Monday Musings: September 23, 2019

Sep 23, 2019

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Public Trust Credit Team
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Recession fears across the Eurozone increase with each passing month

The purchasing managers’ index (PMI) for the Eurozone as a whole fell to a six-year low in September to 50.4, a reading just above 50 which is a common signifier of economic contraction. The data comes one week after the ECB’s decision to further cut interest rates into negative territory and resume its EUR 2.6 trillion QE stimulus. Germany, the Eurozone’s largest economy, continues to show heightened economic woes as trade tensions, a slowing Chinese economy, and the unknown impact of Brexit have crippled the country’s manufacturing sector, giving rise to increasing recession fears by the third quarter. Production in Germany’s auto industry has fallen by 12% while exports have declined 14% this year alone. Germany’s overall composite PMI (which measures total business activity) fell to 49.1 in September, the country’s lowest reading since October 2012. The outlook for prolonged weak demand in the Eurozone and persistent geopolitical uncertainty sets the stage for continued economic stagnation for at least the remainder of 2019.

Funding market calming but longer term considerations unresolved

Following the dramatically elevated overnight repurchase agreement (repo) rates of the past week and the Fed’s use of a repo mechanism that had been dormant for a decade, the funding market has apparently returned to normal. According to Bloomberg reports this morning, the Fed’s $75 billion repo facility was under-subscribed on Monday, the first time since last Tuesday. The liquidity disruptions were triggered by a combination of quarterly tax payments and the Fed’s issuance of bonds to its dealer network that had the effect of reducing the amount of cash available to fund repo. Even as rates rose to high single digits, market participants viewed the event as fleeting; however, the experience raised questions that the Fed will likely address over the coming months. Preliminary reports state that lower interest rate on excess reserves (IOER) and looser reserve requirements will be considered alongside expansion to the Fed’s balance sheet and the creation of a standing repo facility. Money market participants, including Public Trust and the majority of the banking counterparties in our investment universe, will be impacted by the changes, but the extent remains uncertain.

Not All Quiet on the Middle Eastern Front

Iran released the Stena Impero, a U.K. oil tanker it seized several months ago, today in response to a British detention of an Iranian oil tanker. While this provided some support to a strained U.K.-Iran relationship, most of the news over the weekend was noise. The U.S. is pursuing an international coalition to pressure Iran, the Saudis officially named Iran responsible for the oil field attacks causing the U.S. to contemplate retaliatory action, and the U.S. imposed strict financial sanctions on Iran. Oil prices were mostly flat after the news and prices have stabilized since the attack took half of the Saudi production offline. The focus from here will be what option the U.S. chooses for retaliation; news agencies are reporting that a cyber attack is the preferred choice at the moment. Our oil companies are the most exposed to the developments in the U.S.-Iran conflict as Iranian oil exports have moved from approximately 2 million barrels a day to just 200,000 and the price of WTI has rallied 6% since the attack. 
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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