Business

Something has changed...

For months high yield bond yields have been compressed alongside rising stock prices as the flood of global liquidity from central banks.

ECB buying has driven European junk bond yields below those of US Treasuries and in turn that has pressured global high yield risk lower - despite a rise in leverage to record highs.

However, the last two weeks have seen a big shift in flows as investors have fled high yield funds and pushed into investment grade and Treasuries.

The overnight fireworks in Japan, which saw the Nikkei plunge by 860 intraday points and sent vol and volumes soaring (before recovering most losses), spooked traders in Asia and around the globe, and U.S. equity futures are red this morning, along with European shares and oil.

Something snapped in Japan today.

Having successfully pulled off the announcement of the ECB’s “dovish taper” – where monthly bond purchases will be halved to Euro 30 billion from January 2018 – last month, a challenge for Mario Draghi in Q1 2018 has appeared on his radar. The ECB’s bond buying ammunition is slightly less than analysts thought and there is the small matter of the looming Italian election. The latter is likely to be held in March 2018, although it could take place as late as May. Veteran strategist, now Bloomberg columnist, Marcus Ashworth explains in "Italy's Shrinking Safety Net".

IPO mania is gripping Hong Kong and if you’ve been looking for a warning sign that equity markets are close to a peak, just maybe this is it. It was a feature of the Hong Kong market in 2006-07, before the Great Financial Crisis, and in 2000, prior to the bursting of the Dot.com bubble. No surprises, the current mania is also focused on the technology sector. The focal point today is the China Literature Ltd IPO which began trading this morning. The stock price rose as high as HK$110 per share compared with the HK$55 IPO price. No wonder the company’s executives were looking smug.