Market rally

On 18 June Germany's 10-year bond yield closed at -0.32%, a new record low, after European Central Bank (ECB) President Mario Draghi reiterated that there was "considerable headroom" to revive its asset purchase program and to take other expansionary policy measures as necessary. Spain's 10-year bond closed at -0.39%, down 14 basis points, while Portugal's 10-year bond rallied to 0.53%, down 11 basis points. US 10-year Treasury bonds also have reached a 2019 low, closing at 2.06% on 18 June, down over 60 basis points within 2019.

Chief European Economist Ken Wattret flags that Draghi stated that EU treaty legislation requires that the ECB take "actions are both necessary and proportionate to fulfil our mandate and achieve our objective" and that this "implies that the limits we establish on our tools are specific to the contingencies we face". We assess that a key policy measure would be to increase the limits for ECB holdings of EU sovereign debt, giving it the ample additional scope for action that it claims to possess.

According to Financial Times calculations, the global stock of government debt trading at negative yields is now close to USD12 trillion and is approaching an all-time high. This total has roughly doubled since the fourth quarter of 2018 and risen sharply since mid-March when its stood at USD9.3 trillion.

New debt supply

After last week's exceptional rush of deals, this week's supply has been much lighter, ahead of this week's FOMC meeting (this blog is written ahead of the meeting).

Chile enjoyed considerable success with its debut Green bond.

• Initially, it sought just USD523 million of "Green bonds" but launched USD850 million of 2050 bonds at guidance of 120 basis points over US Treasuries.
• The deal was expanded to USD1.42 billion and pricing tightened to 95 basis points, with demand of USD6.7 billion.
• Chile plans to repurchase outstanding debt in maturities ranging from 2020 to 2047, using USD895 million of the expanded proceeds for this purpose.
• Chile's statement flagged that the pricing achieved represents a record long-end low for Chile, and the lowest-ever emerging market spread for such maturities.
• Chile's Head of International Finance, Andres Perez, subsequently stated that Chile plans Euro-denominated Green issuance shortly.
• It will seek up to a further USD1 billion equivalent in Euro-denominated Green bonds to complete its 2019 international issuance program.

Saudi Arabia has asked banks to arrange European investor meetings starting in London on 17 June lasting seven working days. A Euro-denominated issue is then widely expected: Saudi Arabia previously has suggested this would form part of its 2019 issuance strategy.

Last week's extensive reports of large-scale sovereign issuance omitted South Korea's sale of USD1.5 billion of five and 10-year debt. It placed USD500 million of five-year green and sustainability bonds at 2.177%, at 30 basis points over US Treasuries, and USD1 billion of 10-year bonds at 2.677%, a 55 basis-point spread. The deal initially was marketed at a USD1 billion size with guidance of 55 and 75 basis points respectively but was upsized after gaining USD6 billion of demand.

Equity

Primary equity markets remain receptive, boosted by potential policy easing globally:

• German chip manufacturer Infineon Technologies raised EUR1.545 billion (USD1.75 billion) from an accelerated capital increase on 17 June. It placed 113 million shares at EUR13.7 each, a 4.6% discount to the prior day's close and just above its initial guidance of EUR13.66, increasing its capital by 10%.
• Chewy started trading on the NYSE at USD39, versus its above-ranging pricing of its USD1 billion IPO at USD22 per share. It closed at USD34.99, up 59% and has remained firm subsequently.
• Trainline, a UK company which provides internet bookings for 220 rail and coach providers, enjoyed a rapid positive response to its IPO. The GBP602-678 million issue was fully subscribed within two hours of launch on 12 June and covered at the top of the range by 13 June.
• Hansoh Pharmaceutical started trading on 14 June, opening at a 31% premium. Its shares peaked at HKD21 after opening at HKD16, versus the issue price of HKD14.26.
• Huatai Securities has priced its London-listed global depository receipts at USD20.5 each, versus price guidance of USD20-24 each. At this level, it will raise USD1.5 billion (USD1.7 billion after green-shoe), from the 75 million GDRs, which represent 9% of its capital.

Outlook and implications

This week's main development has been the continued rally in global debt markets in expectation of policy easing.

Many commentators have raised the possibility of a US rate cut as soon as this week, and markets are now pricing in "several cuts this year after increasingly dovish signals from the Fed", according to Sian Jones of our US Economics team. Our assessment is that PMI survey data "suggest that Fed should consider potential rate cuts" but on balance would view the Fed to be more likely to maintain their current stance for the time being and to act if current adverse trends in the US economy persist into the third quarter.

Either way, and even if there is a near-term market correction, repeated recent indicators from both the Fed and ECB point to an expansionary stance if economic conditions remain weak, and this is likely to continue to support bond markets, encouraging a further search for yield which will encourage increased risk-taking, and thus support emerging market and longer-duration issuance. The expected policy shift is giving encouragement to primary equity markets despite multiple indicators of economic slowdown.

Posted 19 June 2019 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, S&P Global Market Intelligence