If there’s two places you haven’t wanted to be of late it’s retail and metals.
This is a gross oversimplification, but I think I’ll be forgiven for citing the following proximate causes:
- for retail: Amazon
- for metals: China
Someone is freaking out about the lack of nuance there, but if it’s nuance you’re looking for and you’re new to HR, then I would suggest you take a few minutes to Google “Heisenberg Report” + retail and/or “Heisenberg Report” + commodities, before you go accusing us of glossing over the details.
Anyway, things have calmed down a bit in commodities (Bloomberg Commodity Index up for a third day, off a 16-month low earlier this week) and folks are out there doing their best to spin Friday’s retail data as upbeat, but the bottom line is that it is by no means clear that we’re out of the woods on either account.
Goldman agrees. In the bank’s latest “Credit Trader” note, Lotfi Karoui and Bridget Bartlett have got a pretty simple message for you. To wit:
That’s rhetorical. Of course there are questions. And here’s Goldman to answer them.
Weakness resumes post-earnings; we remain negative on Retail. Retailers’ first quarter earnings disappointed this week, ending what appeared to be a short-covering wave in the prior few weeks. The disappointing earnings should keep the focus on the continued secular challenges facing brick-and-mortar stores. IG Department stores were particularly vulnerable, as same-store sales suffered across Macy’s, Kohl’s, and Nordstrom’s, even after spreads on long-dated bonds had already widened by 27bp each (and 52bp for Kohl’s) this year pre-earnings. In HY, the Retail sector still trades 311bp wider than the HY index, but we believe the continued pressure from lower foot traffic and higher price transparency and online channels fully justify this underperformance gap (Exhibit 1). We remain negative on the sector.
HY Metals and Mining spreads underperform; we prefer E&Ps. While HY E&Ps continue to demonstrate resilience amidst broader commodity weakness, HY Metals and Mining spreads have underperformed more significantly, losing 0.71% on the week compared to -0.15% decline for HY E&P total returns. Heading into 2017, we took a cautious view on the HY Metals and Mining space on the expectation that still challenging fundamentals and tight spread valuations—with the sector trading 5bp tight to the index on average this year—would fail to justify further outperformance. HY Metals and Mining spreads are now trading 22bp wider than the index after widening 9bp in May, reflecting softer macro data and tighter policy in China (Exhibit 2). While our commodities team believes the degree of policy tightening in China comes from a position of strength, not weakness—in an effort to rein in financial excess and leverage rather than hitting the real economy—we would note that sentiment has shifted for HY investors, with the tight spreads for HY Metals and Mining issuers doing little to assuage China’s longer-term growth concerns.