GLOBAL CREDIT BULLETS | Monday, 4th October 2021

Energy crisis – stocking up for the winter
A deep energy crisis is adding to the list of supply bottlenecks. Production disruptions in the Nordics and reduced flows from Russia are limiting natural gas supply across Europe. The shortage is particularly deep in the UK, where a Brexit-induced lack of cargo drivers intensifies the issue. Shortage news have pushed both governments and individuals into panic hoarding, further adding to price pressures. As a result, energy prices are skyrocketing: natural gas prices doubled in the past month, and quadrupled since April. The crisis is gradually impacting all commodities, with Brent up 20% since August lows. As bottlenecks take time to resolve and winter kick in, the gap between demand and supply is bounded to increase, and price pressures may persist. While energy represents a large weight in the inflation basket, most energy contracts are regulated. This protects consumers if the increases are transitory. As contracts fixation expires, though, gas inflation becomes bills inflation, with adverse consequences on price levels and consumer spending. The onset of winter may thus mean supply pressure starts affecting inflation and growth in a more marked fashion.

Rates – waking up to inflation
The past two weeks have seen a strong re-price in rates, with US Treasuries up 25bp to almost 1.55% at the highs (some tightening brought it back just below 1.5% in recent days). The move follows more concerns about energy shortages and some hawkish Fed headlines. In fact, inflation breakevens barely budged, suggesting markets are re-pricing tighter policy amid recent increases in inflation. The next pivot for the market is this Friday’s NFP, as Powell explicitly linked policy steps to the health of labour markets. A good NFP print will be a green light for a November taper. With long-end yields 1% Fed inflation forecasts, we think a full taper by mid 2022 is not fully priced, and global rates have more room to widen in the coming months. The Fed is gradually recognizing current inflation trends are not that temporary, as we suggested in May. Other global central banks continue to turn more hawkish too. After Norway, BOE and BCB last week, this week Czech CNB hiked 75bp, Mexico’s Banxico hiked 25bp, and Colombia’s Banrep started the cycle.

Markets – rotation continues
Wider rates are causing some volatility in markets. Similarly to what happened in February, when rates selloff accelerate credit and equities start suffering. In the week ending September 24^th, for example, emerging market bonds-tracking ETFs suffered $600mn of outflow, the largest print of the past six months. With the exception of China, outflows from equity indexes and high yield credit have been more muted. The moves in asset prices have also been shallow. The cost of buying protection on high yield credit indexes in Europe and US widened 20-30bp, but is still 75-100bp lower than one year ago, with levels close to the 5y low. US equities are 5% off the highs but still 15% up on the year. Equity and rates vol blipped higher but are still in the low part of the 5y range. Overall, the adjustment in rates have been quick but small, which was not enough to make levels interesting in expensive risk markets. Positioning data do not show a marked reduction in risk, but mostly rotation from central bank assets (such as rates and IG credit) into inflation assets (such as value equities and commodities). Investors seem undecided between a reflation and a stagflation scenario. Rates selloff in both scenarios but risk does well in the former but not in the latter. NFP this week and developments on the supply chains will be key for market to pick between the two.