Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Canadians are aware there’s a complex network of pipes and wires under the street bringing power, water and Netflix into their homes but, with busy lives, don’t bother themselves with the details. The commercial paper market – three and six month loans floated to institutional investors by banks and large companies without collateral – plays a similar role in the financial system, along with corporate bonds.
Commercial paper short term loans ensure the functioning of the economy, providing the funds for payrolls, full cash registers at the grocery store and bank machines that spit out cash. The commercial paper market all but seized up last week, along with corporate bond issuance and domestic Bankers’ Acceptance notes, and this explains the aggressive actions by central banks. The credit market seizure is like a power failure for the financial system.
Thanks to central bank efforts, these markets have loosened up and this is a big reason equity markets are set to rally Tuesday.
CIBC’s Ian Pollick wrote,
“The Federal Reserve is wasting no time in introducing new facilities to ensure that the current liquidity crisis does not morph into something more deleterious like a credit crisis. [Monday], the Fed introduced a series of new measures aimed at promoting liquidity in the Treasury and MBS markets, but also took additional steps aimed at U.S. credit markets…in order to maintain critical market functioning the Fed will now begin conducting open-ended QE in the Treasury and MBS market in “amounts needed to support smooth market functioning and effective transmission of monetary policy”. In conjunction with other funding operations the Fed has been conducting, this should help assuage concerns about impaired liquidity in these markets, and sponsor a broad-based easing of financial conditions”
“@SBarlow_ROB CM's Pollick on Fed moves: Fed "is wasting no time in introducing new facilities to ensure that the current liquidity crisis does not morph into something more deleterious like a credit crisis" – (research excerpt) Twitter
“The Fed Goes All In With Unlimited Bond-Buying Plan” – New York Times
“The Fed has finally managed to restore some order to the Treasuries market” – Bloomberg
“Dealers gobble up funding in Bank of Canada's first BAPF operation” – Reuters
“Margin call - Goldman, JPMorgan demand CLO warehouse managers put up cash” – Bloomberg
“ ‘Great liquidity crisis’ grips system as banks step back” – Financial Times (paywall)
Bloomberg’s Brian Chappatta argued that “Bond ETFs will never be the same after virus” in a Tuesday column. He was writing from a U.S. perspective, but most of the facts apply directly to Canadian markets,
“Which is the more accurate reflection of a market: the benchmark index full of bonds that don’t trade or the ETF that does? … bond ETFs across the world are trading at staggering discounts to their net asset values in what some have dubbed an “illiquidity doom loop.” It’s one thing if the largest high-yield municipal-bond fund is going berserk … It’s quite another for supposedly safe assets to get hammered. For better or worse, fixed-income ETFs can never be looked at quite the same way going forward… None of this means the ETF industry is in jeopardy. It just means investors need to realize they won’t function as steady, index-based products during crisis-like periods.”
“Bond ETFs Will Never Be the Same After Virus” – Bloomberg
Morgan Stanley’ European strategy team has uncovered what they believe to be “Fallen Angels - ‘good companies at a better price’."
It’s Europe, so many of the names are unfamiliar to Canadian investors . Exceptions include BHP, Ericsson and Vivendi.
“@SBarlow_ROB MS: "Fallen Angels - 'good companies at a better price'" - (full table) Twitter LEEDER: Full Tweet post?
Diversion: “What to Watch: ‘Devs,’ ‘Tiger King,’ and ‘ZeroZeroZero.’ Plus: Our Dream TV Adaptations” – The Ringer
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