2024-07-31 06:07
LONDON, July 31 (Reuters) - Corporate credit markets shrugged off last week's equity wobble, setting aside any anxiety about the wider economy, allowing even low-rated firms to raise new debt with ease. For many investors, so-called junk credit is the canary in the coalmine. It is the first to croak if the economy runs into trouble, and it can also amplify any distress by upping fears of cascading defaults, bankruptcies and job losses. But there are few if any signs of that fear right now, which underscores how widespread the 'soft landing' consensus is. This also suggests the equity hiccup we saw last week was more about pricey megacaps and Big Tech corrections than a fundamental worry about growth per se. In fact, default rates are falling again. Deutsche Bank points out that trailing 12-month defaults for dollar high-yield bonds fell in June to their lowest point in almost a year - to just 3.1%. The default rate of the weakest "CCC"-rated segment fell for the third consecutive month to its lowest since July 2023. That's below the 4% average default rate of the past four decades and only marginally above the 2.9% average of the past century, according to Schroders. Yield spreads - the U.S. junk bond borrowing premia over equivalent Treasuries - remain close to their two-year lows. At 353 basis points, they're almost 100bp below levels seen this time last year, and spreads on 'B' and 'BB' segments are the narrowest they have been since the banking and credit implosion 15 years ago. What's more, junk bonds are outperforming better-rated investment grade debt for the year to date. And that long-feared 'wall' of maturing debts next year now looks more like a jump-able hurdle, as many companies are having no trouble smoothing out their financing schedules. In fact, many have been able to raise enough new debt to clear the decks ahead of any market disturbance that could arise around the U.S. election later in the year. High yield debt issuers have raised $176 billion so far this year - which is almost 80% ahead of last year's pace. And the market has had no trouble absorbing this flood of issuance. This is partly because demand for high yield debt is high, but supply of new paper isn't. Credit analysts at giant asset manager BlackRock point out that while a ton of high yield debt has been issued this year, only a minimal amount of new money has been raised. A whopping 75% of new debt sales this year have been earmarked for refinancing, the highest level seen in the post-2008 era and more than 10 points above June 2023 levels. Highlighting this 'pull forward' in debt sales in both the high-yield and investment-grade markets, BlackRock strategists Amanda Lynam and Dominique Bly reckon management teams are targetting maturities as far out as late 2025 and even 2026 and are keen to avoid any fund-raising difficulties around year-end. "Corporates may be looking to proactively raise liquidity and avoid potential volatility around certain events later this year - such as the U.S. election," they wrote. REASSURINGLY EXPENSIVE? Is the appetite sustainable? Falling rates without a recession is a powerful combination for anyone wanting to move out of cash and lock in high yields. Some even argue that if you want to avoid Treasuries due to outsize post-election fiscal risks, then corporate credit may be the best middle ground. But some strategists caution that August and September are seasonally unkind to credit markets. And there is a continual fine balance between falling interest rates and recession risks. "Central banks are late – they usually are - making it important that the data hold up," Morgan Stanley's credit team told clients. But the U.S. investment bank remains positive and reckons "moderate growth, moderating inflation, moderating policy and robust investor demand" all justify the historical pricing for U.S. credit. "Spreads should be 'expensive' given this backdrop, and we think they stay that way," they said. So while we may see a surge in volatility as the election nears, we're unlikely to see a similar spike in defaults. The opinions expressed here are those of the author, a columnist for Reuters. Sign up here. https://www.reuters.com/markets/firms-pull-forward-debt-sales-avoid-us-election-bump-dolan-2024-07-31/
2024-07-31 05:56
