Harrison: The Fundamentals of Speculative Risk Assets Have Changed Dramatically

Your Real Vision Daily Briefing for April 2, 2020

Ed Harrison & Roger Hirst discuss a high yield market & how the rise of the dollar against emerging market currencies would impact those economies.

  • Markets haven’t fully digested the real economy effects of the coronavirus crisis, especially coming off a 20-year legacy of expectation that central banks will bail everyone out. 
  • The Fed may have drawn a line in the sand for high-yield and equities, refusing to do credit easing down to that level, but people are used to central banks coming supporting everything.
  • The fundamentals of more speculative risk assets, like equity and high-yield, have changed dramatically.

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Markets need time to digest the horrible U.S. jobs claim number and the impending economic pain it suggests, according to Ed Harrison and Roger Hirst, who discussed the state of markets during today’s Real Vision Daily Briefing.

Despite an unemployment rate far worse than projections called for, S&P futures were still green on the day, indicating that we’re still in the digestion process and undergoing rebound dynamics, they said.

Harrison and Hirst see a lot of stress in high-yield markets and said despite the fact that the Fed excluded high-yield and equities from credit easing, people still expect a bailout.

“There’s a 20-year legacy of expectation that everything gets bailed out by cheap money, cheap liquidity, or excessive liquidity,” Hirst said.

Harrison offered a sense of how high yield markets have changed, pointing to Carnival Cruise Lines (CCL) tapping bond investors with the sale of $3 billion of notes in U.S. dollars and euros. The new bonds will be secured by a first-priority claim on the company’s assets, such as its vessels, and mature in three years. The dollar-denominated portion is being marketed with a coupon of about 12.5%.

“The fundamentals of more speculative risk assets – equity, high-yield – have changed dramatically,” Harrison said. “This issue from Carnival tells you that’s the case.”