Corporate Treasury Weekly: taking advantage of the summer lull

05 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 Bank of England looks set to start tapering its quantitative easing sooner than later, following in the Fed’s hawkish flight path – but the spread of the Delta variant remains a key macro uncertainty for global markets. Still, the outlook for credit and stocks remains strong, the former driven by a summer drop in supply and investor flows and the latter driven by risk appetite and valuations. Against that backdrop, how should treasurers be thinking about taking advantage of the summer lull?

  • The Bank of England (BoE) looks set to taper earlier than expected and could start hiking interest rates in 2022. The BoE’s monetary policy setting remained unchanged at this week’s meeting, but we could see modest tightening of QE ahead. We also see the first interest rate hike coming at the end of 2022 (up from February 2023). Unmet demand for workers in the UK seems to be shrinking much more quickly than thought but vacancies are still high, and higher inflation forced the BoE to raise its near-term profile for inflation to peak at 4% this year.
  • Global growth remains strong, but momentum is shifting towards advanced economies. Business surveys this past week showed that global manufacturing remains strong, but that developed markets are outperforming emerging economies – which are held back in large part by mounting concerns over the Delta variant. Europe is catching up with the UK and US, but supply chain pressures are still being felt by businesses (more on this below in the chart of the week section).
  • The key macro uncertainty for markets is the arrival of the Delta variant in the US and Asia. Vaccinations have plateaued at uncomfortably low levels in the former, and new social distancing measures in the latter could upset the improving global growth story. We expect developed markets to be able continue to reopen and take the UK experience so far as a positive.
  • The end of generous furlough, unemployment schemes, and possibly also moratoria on debts are a secondary uncertainty. We downplay all three given the still strong labour data and (relatively cheap) asset valuations, but it remains a risk given September is already set up to be a volatile period with a raft of key central bank meetings.
  • Amazingly, bond yields continue to fall, and credit spreads could tighten further in Europe. July was a very good month for global bond markets. Depending on the region, 10-year yields have now reversed between half and three-quarters of the rise seen earlier this year, partly because growth concerns have eroded inflation expectations (despite strong inflation data). In the Euro Area, the European Central Bank’s strategy review also raised expectations of longer easy monetary policy, which could push credit spreads tighter still.
  • A bullish outlook for Sterling against other safe havens. The US Dollar outlook has become more balanced as the Delta variant spreads and quantitative easing tapering now on the horizon, creating scope for Sterling’s near-term outperformance against it (and the Euro, given the ECB’s lower-for-longer posture).

Broadening and deepening ESG within treasury

As corporate treasury teams seek to embed their firms’ sustainability credentials, some are starting to look beyond now-familiar debt products like green bonds and sustainability-linked loans – and are working with the industry to structure FX and derivative products to include sustainability KPIs. The products are still in their infancy but for the structures that are emerging, sustainability targets (often annual, akin to revolving-credit facilities) are linked with step-up / step-down mechanisms or with annual rebates.

Taking advantage of the summer lull – better pricing and duration appetite

With just €1.5 billion in investment-grade bonds sold over the past week, the summer lull is fully underway. The lack of supply and investor flows has tended to help execution, with many deals this week successfully pricing at no – or in some cases negative – new issue concession. For most of the past few months, bond issuers have been focused on more intermediate maturities. But the latest rally has combined with the summer slowdown to make longer-dated issuance much more attractive. This could remain a feature of the post-summer issuance window if the current (highly supportive) yield environment continues.

Higher-frequency business surveys like the purchasing manager’s index (PMI) suggest that the rapid rebound in economic activity continues to generate supply chain constraints and price pressures. Global suppliers’ delivery times lengthened to new records and backlogs dipped only slightly from a very high level (see the first chart). Meanwhile, rising congestion at ports coupled with the inability of supply to catch up with increasing demand for containers has driven shipping costs higher (see the second chart).

Suppliers’ delivery time is lengthening and work backlogs rising

Sources: IHS Markit, NatWest Markets. For work backlogs, a score of 50 or above reflects a rise. For supplier delivery time, a score of 50 or above signals a reduction.

By the end of July, global sea freight rates for containers reached nearly 6 times their levels in January 2020 (5.8x to be precise), with a sharp rise in rates for routes from Asia to Europe. Rates from Asia to the US actually fell.

Where does all of this leave trade in H2? As supply challenges recede, better trade growth in the second half of 2021 could be supported by large backlogs of work that exporters will need to fulfil and inventory build-up. However, there could be a sizeable slowdown in the pace of the recovery.

Global shipping costs are rising

Sources: Freightos Baltic Container Freight Rate, NWM; Index: January 2020=100

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