NEW YORK, July 31 (Reuters) - Concentrations of heavy metals found in single servings of some chocolates and cocoa-based products are too low in most cases to pose a health risk to consumers, research published on Tuesday in the journal Frontiers in Nutrition shows. This is true when products are consumed as a single serving, but consumption of more than one serving per day or in combination with other sources of heavy metals - such as seafood and unwashed brown rice - may cumulatively add up to exposure that exceeds recommendations, the researchers said. Some consumer groups and independent test agencies have previously reported heavy metal contamination in cocoa products such as dark chocolate, with possible causes being the type of soil where cocoa is grown and industrial processing. Researchers at the George Washington University School of Medicine and ConsumerLab.com found that 70 of the 72 cocoa-containing products they analyzed fell below limits set by the Food and Drug Administration (FDA) for lead contamination. Using stricter limits set by the state of California, however, 31 of the 72 exceeded limits for lead, while 13 of 37 exceeded limits for cadmium. The researchers said the findings of their study showed the products may not pose a health risk when consumed as single servings, though larger portions could exceed the strict California limits set in a law known as Prop 65. The recommended single serving for chocolate is about 1 oz to 2 oz (30 gm to 60 gm). "If contaminated products as a whole are consumed in small amounts and infrequently by most, these contaminants may not be a public health concern," read the paper, which concluded with a call for more testing of consumer products. "In contrast, if many such products are consumed fairly regularly by the average consumer, the additive exposure may be a public health concern." U.S. chocolate industry group the National Confectioners Association said the research confirms that "chocolate and cocoa are safe to eat and can be enjoyed as treats as they have been for centuries." The long-running research analyzed 72 products for potential contamination with heavy metals such as lead, cadmium and arsenic in four different cohorts in 2014, 2016, 2019 and 2022. "Median concentrations of each metal tested were lower than even the conservative Prop 65," they said. "However, consuming some of the products tested, or more than one serving per day in combination with non-cocoa derived sources ... may add up to exposure that would exceed the Prop 65 (limits)." The researchers used the California legislation because it sets limits on contamination for the three types of heavy metals tested, while the FDA regulation only sets limits for lead. Sign up here. https://www.reuters.com/business/healthcare-pharmaceuticals/heavy-metal-most-chocolates-may-not-pose-health-risk-researchers-say-2024-07-31/
2024-07-31 05:52
ZURICH, July 31 (Reuters) - The Swiss National Bank (SNBN.S) , opens new tab swung to a loss of 2 billion Swiss francs ($2.27 billion) in the second quarter, the central bank said on Wednesday, as the rising value of the Swiss franc reduced gains from foreign currency investments. The result compared with a first-quarter profit of 58.8 billion francs, and came despite valuation gains in the SNB's gold and equity portfolios. During the quarter, the SNB made a 3.26-billion-franc gain from the increased value of the 1,040 tonnes of gold it holds, as global political tension boosted the price of the precious metal. Foreign currency positions - the 740 billion francs of stocks and bonds the SNB has bought - reported a loss of 3.10 billion, however, as the franc's higher value and lower bond prices wiped out gains from increases in global equity markets. The SNB also lost 2.06 billion francs on its Swiss franc positions, mainly from paying interest on sight deposits to commercial banks. The second quarter loss is unlikely to be a major concern for the SNB, as making a profit is not part of the central bank's mandate, which instead focuses on price stability. "The SNB’s financial result depends largely on developments in the gold, foreign exchange and capital markets," it said. "Strong fluctuations are therefore to be expected." UBS economist Florian Germanier said the rising value of the franc could be a factor in the SNB's result in coming months. "We expect the franc to strengthen as other central banks cut rates and because of geopolitical tensions adding to the safe haven flows into the currency, which is a significant risk for the SNB's results for the rest of the year," he said. ($1=0.8810 Swiss francs) Sign up here. https://www.reuters.com/markets/rates-bonds/swiss-central-bank-posts-227-billion-loss-second-quarter-2024-07-31/
2024-07-31 05:41
