What a difference a few months make.
2016 began with a series of stock routs in China and a collapse in oil prices to below $30 a barrel, prompting panic in the market for bonds issued by energy companies.
The riskiness of so-called high-yield debt spiked to record levels and a new crisis looked imminent.
Analysts predicting doom were out in force, with Societe Generale’s Albert Edwards forecasting a 75% drop in the US S&P 500.
Instead, markets rallied.
Analysts at investment bank Jefferies, led by Sean Darby, attribute this to two factors — easing monetary conditions, which makes it cheaper to borrow and swap out maturing debt, and a recovery in oil.
Here’s what they have to say (emphasis ours):
US monetary conditions have loosened as the inflation rate has climbed and real rates have gone negative despite last year’s rate hike. China’s monetary conditions through the double whammy of a cut in the RRR and increased bank loan growth have further eased monetary conditions in the dollar bloc.
The drop in non-OPEC oil production (primarily led by the US) and tentative verbal agreements amongst some OPEC members appears to have put a bottom in oil prices.
The bottom line is that the ‘perfect storm’ is passing and that a number of unrelated factors have caused monetary conditions to ease.
As a result, a relative calm has returned to the high-yield debt market and money is flowing back in.
Here’s the chart from Jefferies: