Corporate Treasury Weekly: geopolitical risk is on the rise – what’s your hedge?

19 August 2021

Giles GaleHead of European Rates Strategy

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Breaking down trending trades & themes to help corporate treasurers get ahead of the latest issues shaping markets.

The big picture

The growth outlook remains strong in the UK, and although the Delta variant and geopolitics weigh on sentiment, markets have largely shrugged both off – at least for now.

Risk monitor for the week ahead

  • The UK’s strong growth momentum makes 2022 rate hikes and Sterling strength more likely. We also see the Bank of England’s (BoE) phased strategy for monetary tightening, which emphasises moderate rate hikes followed by a switch to sales of bonds previously bought under quantitative easing (QE), keeping short-term bond yields relatively low.
  • Markets still have the Delta blues, but UK data remains an encouraging story for other highly vaccinated countries. The UK, where a wave of infections in early summer has subsided due to very high vaccination rates, despite substantial reopening, is the model to keep in mind for developed markets. We expect the rest of Europe to have a similarly encouraging experience, and although the US has a lower vaccination coverage, significant restrictions are unlikely to return.
  • Recent US data still suggests a November taper is on track, but Jackson Hole next week will be one to watch. We expect ‘notice’ of the Fed’s tapering of quantitative easing to be given in September, with an actional announcement in November and action in December. A key risk might be next week’s Jackson Hole symposium, where tapering could be brought forward, but we think that’s less likely amidst rising uncertainty over the economic impact of the Delta variant.
  • Geopolitical risk is on the rise but it’s not yet clear markets know how to react. The swift developments in Afghanistan were negative for markets sensitive to risk sentiment. But from the narrow perspective of global markets, any economic impact probably remains both distant and uncertain, which is why stocks haven’t seen any knee-jerk drops.
  • Growth in Asia shows signs of peaking. In China specifically, our economist Peiqian Liu has downgraded her growth forecast to 8.5% for 2021 (from 9.0%), with economic data from July  – industrial production, retail sales, and fixed asset investment – falling short of expectations.

Trending with treasurers

High-yield bonds get a warm welcome from investors

Becton Dickinson’s four-tranche bond deal last week was worth talking about because a low-BBB rated issuer managed to raise €2.7 billion in mid-August, with (a) the second lowest-ever outright yield level for a 2-year corporate bond (-0.146%), (b) a 4-year tranche at similar spread to a higher-rated issuer the previous week, and (c) the first low-BBB corporate to issue a 20-year since 2019. The sale would suggest investor appetite for high-yield bonds remains robust, even during silly season.

A flat yield curve has motivated more discussions around pre-hedging

As we head into a busy and somewhat less certain September, and if we’re correct in thinking that the yield curve will start to steepen once the BoE starts selling bonds previously bought under QE, ‘paid to wait’ type strategies – where treasurers commit to locking rates if they fall below a pre-agreed threshold, and get paid to do so – start to make more sense.

Chart of the week

The UK Office for National Statistics’ (ONS) ‘faster indicators’ on UK firms’ turnover has generally provided a good steer on monthly economic growth. The survey question asks: In the last two weeks, how has the coronavirus pandemic affected your business's turnover, compared to what is normally expected for this time of year?

The latest ONS turnover data (which stretch to 25 July) signal a further rise in the level of growth gross domestic product (GDP), with turnover growth improving 6.2% year-on-year in July.

UK corporate turnover continues to improve, despite moderating slightly from levels in June

Sources: UK Office for National Statistics

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