TOKYO, July 31 (Reuters) - Demand for hybrids is likely to deliver another quarter of double-digit growth for Japan's Toyota Motor (7203.T) , opens new tab when it reports earnings on Thursday, although it is expected to show signs of slowing after a run of record profits. Analysts will be paying close attention to how much momentum the world's top-selling automaker has lost from previous quarters, given challenges like a tough market in China and fallout from a certification scandal. Sales data already give a hint of the potential slowdown. Toyota's global sales declined 2% in April-June versus a year earlier as robust U.S. and European demand wasn't enough to make up for declines at home and in China. For the April-June quarter, Toyota is expected to deliver a 20% rise in operating profit to 1.3 trillion yen ($8.50 billion) the average prediction of six analysts shows, as per LSEG. That would be the company's weakest profit growth since July-September 2022. The automaker has already forecast a 20% decline in full-year profit, citing looming investment in both its strategy and suppliers. Toyota has benefited from a slowdown in global demand for electric vehicles, allowing it to sell more hybrids, which typically command higher margins than regular gasoline cars. The company's inventories in the U.S. are also tight, reducing the risk of incentive spending to entice customers to buy cars, said James Hong, head of mobility research at Macquarie. "You basically have one of the largest market players with the lowest level of inventory," he said, adding that, together with the company's growing hybrid offering, was likely to help keep earnings at a high level. Hybrids made up 39% of Toyota's global sales in the first six months of the year, or 1.9 million vehicles, including the luxury Lexus brand, according to company data. The strategy to boost hybrid sales in the U.S. over the short term instead of battery-electric vehicles might also shield it from potential changes in U.S. government policy on EVs. Former President Donald Trump, the Republican candidate in the U.S. presidential election, has said he would end the government EV mandate if he wins. Shares of Toyota are up 13% so far this year, but have not performed well over the past months, coming down 25% from a peak in late March. In dollar terms, they are up 6%, compared to a 10% decline in Tesla (TSLA.O) , opens new tab over the same period. Toyota's strong financial performance and gains in its share price belie pressure that Chairman Akio Toyoda has faced over certification irregularities at Toyota Group companies and the automaker itself. In an interview published on Monday, the grandson of the company's founder said he may not be re-elected as a board director if shareholder support for him, which slid to 72% this year from 85% in 2023, continues to fall at the pace it did. While strong in hybrids, Toyota still trails behind rivals such as Tesla and European and Chinese automakers when it comes to EVs, which accounted for only 1.5% of its global sales in the first half of the year. Toyota's China sales were down 11% to 785,000 vehicles over the first six months of 2024, compared to a 14% gain to 1.2 million vehicles in the U.S over that period. ($1 = 152.8800 yen) Sign up here. https://www.reuters.com/business/autos-transportation/toyota-post-rise-q1-profit-hybrid-demand-momentum-may-be-slowing-2024-07-31/
2024-07-31 05:14
July 30 (Reuters) - Microsoft (MSFT.O) , opens new tab said it would spend more money this fiscal year to build out AI infrastructure even as growth slowed in its cloud business, another sign the payoff from hefty investments in the technology may take longer than Wall Street had hoped. Shares fell 7% on the spending forecast but pared losses to trade down 4% after the bell on Tuesday after Microsoft said on a post-earnings call that Azure cloud growth would accelerate in the second half of fiscal 2025. Big technology companies have been pouring billions of dollars into data centers to capitalize on the generative AI boom. Google-parent Alphabet (GOOGL.O) , opens new tab warned last week that its capital spending would stay elevated for the rest of the year. Microsoft said its capital spending rose 77.6% to $19 billion in its fiscal fourth quarter that ends June 30, with cloud and AI-related spending accounting for nearly all of the expenditures. For all of fiscal 2024, capital spending totaled $55.7 billion. Group CFO Amy Hood said the spending was necessary to support demand for AI services and the company was investing in assets that "will be monetized over 15 years and beyond." Still, investors who have run up Microsoft stock by nearly a quarter in the past 12 months on AI optimism were disappointed with the Azure growth. Microsoft predicted that the business would grow 28% to 29% on a constant currency basis in the July-September quarter, compared with estimates of 29.7%, according to Visible Alpha. That followed a 29% rise in the quarter ended June 30, which was below estimates of 30.6% and marked a slowdown from the previous three months. "The street doesn't have a lot of patience. They see you spending billions of