European markets have been on a wild journey

Good morning. That is Harriet Clarfelt, standing in for Mr Armstrong as he takes a much-deserved day without work. Complaints to him, some other feedback to me, please: harriet.clarfelt@ft.com.

I personally was on vacation simply final week; one thing that Rob maybe took into consideration as he sought out a well-rested colleague, contemporary from sunnier climes.

Little probability on the climate entrance, provided that I ventured again to my hometown, London. However, usefully, a short hop throughout the continent to Austria and France did immediate me to take a better have a look at European markets. (And dumplings, schnitzel and lots of different starchy meals merchandise . . .)

Which leads me on to . . . OATs

French authorities bonds, aka OATs (quick for obligations assimilables du Trésor), have had a unstable time since President Emmanuel Macron known as snap parliamentary elections two Sundays in the past.

The ten-year French bond yield surged final week as the worth of the instrument fell, and the unfold or hole between French and German benchmark yields — seen as a barometer for the chance of holding France’s debt — rose to greater than 0.8 share factors final Friday, its widest degree since 2017.

As has been well-documented by my colleagues, different French markets have additionally come below stress over the previous fortnight as buyers digested the potential for a far-right authorities with large spending plans, and the formation of a leftwing bloc that might erase Macron’s centrist alliance.

Final week marked the worst decline for the Cac 40 index since 2022, and — as I’ll focus on — European company borrowing premiums leapt larger.

So: 1) What do these larger premiums imply for corporations with euro-denominated debt obligations? and a couple of) Might this bout of volatility current a chance for would-be buyers?

My solutions, briefly, are: 1) Corporations tapping the European investment-grade bond market now should pay the best premium in a number of weeks to subject debt — not superb if you happen to’d been planning to get a giant deal away any time quickly.

And a pair of) Perhaps — if you happen to imagine that any additional turmoil shall be shortlived past the two-round French political contest happening on June 30 and July 7. Though, in fact, particular person credit score choice is essential — after which there’s the truth that France is much from the one nation holding elections this yr.

First, some numbers. The common euro investment-grade unfold — the premium paid by debtors to subject debt over equal German Bund yields — sits at roughly 1.2 share factors, having final week touched its highest level since February.

That’s nonetheless a lot decrease than it was six months in the past, however significantly larger than early June’s degree of simply 1.06 share factors.

The common high-yield, or “junk” unfold, can be a lot decrease than it was final yr, however has climbed sharply from 3.21 share factors to simply below 3.5 share factors this month, in accordance with Ice BofA knowledge.

For Goldman Sachs’ chief credit score strategist Lotfi Karoui, such strikes mirror “uncertainty [about] the outcome over the election, and the lack of clarity that investors have about the economic agenda of various players”.

True, US company bond spreads have additionally expanded in June. However the transfer has been much less pronounced than throughout the pond — and that lack of direct correlation means the hole between the 2 areas’ investment-grade spreads reached its widest degree in 4 months earlier this week.

So, some is perhaps tempted to hang around briefly within the greenback market till volatility calms down in Europe. In an indication of the US market’s openness to new issuance — and protracted demand from buyers — numerous large offers have landed this week, with Residence Depot finishing a nine-part $10bn bond sale on Monday.

However may we be witnessing extra of a long-lasting shift? There’s an argument that spreads have been just too slender for the chance they have been imagined to be reflecting earlier than, and it was about time for a widening. Certainly, Man Group’s Mike Scott notes: “France [has] provided a catalyst for the reassessment of risk — which had not been appropriately priced.”

Analysts at Deutsche Financial institution wrote this week that they’re “still comfortable with credit on an absolute basis” and that “the odds of a European systemic political shock are overstated”. However they added that European credit score ought to now commerce with a wider unfold to US credit score, “both on political fears, and an ECB seemingly hesitant to diverge from the Fed” with reference to rate of interest cuts.

In equity, euro credit score spreads have really edged somewhat decrease from the place they have been final week. (Selecting to put in writing a couple of matter, after which desperately watching the development begin to unwind, is an occupational hazard of a markets journalist.)

This is perhaps a sign that issues are starting to ease already.

And if you happen to imagine that markets’ worst political fears are unlikely to be realised, and that volatility gained’t final for too lengthy, then this may very well be a pleasant second to scoop up some barely cheaper debt.

“People were complaining about tight credit spreads,” notes Vontobel’s Christian Hantel. “If you look now at the widening in Europe — and assuming that the damage on the political landscape in France could hopefully be limited — it could be an interesting entry opportunity for investors.”

JPMorgan analysts concur. “In our view, while there are many risks, this situation ultimately provides a buying opportunity,” they wrote final Friday, noting that “European investors are no stranger to political risk.” In the meantime, “technicals” — particularly investor inflows into euro high-grade bond funds — have remained “extremely strong”.

My view? Opportunistic shopping for on the idea that volatility will proceed to ease nonetheless requires a hearty dose of judiciousness about particular person corporations’ prospects — and credit score high quality — in any political state of affairs.

To not point out a recognition of the broader worldwide context we discover ourselves on this yr, with UK elections touchdown between France’s two rounds, and naturally, the US election looming in November.

Then there’s the query of when and the way far central banks will reduce charges . . . and the controversy concerning the broader financial outlook.

For Man Group’s Scott, “volatility is here to stay” as numerous elections play out — however so far as high-yield credit score goes, “the bigger thing in general is going to be the growth backdrop”.

Defaults diverge

The newest month-to-month company default experiences are out, and — opposite to a few of the fears being espoused up to now yr, issues don’t look too dangerous. However they don’t look too good both.

International defaults totalled 14 in Might, in accordance with S&P International Scores, taking the year-to-date complete to 69. That’s two fewer than the comparative interval in 2023. However as S&P says, it’s nonetheless “well above” the five-year common.

Might’s default numbers additionally spotlight the theme of regional divergence. US defaults final month have been larger than these in Europe — at 9 versus 4. However whereas US defaults really dropped month-on-month, Europe’s defaults held regular, retaining the area’s year-to-date tally at its highest since 2008, at 19.

Furthermore 11 of these European defaults have been so-called distressed exchanges.

Any such debt-exchange transaction might help corporations (and their private-equity backers) keep away from costly chapter proceedings — although our earlier reporting signifies that distressed exchanges can often simply kick the can down the highway in direction of the courtroom, anyway.

S&P and Moody’s do count on default charges to development decrease over the subsequent 12 months. However that’s contingent to some extent on the trail of rates of interest, development and geopolitical developments.

Weaker company debtors — and significantly leveraged mortgage issuers, whose debt prices float up and down with prevailing rates of interest — shall be keenly trying to find indicators of aid on the horizon. The difficulty is that central banks are unlikely to quicken the tempo of mentioned aid except they’re dealing with sharply slowing development.

And that atmosphere wouldn’t be nice for highly-indebted, low-quality corporations both.

One good learn

Hertz raises contemporary money for respiratory room.

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