Credit’s Weekly Thoughts

Monday Musings: November 12, 2019

Nov 12, 2019

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Public Trust Credit Team

Third quarter capital expenditure growth is roughly on par with second quarter 2019, but a slowdown is expected in the fourth quarter

This week, the Financial Times reported that capital expenditure grew 3.2% in July through September, based on earnings released so far from approximately four-fifths of the S&P 500 companies. Though expectations for a trade resolution between the U.S. and China are anticipated to gain traction this month, companies are projected to reign in capex to a growth rate of 1.8% in the fourth quarter as trade uncertainty continues to weigh on business confidence. The lack of visibility in trade talks have companies dampening business investment until they see greater clarity on U.S.-China trade discussions. The trade war between the world’s two largest economies is currently at the 16-month mark.

Civil unrest in Hong Kong becomes increasingly violent with each passing month

The once peaceful demonstrations to Beijing’s growing influence over the territory’s government has become progressively more violent over the past five months, forcing continued school and business closures and wreaking havoc on public transportation services. The most recent protests this past weekend have left HK at the brink of a total meltdown with buildings set ablaze and streets left stained with bloodshed. Most HK residents are left divided as they support the protests on the one hand but worry that sustained violence is beginning to have a drastic impact on their daily livelihood, particularly after the territory officially slipped into recession in the third quarter. Protestors are becoming increasingly frustrated with what they believe to be an “unjust police response” and so far, Chief Executive Carrie Lam has done nothing as promised with regards to investigating police brutality. With the government refusing to establish an independent inquiry at this time, most consensus points towards an escalation of violent demonstrations as the base case scenario with any form of peaceful compromise over the near-term representing the adverse.

Apple taps the eurobond market

Last Thursday, Apple issued €2 billion of green bonds in Europe, making it one of the largest green bond deals on record. Apple’s bonds are priced just 15 basis points above euro swaps for the 6-year issues and 30 basis points above swaps for the 12-year issues. We believe that U.S. companies will continue to leverage the low rates in the European market by participating in reverse Yankee issuance.

Tariff update: let's flip a coin

On Friday, President Trump walked back comments from the Chinese Vice Premier, stating that a rollback of certain tariffs and a withdrawal of the December 15 list four tariffs would be part of the “phase one” trade deal that was expected to be signed this month. Trump stated that he in fact had not agreed to a tariff rollback in the phase one deal but that China “wants to make a deal” even more than he does. On the other hand, reports out today signal the White House may be planning to delay scheduled European auto tariffs by six months. Investors remain in the dark about U.S. tariff policy and the U.S.-China preliminary trade deal. We will be looking to Trump’s press conference later today for insight into the administrations next steps regarding trade policy.

All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

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