Harrison: Watch High Yield Bonds and Leveraged Loans for Distress in Financial Sector

Your Real Vision Daily Briefing for April 14, 2020

Ash Bennington & Ed Harrison unpack new GDP growth forecasts, the latest economic warning from the IMF, and the first round of Q1 2020 bank earnings.

  • The IMF said it expects the global economy to contract by 3% in 2020 and negative earnings pre-announcements have been issued by major companies, yet markets continued to rally today.
  • Q1 earnings from JPMorgan Chase and Wells Fargo showed their profits took a beating as they are preparing for a deep recession.
  • High yield bonds and leveraged loans are two places to look for indications of trouble in the financial sector as we move beyond this hopeful phase.

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The “Great Lockdown” has caused a dramatic drop in 2020 growth expectations from the IMF, which said we are likely to see the worst recession since the Great Depression. But the big news was that the market was up 3% on the back of negative earnings reports from the country’s largest banks, Ash Bennington and Ed Harrison said during today’s Real Vision Daily Briefing. 

It came as no surprise that first-quarter earnings took a hit as JPMorgan and Wells Fargo brace for a deep recession; Bennington and Harrison said that uncertainty will come in Q3 and Q4. No models have ever done this before, we don’t have visibility into the future, and that uncertainty will feed volatility once we move out of this hope phase, they said.

Harrison said a lot of the losses are going to be taken by asset managers, and he’s also looking at leveraged loans for signs that banks are in trouble and we’re moving into the third phase of the crisis.

Even though the Fed has now decided to wade into junk and they’re buying fallen angels and high yield, Harrison pointed out that they’re not doing indiscriminate buying of high yield bonds so there’s the potential for a lot of defaults there. And the Fed is doing nothing in the leveraged loan market, which is on the balance sheets of banks. 

“I think right there with regard to asset managers and leveraged loans is a place to watch in terms of this third phase, the insolvency phase, because that’s where the write downs are going to hit and that’s where, in the financial sector, you’re going to have distress appear as a result,” he said.