For many months there has been a great deal of fear about the threat of BBB bonds falling into the “junk” category. The whole fear is based on the idea that as the economy slows, this huge group of companies would get downgraded and there would be forced divestiture, sending bond prices strongly lower. However, the opposite has happened. Over the last few months, BBB bonds done nothing but strengthen. In fact, the spread between BBBs and Treasuries just hit a 52-week low, showing investors renewed faith in what is the largest segment of corporate bonds.
FINSUM: Unsurprisingly, the price growth has led to a bunch of new issuance. It is important to remember that though prices have risen, the risk of a recession and downgrades is still very much there.
In what comes as a very encouraging sign in the trade war, Washington is considering dropping some tariffs on Beijing as part of an effort to close a deal with China. The Trump administration is reportedly debating whether to drop $112 bn worth of tariffs. That said, the White House would be expecting something in return. The potential cut in tariffs follows the cancellation of a new $250 bn+ tariff package.
FINSUM: Both sides making concessions is the key to a solid deal. We find this encouraging.
The car industry is the epicenter of the current economic slowdown. The car business is both the culprit and a victim of the biggest economic downturn since the Crisis. It is not just in Germany, but also in Asia and Detroit. The industry uses so many raw materials and supplies from many adjacent industries, that the contraction in the auto sector is is dragging the whole global economy down with it. The chief executive of VW says “This trade war is really influencing the mood of the customers, and it has the chance to really disrupt the world economy … Because of the trade war, the car market [in China] is basically in a recession . . . That’s scary for us”.
FINSUM: What is curious about the car downturn is that consumers are very strong. Therefore, from our view, the weakness in the auto sector is more concerning because it could be a leading indicator.
Over the last month or so, the biggest risk for advisors in the regulatory space has been the reemergence of the fiduciary rule. The DOL is set to release a new version of the rule as soon as by the end of this year. While this caused anxiety in itself, the most worrying aspect has been that Eugene Scalia, new head of the DOL, appeared likely to have to recuse himself from involvement in the new rule-making process because of his involvement as a private lawyer with the first version of the rule. However, government ethics lawyers have just announced that after consideration of the situation, Scalia will NOT need to recuse himself and can take part in making a new rule.
FINSUM: This is a big win for those who do not want a new DOL rule, or at least not a new one that looks anything like the first version. Consumer advocacy groups are very upset about the decision.
Investors have been jolly lately about the progress made in the trade war. Ever since Trump’s announcement of a “phase 1” deal a few weeks ago, trade war concern has been diminishing, with markets rising accordingly. However, there was a reality check today as China made worrying comments, saying that they don’t think any long-term/substantial deal would be possible with Trump, and that they are even worried about him backing out of a simple short-term deal because of his “impulsive nature” (from Bloomberg).
FINSUM: Talk about throwing cold water on something. That said, none of these comments—positive or negative—mean too much. What ends up on paper matters more.