothing happens.

(New York)

If you are worried that much higher rates will cause an exodus from the stock market, you are not alone. Many advisors across the country are closely watching the markets to see signs of a mass departure. The big worry is that even three-year Treasury bills now have yields which exceed the dividend yield of the S&P 500. So while for the last several years the theme was “there is no alternative”, now there are some very good ones, which could scuttle the market.

FINSUM: The good news here is that the so-called “Great Rotation” into stocks never really materialized, so there is not going to be a great rotation the other way, or at least everyone hopes so.

(Washington)

You know that Mercedes or BMW you have sitting in your driveway? Kiss it goodbye, maybe. In a move that seems likely to cause as much consternation at home as abroad, President Trump is planning a broad ban on German luxury cars. Trump’s proposals have ranged from a 25% tariff on German cars (extremely heavy) to outright bans. He reportedly told French leader Emmanuel Macron that he would maintain his trade policy until “no Mercedes models rolled on Fifth Avenue in New York”.

FINSUM: BMW alone makes $8-9 bn in annual revenue from sales of cars in the US. If Trump wanted to start a bitter trade war, this would be a good first step. Americans aren’t going to like this one either.

(Rome)

Well it just happened. The two alternative Italian parties—the Five Star movement and the League have just formed a coalition government to govern Italy. The new PM of the country will be Conte, a very inexperienced politician who comes from a legal and academic background. According to the WSJ, “Matteo Salvini, the 45-year-old leader of the League who pledged to deport hundreds of thousands of illegal immigrants, will become interior minister”.

FINSUM: There is now a strongly anti-Euro and anti-EU government in power in Italy. A default and a devolution to the old Lira are entirely within the realm of possibility.