Bank Credit Weekly: GameStop Is Noise, Not a Signal, for Risk Assets

GameStop & Robinhood Debacle - What Does It Mean for Asia?

Bank Credit Compass: Credit Tourist May Vacate if Real Fundamentals Do Not Catch-Up

Bank Credit Weekly: Duration Desires Deliver Asia's AT1 & Sub Outperformance

Bank Credit Weekly: Moving the Goal Posts

Bank Credit Weekly: Distractions May Drive Markets Near Term

Gravity Works As WeWork Doesn't; Now Plan B

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Ironically, a distracted and internally divided US Congress combined with an accommodative Fed could be bullish for risk assets and simultaneously reduce bearish fixed income pressures. For bond investors, it could be reassuring that the Goldilocks election outcome remains as political balances keep the US government from undertaking an even larger, more sustained, reflationary fiscal push. This could benefit Asia-headquartered risk assets.Some observers worry, rightly so, that the trial of former President Trump threatens to elongate the political divide in the U.S. This could make it more difficult for President Biden to effectively deliver on his fiscal spending plans in a timely manner while economic activity indicators soften. In addition, expectations that President Biden’s $1.9 trillion stimulus plan may be materially watered-down, by almost one-half, raised expectations that Fed accommodation would be extended longer than anticipated when the stimulus plan was first announced. As such, the current distraction may be credit positive. Meanwhile, U.S. CCC-rated indexes compressed into uncharted territory as CCC-index yields hit all-time lows. Asia risk asset followed, although the credit spread relationship between these two geographies remains far from the norm.  We note that credits only have limited upside in the reflation scenario.  Please see <a href="https://www.smartkarma.com/insights/bank-credit-weekly-moving-the-goal-posts" target="_blank" data-smartkarma-citation="insights:46889" rel="noopener">Bank Credit Weekly: Moving the Goal Posts</a> for more on this. A delay in the reflation scenario could also benefit Asia-headquartered risk assets.In addition, just as the US-dollar media narrative began to change from one of universal weakening to strengthening, US-dollar strengthening stopped. Declining odds on a large federal stimulus package likely arrested dollar strength. We present our US-dollar views inside and why it may be short-term Asia credit positive.Meanwhile, Fed officials are not reading from the same song sheet. Admonishing others to avoid asset purchase tapering discussions at the Fed is tantamount to a Say no Evil, Hear no Evil strategy. This is misguided as an open discussion could limit volatility once tapering begins. Please see last week’s <a href="https://www.smartkarma.com/insights/bank-credit-weekly-distractions-may-drive-markets-near-term" target="_blank" data-smartkarma-citation="insights:47117" rel="noopener">Bank Credit Weekly: Distractions May Drive Markets Near Term</a> for more on this. Fed Chairman Jerome Powell will discuss the FOMC’s decisions on Wednesday, 27 January.Against this backdrop, almost all of Asia’s bank debt tightened during the week. Improved risk sentiment, the arrest of a stronger US-dollar, EM inflows and country specific announcements drove these results. In particular, the Reserve Bank of India’s proposal to revise the regulatory framework for India’s non-bank finance companies likely had a positive impact on the US-dollar bonds of these institutions.Several Asia-headquartered banks reported earnings as the week ended and into the weekend. Asia bank earnings season is upon us. However, we note that asset quality indicators at many banks greatly underestimate the level of troubled debt within the institution as forbearance measures remain in place in several operating environments. This is driving provisioning costs lower than would be expected in a more normal operating environment. The value of these earnings reports is significantly diminished for credit investors. As such, credit value should remain driven by larger market forces.Market Outlook: The distraction of another set of impeachment proceedings could turn out to be market friendly if it results in more targeted stimulus. Outside of the Washington beltway, the real issue of how much is too much stimulus as the vaccine is rolled-out will lead to concerns on when the Fed begins to taper its asset purchases. Credit has limited upside in a fast reflation scenario. A slower, more contained, reflation environment could be Emerging Market credit supportive.

Ironically, a distracted and internally divided US Congress combined with an accommodative Fed could be bullish for risk assets and simultaneously reduce bearish fixed income pressures. For bond investors, it could be reassuring that the Goldilocks election outcome remains as political balances keep the US government from undertaking an even larger, more sustained, reflationary fiscal push. This could benefit Asia-headquartered risk assets.Some observers worry, rightly so, that the trial of former President Trump threatens to elongate the political divide in the U.S. This could make it more difficult for President Biden to effectively deliver on his fiscal spending plans in a timely manner while economic activity indicators soften. In addition, expectations that President Biden’s $1.9 trillion stimulus plan may be materially watered-down, by almost one-half, raised expectations that Fed accommodation would be extended longer than anticipated when the stimulus plan was first announced. As such, the current distraction may be credit positive. Meanwhile, U.S. CCC-rated indexes compressed into uncharted territory as CCC-index yields hit all-time lows. Asia risk asset followed, although the credit spread relationship between these two geographies remains far from the norm.  We note that credits only have limited upside in the reflation scenario.  Please see Bank Credit Weekly: Moving the Goal Posts for more on this. A delay in the reflation scenario could also benefit Asia-headquartered risk assets.In addition, just as the US-dollar media narrative began to change from one of universal weakening to strengthening, US-dollar strengthening stopped. Declining odds on a large federal stimulus package likely arrested dollar strength. We present our US-dollar views inside and why it may be short-term Asia credit positive.Meanwhile, Fed officials are not reading from the same song sheet. Admonishing others to avoid asset purchase tapering discussions at the Fed is tantamount to a Say no Evil, Hear no Evil strategy. This is misguided as an open discussion could limit volatility once tapering begins. Please see last week’s Bank Credit Weekly: Distractions May Drive Markets Near Term for more on this. Fed Chairman Jerome Powell will discuss the FOMC’s decisions on Wednesday, 27 January.Against this backdrop, almost all of Asia’s bank debt tightened during the week. Improved risk sentiment, the arrest of a stronger US-dollar, EM inflows and country specific announcements drove these results. In particular, the Reserve Bank of India’s proposal to revise the regulatory framework for India’s non-bank finance companies likely had a positive impact on the US-dollar bonds of these institutions.Several Asia-headquartered banks reported earnings as the week ended and into the weekend. Asia bank earnings season is upon us. However, we note that asset quality indicators at many banks greatly underestimate the level of troubled debt within the institution as forbearance measures remain in place in several operating environments. This is driving provisioning costs lower than would be expected in a more normal operating environment. The value of these earnings reports is significantly diminished for credit investors. As such, credit value should remain driven by larger market forces.Market Outlook: The distraction of another set of impeachment proceedings could turn out to be market friendly if it results in more targeted stimulus. Outside of the Washington beltway, the real issue of how much is too much stimulus as the vaccine is rolled-out will lead to concerns on when the Fed begins to taper its asset purchases. Credit has limited upside in a fast reflation scenario. A slower, more contained, reflation environment could be Emerging Market credit supportive.

Risk Assets Are Supported by a Distracted Congress and Accommodative Fed

Asia High Yield Bond Index

Risk Assets Are Supported by a Distracted Congress and Accommodative Fed