It is important to avoid both overplaying and underplaying the events of Monday, August 24, or “Black Monday” as rolling news channels felt compelled to call it.
Any commentator using the word “crisis” was overplaying it. Anyone ignoring the fact that global equity markets can spasm so violently on the outlook for a very large and somewhat opaque economy is probably guilty of the opposite.
Apple’s market value alone swung by around $150bn on Monday. Having dived by over 10% in early trading, the turnaround in the share price was aided by the tech group’s chief executive sending an email to CNBC’s Jim Cramer saying business in China was just fine, thank you very much. The shares still finished down 2.5%.
For the European FIG market, the damage was a solid “not that bad”. Core senior bonds were 4bp-5bp wider, periphery senior on average 7bp-8bp wider and tier two 10bp-15bp wider depending on the jurisdiction.
A handful of projects were held up, but FIG syndicate desks were resolute on Tuesday morning, saying a couple of days of stability, combined with London’s Tube strikes being called off, would see an issuance window open towards the end of this week.
But the key lesson for banks was that the chances of the US Federal Reserve raising rates on September 16 took a big hit.
On Monday morning Barclays analysts were favouring a September rate hike from the Fed. By the end of the day, March was their new call.
“As recently as mid-June a hike of 25bp by the end of 2015 was fully priced in. That has now been put back to [second quarter] 2016,” wrote Richard Batley at Lombard Street Research.
Should the Fed’s mind be changed by one day of trading? No. Has it been? You never know. Even though Monday’s rout had very little to say about the US economy, those on the Federal Open Market Committee will harbour genuine concern about its exposure to a slowing China.
No one likes a global asset sell-off, except those who were watching Jim Cramer and managed to buy in before Apple’s shares popped, but for FIG bankers the silver lining is that one source of volatility for September may well have been completely removed from sight.
That is good news when there are several billion euros worth of FIG deals slated for next month, with those that were barred from the market by the Greece crisis in the second quarter competing for space with natural senior funding and banks starting to think about building up their tier two buckets ahead of Total Loss Absorbing Capacity (TLAC) time.
The only problem will be elevated new issue premiums, which were already likely to be high in September given the wall of supply coming investors’ way. They are unlikely to fall until there is a decent period of stability from China, and perhaps some more clarity from the Fed on its rate hike timeline.
That said, ABN Amro and HSBC were criticised in some quarters for paying 40bp plus premiums in the wake of Greece’s flirt with a euro exit before the summer. They are probably feeling pretty pleased with themselves around now.