Despite the Fed blackout there is a lot going on. The Mega-cap tech companies had a hard time yesterday, but the rest of the S&P 500 was strong, a bit of a rotation. Chinese imports in May were strong (including commodity imports), suggesting growth might be holding up better than anticipated. Treasuries were heavy, yields jumping 8-13bps across the curve following the surprise Bank of Canada rate hike to 4.75%, the highest since 2001. There’s the threat of the “T-bill tsunami” and then there was Ray Dalio saying that “we are at the beginning of a late, big-cycle debt crisis when you are producing too much debt and have a shortage of buyers.
Asia activity remains subdued, with flows well below the average. This is partly due to the dearth of new issuance. Year to date the Asia ex-Japan primary market has managed $60bn of new issuance: .Korea $19bn, Mainland China $15bn and HK $12bn. It is expected that this low run rate will persist for the rest of the year as Asia IG issuers steer towards local currency or hard currency loan financing. HSBC has reduced its full year forecast to around USD100bn for 2023.China corporates have been the main miss, issuing only $3bn so far. Local Government Financing Vehicles have not issued a cent in US$ this year, focusing instead on CNY issuance in the Shanghai Free Trade Zone.
GS is focusing on the LGFV domestic debt market where over there are RMB 1.9tn of maturing bonds in 2023 and over 40% of the existing LGFV local debt comes due in the next 2 years. The report is keen to maintain that defaults are unlikely, given the tools that the policy makers have at their disposal, but that falling local government revenues are putting stress on the sector. LGFV’s from provinces such as Yunnan and Tianjin are highlighted as the most indebted. Caveat emptor.