Corporate Treasury Weekly: peak optimism on the US, peak pessimism on Europe, and clouds lift for pandemic-affected firms

22 April 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.

We think we’re nearing peak optimism on economic growth in the US and peak pessimism in Europe, but there and elsewhere (especially in the UK), a fast-moving recovery means we continue to see no way but up for bond yields in the months ahead. For now, corporate treasurers in pandemic-affected sectors like travel & aviation are looking to get ahead before rates take off.

  • On economic growth, we may be near peak optimism on the US and peak pessimism on Europe: recent data on the US economy has been as strong as any of us can remember: nearly a million jobs were created in March; manufacturing & services sentiment has reached multi-decade highs; housing, jobless claims, retail sales all came in better than expected. In Europe, data has been sparser, and the read more clouded by return to restrictions in some regions, notably France and Germany. But Europe has also shown impressive resilience, and we are starting to look to a potential growth & sentiment momentum shift to the continent.
  • China’s economic recovery is starting to broaden – which is good news for the global economy: China’s gross domestic product (GDP) rose sharply to 18.3% year-on-year, even as it slightly missed market expectations, and data suggests that the recovery in Q1 GDP was more broad-based than previous quarters. Retail sales shot well beyond expectations, growing 34.2% year on year, while fixed asset investments - amounts invested in building, land, machinery & equipment, and infrastructure – grew 25.6% year-on-year.
  • US bonds rallied – but we doubt this will last: the impressive US economic data might on the face of it appear at odds with a recent rally in US bonds, but as we flagged in our last weekly, we suspect unusual investor activity at the beginning of a new fiscal year (more foreign bond-buying, pent-up pension fund demand). We doubt this will last more than a few weeks, if that, and we now think US bond yields are at or close to lows.
  • European bond yields will likely follow the US & UK higher: heavy bond buying by the European Central Bank (ECB) may keep rates suppressed a little longer, but if we are right on the direction for US rates, and about the European recovery, European rates have room to rise too – and possibly further than elsewhere given their repressed starting point. Meanwhile, as the Bank of England appears unmoved by a lift in bond yields and the recovery proceeds apace, we continue to see no way but up for UK rates.
  • Positive sentiment around Sterling may have reached a turning point: we get the sense that sentiment on the UK, which rose on the back of a Brexit deal breakthrough followed by vaccine progress, has peaked, which means we are less positive on Sterling. The upcoming Scottish elections – where the topic of UK independence is likely to take some prominence – may also lead to investor skittishness (and volatility) in the run-up.

Clouds part over travel-linked companies on the back of the post-pandemic recovery

We’ve seen significantly more interest from travel-related firms to buy Euros this week, continuing a trend highlighted in last week’s note that sees pandemic-affected businesses gain more confidence (and positive investor attention) as recovery momentum builds. Since Gatwick Airport’s operating company transaction last week (which has performed very well in secondary markets), Amsterdam’s Schiphol Airport raised €1 billion by selling 4-year and 12-year bonds. Investor sentiment took off – both tranches priced 25 basis points tighter than initial guidance.

Stable rates, strong data create perfect weather for corporate bonds – but ECB asset purchasing withdrawal & political risks remain

Stable rates, strong data, and, in Europe at least, relatively tight supply, all make this a seller’s market. What could upset that? If the ECB starts to withdraw quantitative easing, higher bond yields could be in the offing. Political risks including the German Constitutional Court’s pending decision on a law to allow the funding of the European recovery fund could also matter.

Chief Sustainability Officers focus on supply chains & collaboration to achieve ESG targets

Chief Sustainability Officers who participated with a roundtable discussion hosted by NatWest this week have been focused on (i) understanding and adjusting supply chains and (ii) collaborative approaches to industry challenges, noting the need to partner & share best practices to achieve sustainability targets. Stay tuned for a more in-depth summary of the discussion’s key takeaways.

The UK Office for National Statistics’ (ONS) Labour Force Survey (LFS) shows a two-tier UK labour market emerging. Full-time employee jobs rose by 213k in the 3 months to February 2021, but this was more than offset by declines in part-time employees (-110k) and self-employment (-178k).

The shift from part-time to full-time employee jobs is likely indicative of improving labour market conditions and the more general recovery in working time (see chart below). Clearly, less favourable conditions persist in the self-employment sphere, though we expect to see clearer evidence of recovery here as coronavirus restrictions ease.

Workin’ nine to five: working time & employment

Sources: UK Office for National Statistics.

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