The credit cycle has ended – the corporate bonds & high yield overall will come under severe pressure as the one-two combination of Corona virus and its disruption to global supply chain and the break down in OPEC+ is now starting to being priced properly. Underweight leverage companies and banks
High Yield has a high exposure to energy which is highly leveraged and capital intensive. Most crisis’ starts with either too low prices or too high. The oil market remains one of the few trading markets with price discovery left (meaning the prices reflect its markets and expectations without government or central bank intervention, and no more so now that OPEC+ is fully incapable of action). I consider YTD WTI Crude as the actual risk overall to RISK assets (including equity). I.e.: I think REAL risk to downside is 32% from peak – not the 15% we have seen so far. Equity and Oil has same volatility overall right now making them like-for-like risk.
Oil is down:
YTD: 32%, Last 5 days: 5.2%, 1Y: -26%
Action for week:
We come into the week with only small CALLS on S&P 500 3200/3300 call in March, based on further panic from G7, China fiscal stimulus and ECB next week. However week so far, writing this 18:45 CET, there is no news from China hence we expect Saudi/Russia/OPEC+ plus focus on Corona to be main topics in early trading tonight.
We will focus on credit spreads, and highly leveraged companies (Peter Garnry’s SAXOCREDITcorona basket)
(You can create these baskets very easily in Saxo TRADER)