Moody’s downgraded China’s sovereign credit rating to A1 from Aa3 and changed outlook to stable from negative. Leverage, high debt and slowing growth are the trio concerns for Moody’s China downgrade. Moody’s expect direct government, indirect and economy-wide debt to continue to rise. According to Moody’s rating agency, China’s structural reforms will not enough to prevent its rising debt.
China’s credit rating history by Rating agencies below…
We all know that debt in China has been increasing since the financial crisis and the credit risk of companies keeps on rising. There are companies which have very high debt levels in China. It’s not easy to assess them because of the expansion of shadow banking in China.
Here is very interesting article about China’s credit rating :
4 Reasons Why Moody’s Is Wrong About China !
According to Kenneth Kim,
1-The concerns of China’s “economy-wide” leverage is misplaced.
2-It is okay if China’s growth rates fall.
3-It is okay if China mostly relies on debt financing instead of equity financing.
4-China’s financial sector is growing..
Equity markets in China fell sharply on the news. China stocks and currency hit after Moody’s downgrade the country’s rating.
China yields rose after Moody’s downgrade, China’s yield curve rallied, signaling further trouble
The Fed minutes signaled rate hike very soon and mentioned that economic weakness is transitory and focused on significant uncertainty about Trump’s economic policies. Fed officials also discussed plans to reduce the central bank’s 4.5 trillion US dollar balance sheet.
Federal Reserve Balance Sheet
US labor market strength
US jobless claims rose slightly, but remained below expectations this week.
US GDP growth revised up to 1.2% in Q1.
US corporate profits unexpectedly fell in Q1
ECONOMIC POLICY UNCERTAINTY INDEX AND VIX
Very useful article here:
This special feature aims to explain the decoupling of economic policy uncertainty and financial conditions. Shocks to uncertainty and shocks to financial conditions are strongly.
According to the Markit Economics, the composite Purchasing Manager’s Index (PMI) remained steady at 56.8 in May from April in Eurozone. Business activity is expanding at its fastest rate for 6 years so far in the second quarter, consistent with 0.6-0.7% GDP growth in Eurozone.
There are faster expansions in France and Germany
Business activity growth was recorded in both Germany and France. On the other hand, Italy manufacturing confidence fell unexpectedly fell in May.
However, Eurozone still has some problems about non-performing loans.(especially in Greece/Portugal/Italy). Debt to GDP ratio in Portugal is the highest in the Eurozone after Greece.
As you can see from the table below, the relationship between US dollar index(DXY) and USD/EURO has a very strong positive correlation in the last month since the value is so close to +1.
US DOLLAR INDEX AND EURO/USD CHART
Euro advanced against US dollar after dovish Fed minutes. According to calculations by Reuters and Commodity Futures Trading Commission data released on Friday, net long positions on the euro rose to its highest than 3 years.
UK GDP growth
UK growth slowed sharply in the first quarter of 2017. On the other hand, business investment rose in the first 3 months of 2017 compared with the previous quarter.
Economic policy uncertainty peaked around the UK referendum and the US presidential election. On the other side, UK economy is still affected by the uncertainty about Brexit and early General election in UK.
Weak Q1 UK GDP was driven by falling exports and consumption slowdown.
Output components of UK GDP growth
Within services, the largest contributor to growth was business services and finance.
FTSE 100 closed record high as pound fell to a 1 month low ahead of the early general election in UK.
BITCOIN KEEPS EXPANDING ANDD BREAKING RECORDS
Bitcoin reached a record high on Thursday amid increased political risk in the US and Brazil. Bitcoin’s value has nearly doubled since the start of May.
Bitcoin is twice as valuable as gold now!
In spite of Bitcoin’s volatility, some investors prefer Bitcoin to run away from increased geopolitical risk.
Sovereign Risk and Credit Ratings
BlackRock Sovereign Index – Quarterly Update – April 2017
The BSRI breaks down the data into four main categories that each count toward a country’s final BSRI score and ranking: Fiscal Space (40%), Willingness to Pay (30%), External Finance Position (20%) and Financial Sector Health (10%).
As a result of this, Venezuela has the highest sovereign risk while Norway has the lowest.
Countries with Highest Rating (latest April 2016)
Countries with Lowest Rating (latest April 2016)
Source: Trading Economics
Emerging Markets are not all created Equal!
Great graph by Visual Capitalist !
From the graph below, you can see that emerging markets have different risks. For example, Turkey, Russia, South Africa, Thailand, Brazil, Chile, Colombia, Mexico, Peru are most affected by changes in currency markets. On the other side, China is so sensitive to domestic economic forces and developed markets. Interestingly, Mexico, Hungary, Taiwan, South Korea and Czech Republics are also so vulnerable to developed markets. Moreover, Brazil, Chile, Peru, Russia, Qatar, South Africa and Indonesia are sensitive to commodity markets.
Moody’s changed on May 26th the outlook for Brazil from stable to negative, while leaving the credit rating unchanged at Ba2. In other words, Moody’s kept Brazil’s rating at two levels below investment grade at Ba2, that’s a notch below Turkey and Russia. Moody’s mentioned the uncertainty rise for reforms following recent political events and its threat to the economic recovery as the two factors considered for the outlook downgrade. In addition to this, Standard & Poor’s credit rating for Brazil stands at BB with negative watch outlook. Fitch’s credit rating for Brazil was last reported at BB with negative outlook.
Brazil’s sovereign credit rating history by Rating agencies below.
As we remember from the last week, after the corruption allegations scandal, Brazil’s country risk has risen the most since 2008 and sovereign bond yields followed higher. (so borrowing gets more expensive)
Brazil Yield Curve Rally
Meanwhile, Brazil government budget deficit widened 16.7% YoY in April.
According to Standard and Poor, 38 Brazilian banks & Sovereign face rising debt risk.
You can reach the banks name here:
Brazil equities edged down amid political tension.
Oil prices fell sharply last Thursday after OPEC decided to extend the output cuts for nine months rather than six in an effort to rise oil prices. It seems to me that there is still a room to rise oil prices until the end of the year.
Here is very useful article about oil prices:
Performance charts of the week
Lastly, Brazil, Chile, Mexico, Japan and Venezuela credit default swap(CDS) 5Y spreads have widened this week as rising oil prices pressure and political risks.
Markit CDX credit default swap indexes cover North America and emerging markets. Markit iTraxx credit default swap indexes cover Europe, Asia, Australia and Japan. The indexes are owned, calculated and administered by Markit. For more information visit http://www.markit.com/cds