These are nervous times for the financial markets.
The preceding weeks had seen equities tumble due to earnings disappointments and doubts about the high-tech arena. Ditto for bonds, which had been volatile due to energy-driven inflation fears, weakness in the junk/high-tech arena, and jitters rebounding from the stock market weakness itself.
But all bets were off last Thursday. The President, who had been celebrating his wedding anniversary (no jokes now) with a stay in New York City, was roused from his bed that morning with news of the latest violent developments in the Middle East. Crude oil shot up at least 11% in the immediate aftermath. Markets, which had opened on the upside, quickly reversed themselves.
When the dust had settled, the Dow Jones Industrial Average was down more than 380 points. Investment grade corporate bonds were off some 20 basis points, intraday, and junk bonds were off the screen.
Deat Cat Bounce?
Now that the inevitable “dead cat bounce” has set in, the trendline, for the debt market at least, will become apparent now that players have returned from the weekend and gotten back to serious business. Nothing of major significance had been scheduled to price anyway Friday, but nobody has officially backed away from major offerings, at least at this point.
What the Middle East has in store for us is anybody’s guess. Overshadowed by this is the domestic concern over inflation. Friday’s Producer Price Index (PPI) update proved disappointing, with a 0.9% overall increase. Wednesday’s Consumer Price Index (CPI), being more of a following indicator, is unlikely to prove any more nettlesome than the rest of the news out there.
But the bond offering “pipeline” is as crowded as ever. In the absence of clear directional indications, players have been reluctant to pronounce the fate of issues that have been in the works for some time.
Here are a few developments to look to as litmus tests for the rest of this week:
The fact that these maturities do not look out farther than 10 years certainly reflects market skittishness, and a source at one of the lead underwriters concedes privately the possibility that the deal won’t come off if volatility picks up again.
Whether this spills over to investment grade will be made apparent as soon as this week, as details of the Telecom Italia $5 billion multi-tranche global offering emerge. In the meantime, France Telecom is set to borrow about that amount in euros via a group said to include two French dealers and one from the United States. The firm had earlier been reported to be in the market to borrow as much as $10 billion, most of that in dollars.
Looking ahead, now that a possible merger of some kind between British Telecom and AT&T looks to be off, underwriters are hoping to get a crack at a long-planned $10 billion British Telecom issue. The deal was first knocked out of the box over concern that the firm’s debt was going to be downgraded. Then, it had to make way for an issue from Spain’s Telefonica. More recently, a BT issue has been reportedly held up due to the AT&T talks.
Last week’s $9 billion of two- and seven-year Fannie Mae Benchmark Notes, which priced Wednesday, received at least $3.5 billion of its book from overseas. This is far from unusual. The shorter issue, which was well oversubscribed, received a greater-than-normal boost from Middle East investors (go figure). But the longer maturities involved in this week’s Freddie Mac issues will, if anything, lessen the “flight to quality” impact. And, if anything, continued volatility would put pressure on those trying to peddle the 30-year issue.