Growing Nervousness Around High-Yield Bonds
In an article for the Financial Times, Mary McDougall reported on growing investor nervousness regarding junk bonds due to tightening credit and financial conditions. According to the Federal Reserve’s survey of Senior Loan officers about 46% of banks are planning to tighten lending standards given worries about defaults and recent stresses to the banking system.
Historically as lending standards tighten, it leads to a wider spread between junk bonds and Treasuries, indicating concerns over growing defaults. This can even potentially exacerbate a recession as companies have tougher times accessing capital markets which can affect corporate decisions,leading to belt-tightening and job losses.
What’s interesting is that many expected that the regional bank failures that began in March would have impacts on spreads and lending. Yet, there hasn’t been an impact yet. In fact, the entire bond complex has been quite strong since these stresses began as many interpreted it as increasing the odds of the Fed pausing rate hikes.
The Federal Reserve also seems to share these concerns as Chair Powell discussed the possibility of a credit crunch and that it poses one of the major risks to its economic outlook and financial stability.
Finsum: Despite the Fed’s rate hikes and regional banking concerns, lending and spreads have remained relatively resilient, but some are concerned that this won’t last.
Category: Wealth Management;
Keywords: #bonds; #Fed; #fixed income
Energy Sector Earnings Forecast to Decline 21% in 2023
In an article previewing the first quarter earnings season for the energy sector for Zacks Investment Research, Sheraz Mian discussed the major factors for why analysts are forecasting 2023 earnings to decline by about 21% compared to 2022.
The major factor is that prices are down by about 25% when compared to last year. Additionally, costs are going up faster than expected, leading to downwards pressure on margins. Given these uncertainties, companies continue to be conservative in terms of CAPEX and optimizing balance sheet health.
In terms of the outlook for crude oil prices in 2023, the major headwind is weaker demand as economic growth decelerates across the world. Many expect the US economy to stumble into a recession later this year as the Fed keeps rates high to tamp down on inflationary pressures. Additionally, Chinese growth has also been less robust than expected following the end of its Covid policies.
This is sufficient enough of a headwind to offset bullish impulses from OPEC cutting production, sanctions on Russian oil production, and the US government restocking its depleted crude oil inventories.
Finsum: Earnings for the energy sector are expected to be down 21% compared to last year as recession concerns dominate.
Volatility Ignoring Regional Banking Stress
In an article for MarketWatch, Jamie Chisholm discussed some reasons for why stock market volatility has remained depressed despite the ongoing crisis in regional banks which some fear could lead to a credit crunch. In contrast, the stock market seems more responsive to economic data and the Federal Reserve.
Economic data continues to signal an economy that is growing albeit decelerating but also not in a recession which would hurt corporate earnings. Q1 earnings also have come in stronger than expected.
The Federal Reserve is in the final innings of its rate hike cycle. Futures markets are already looking ahead at rate cuts by the end of the year or Q1 of next year. And, inflation data continues to moderate and move in the right direction which is also supportive of asset prices.
It’s also surprising that the market seems unconcerned about the debt ceiling deadline and a potential default, although there has been chatter about positive progress from negotiations between Republicans and Democrats. Surprisingly, the regional bank crisis is having little spillover impacts on the market or economy. In fact, the S&P 500 is 3% higher than from when the crisis began, while the Vix is nearly 10% lower.
Finsum: One mystery for market participants is that volatility remains depressed despite ongoing struggles for regional banks and a looming debt ceiling deadline.
Is ESG Smart Business or Liberal Overreach?
In an article for USA Today, Jessica Guynn summarized the current debate between those who advocate for ESG investing and those who see it as a disguise for ‘woke capitalism’. In contrast, supporters of ESG see these factors as being critical to their investing process. For instance, they see preparations for climate change as part of a managers’ fiduciary duty given its potential impact on asset values.
These tensions came up at the House Oversight Committee meeting last week as Representative Rankin was critical of anti-ESG attacks which he said were coming at the behest of the fossil fuel industry. In turn, Republicans were equally harsh as they countered that asset managers should only consider financial information and that by considering non-financial factors, they were risking the retirement savings of American workers.
At the state level, 17 Republican Attorney Generals jointly filed a motion to block Blackrock from advocating for ESG principles for utility companies.
Many of those opposed to ESG see it as preventing energy companies from making sufficient long-term investments that are necessary to continue fossil fuel production and blame it, in part, for the inflation and oil spike during 2021.
Finsum: ESG investing continues to be a source of political conflict. These tensions came to a head at a contentious House Oversight Committee meeting.
FINRA Boots SW Financial, Cites Reg BI
In an article for FinancialPlanning, Dan Shaw covered FINRA expelling SW Financial of Melville, NY for a variety of violations of industry rules. FINRA cited the firm selling private placement IPOs that were unsuitable for some of its customers. This is a violation of Reg BI, where brokers can only sell private shares to wealthy or accredited investors.
As of April 2023, SW Financial had 38 representatives, 4 branches, and had been operating since 2007. SW Financial’s co-owner and CEO Thomas Diamante was suspended from the financial industry for 9 months and fined $50,000. Diamante and SW Financial agreed to the settlement without admitting or denying guilt.
FINRA also said that the firm notified clients that it was receiving a 10% commission on the private placement but not that it would be getting an additional 5% in selling compensation. This is another violation of industry rules, where 10% is the most commission that can be earned.
In total, the firm received about $2 million in compensation that created a ‘conflict of interest’ for the firm and its clients. They were also cited for a failure to conduct proper due diligence.
Finsum: FINRA expelled SW Financial for failing to follow Reg BI and churning customer accounts.