dollars and they want to see a pickup in revenue of that amount," said Daniel Morgan, senior portfolio manager at Synovus Trust, which holds shares in Microsoft. "If these companies do not hit it out of the ballpark and are far better than the estimates then they are going to be knocked back," he added. While overall Azure growth slowed, AI services accounted for a larger portion of the increase in revenue in the June quarter at 8 percentage points, compared with 7 percentage points in the previous quarter. The company does not break out the absolute revenue figure for Azure, the part of its business best situated to capitalize on booming interest in AI. CEO Satya Nadella said that Azure AI was now used by more than 60,000 customers, up nearly 60% year-on-year and that the average spend per customer continues to grow. Nadella has pushed the company to go all-in on the technology, weaving AI into almost every product from search engine Bing to productivity software such as Word. Large parts of those efforts have been fueled by technology from OpenAI, in which Microsoft has invested about $13 billion, including the 365 Copilot assistant for enterprises. The productivity business - home to the Office suite of apps, LinkedIn and 365 Copilot - posted growth of 11%, compared with expectations of 10%. Revenue from its Intelligent Cloud unit - home to the Azure cloud-computing platform - rose 19% to $28.5 billion in the fourth quarter, missing analysts' estimates of $28.68 billion, LSEG data showed. Microsoft - seen as a bellwether for the tech industry thanks to its wide-spanning business - said total revenue rose 15% to $64.7 billion in the fourth quarter. Analysts had expected $64.39 billion, according to LSEG data. Revenue from its personal computing business, which includes Windows and devices such as the Xbox and Surface computers, grew 14% as Microsoft benefited from stabilizing personal computer sales. The PC market grew for the second straight quarter in the April-June period, according to research firm IDC. Sign up here. https://www.reuters.com/technology/microsoft-beats-quarterly-revenue-estimates-2024-07-30/
2024-07-31 05:01
A look at the day ahead in European and global markets from Ankur Banerjee Investors in Europe will wake up to a volatile yen after the BOJ raised interest rates in a long-awaited move and a growing divide in the AI world following contrasting earnings from tech bellwether Microsoft and chipmaker AMD. The Bank of Japan hiked the overnight call rate target to 0.25% from 0-0.1% by a 7-2 vote and laid out a detailed quantitative tightening plan that will reduce monthly bond buying in several stages to around 3 trillion yen as of January-March 2026. The yen and the Nikkei were initially choppy, with bank stocks in Tokyo spiking higher. The yen was last at 152.73 per dollar. Having started July wallowing near 38-year lows of 161.96 per dollar, the yen is now stalking a three-month high. The more than 5% rise in the month is the currency's first month of gains this year. A slew of factors including likely official intervention, a sell-off in equities and a reassessment of popular carry trades have helped the yen rebound although the currency is still down 7.6% against the dollar for the year. With the BOJ out of the way, investors will now be waiting for the Federal Reserve to indicate that rate cuts in the U.S. are around the corner even if the central bank stands pat on rates later on Wednesday. The risk is, of course, that the Fed is unwilling to commit to rate cuts, with markets having already priced in 68 basis points of easing this year. But before that, the euro zone's inflation report will be the main economic focus for the day and comes after data on Tuesday showed the economy in the region grew slightly more than expected in the three months to June. Meanwhile, quarterly results from major tech firms are highlighting a divide in the AI landscape as chipmaker Advanced Micro Devices (AMD.O) , opens new tab reported strong earnings and Samsung Electronics (005930.KS) , opens new tab anticipated robust demand for chips in the second half of this year. In contrast, Microsoft (MSFT.O) , opens new tab disappointed investors with its slow cloud growth suggesting that the payoff from the billions in AI investments may take longer than investors might have hoped. Thus it remains to be seen whether chipmakers' strong results pull European tech shares (.SX8P) , opens new tab higher or if lacklustre earnings from mega stocks drag them lower. Key developments that could influence markets on Wednesday: Economic events: Euro zone inflation for July Earnings: Adidas, Danone and GSK Sign up here. https://www.reuters.com/markets/europe/global-markets-view-europe-2024-07-31/
