CRACKS ARE FORMING IN LOAN MARKET - BUT HOW BAD? (1117 EDT/1517 GMT)
Higher interest rates generally are good for loans as demand for floating rate products increases, but stagflation could pose a risk this time around as the good times lose some luster, says Neha Khoda at BofA Securities.
Loans are likely to hold together as rates rise, but there is bound to be trouble on the margin as volatility remains elevated and dispersion, downgrades and defaults head higher over the next year, Khoda writes in a note on Monday.
As long as the loss of risk appetite is not total and only serves to distinguish the winners from the losers, it makes loans as an asset class stronger, Khoda said.
The key is whether the market suffers a "minor pullback" in risk or something larger. Severe risk cutbacks can result in a sudden loss of financing and lead to irreversible damage to business models that precipitates a default cycle, she says.
Most default cycles in leveraged finance happen in lock-step with economic recessions, but Khoda says at times bad credit markets have prevailed without a larger macro underpinning. To be sure, talk of recession is premature, in her view.
Loan coverage is the key to watch, as it encompasses the two biggest fundamental risks for loan issuers - interest costs and earnings.
Benchmark rates are likely to rise between 1.5% to 3.5%, resulting in coverage rates of about 2.5x in a pessimistic scenario and 3.5x in an optimistic scenario.
Issuers at risk are those with CCC or low-B credit ratings where debt coverage will be 1x in a pessimistic scenario. "This is where the cracks will grow wider with increasing rates," she said.
U.S. FACTORIES TAKE A SMOKE BREAK (1100 EDT/1500 GMT)
The manufacturing sector, which accounts for around 11% of U.S. GDP, continues to be burdened by high prices, a yet-to-be-resolved supply chain muddle, rising input costs and a tight labor market.
New orders for U.S. factory made merchandise dropped by 0.5% in February, retreating from January's upwardly revised 1.5% gain and hitting the consensus bull's eye.
Excluding transportation goods, however, factory orders actually increased by 0.4%, standing on the shoulders of the prior month's 1.2% gain, according to the Commerce Department.
This echoes the Institute for Supply Management's (ISM) purchasing managers' index (PMI) released on Friday, which showed the manufacturing sector losing momentum in March.
This deceleration was largely due to the new orders component, which plunged to its lowest level since May 2020, the first month of recovery from the steepest, most abrupt recession on record.
"The U.S. manufacturing sector remains in a demand-driven, supply chain-constrained environment," ISM's Timothy Fiore said on Friday.
The Commerce Department also revisited its durable goods data released earlier in the month.
New orders for long-lasting items - which include everything from waffle irons to fighter jets - dropped 2.1% in February, slightly better than the 2.2% decline initially reported.
Core capital goods - which excludes defense and aircraft, and is considered a barometer of business spending plans - was also nominally better than the first take, having fallen 0.2% instead of 0.3%.
Wall Street began the first full week of April offering a mixed bag.
Market leading megacaps pushed the S&P 500 and the Nasdaq into the green, while healthcare and industrials are keeping the Dow essentially flat.
(Stephen Culp)
THE BEAR MARKET RALLY IS OVER - MORGAN STANLEY (1019 EDT/1419 GMT)
With Q1 in the rearview mirror, Morgan Stanley chief U.S. equity strategist Michael Wilson notes the rough quarter which saw the S&P 500 fall about 5% was largely in-line with the firm's view entering the year, with a rally in the latter half of March helping to salvage the quarterly performance.
But that rally in the latter half of March was a bear market rally, according to Wilson, and that is now over.
While concerns about the Federal Reserve's hawkish turn weighed on stocks in the quarter, the other major driver of markets was the war in Ukraine, which Wilson said was not in their initial forecast on 2022 and has made the firm "incrementally more negative on growth trends than we were at the end of last year."
Wilson said investors now face multiple headwinds to growth that will be harder to ignore, including payback in demand from last year's stimulus, high prices causing demand destruction, the war in Ukraine pushing up food and energy prices that serve as a tax and inventory builds that have caught up to demand.
With inventory catching up to demand, pricing power will dissipate, and "discounting could return in many areas of consumer goods that typically are price takers," while there is also the likelihood of order cancellations as shortages caused an increase.
With the defensive tack, Wilson remains overweight utilities , REITs and healthcare while underweight consumer discretionary and cyclical tech.
(Chuck Mikolajczak)
AIRLINES WEIGH ON EUROPE'S TRAVEL AND LEISURE STOCKS (0913 EDT/1312 GMT)
Europe's travel and leisure index is flashing green, outperforming the wider index with a 0.9% gain while the STOXX 600 is currently only 0.5% higher.
But zooming in, the story is more complicated, with leisure doing the heavy lifting as travel stocks topple.
Airlines are suffering, with Easyjet down about 1.7%, Wizz Air falling 2.7% and BA-owner IAG down 0.4%. Ryanair and Deutsche Lufthansa are down 1.1% and 0.7% respectively.
Flight disruption in the UK is topping headlines today after EasyJet cancelled hundreds of flights due to staff sickness levels amid a surge in Covid-19 infections in the country.
Meanwhile gaming company Evolution is lifting the travel and leisure index, up 5.6%. Betting giant Flutter Entertainment is 0.94% higher and French lottery operator FDJ is 1.2% up.
U.S. FUTURES MODESTLY HIGHER AS TWITTER SURGES (0847 EDT/1247 GMT)
U.S. futures were little changed on Monday, slowly losing steam as the opening bell approached in a somewhat light week for economic data with eyes on the latest round of talks between Ukraine and Russia as the West mulls more sanctions against Moscow.
As global outrage grew following civilian killings in North Ukraine, the possibility of additional sanctions against Russia by the U.S. and Europe increased, while peace talks between Moscow and Ukraine were poised to restart on Monday.
The S&P 500 used a late flurry to the upside to snap a two-day losing skid on Friday, following a payrolls report that was widely expected to keep the Federal Reserve on its aggressive monetary policy path, which expectations solidifying for a 50 basis point hike at its May meeting.
Shares of Twitter surged more than 20% in premarket trade, however, as Tesla CEO Elon Musk disclosed a 9.2% stake in the social media company.
Below is your premarket snapshot:
(Chuck Mikolajczak)
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