WEEKLY MARKET OUTLOOK OCTOBER 12, 2017 CAPITAL MARKETS RESEARCH Moody’s Analytics markets and distributes all Moody’s Capital Markets Research, Inc. materials. Moody’s Capital Markets Research, Inc is a subsidiary of Moody’s Corporation. Moody’s Analytics does not provide investment advisory services or products. For further detail, please see the last page. Special Events Supply an Upside Surprise Credit Markets Review and Outlook by John Lonski Special Events Supply an Upside Surprise. » FULL STORY PAGE 2 The Week Ahead We preview economic reports and forecasts from the US, UK/Europe, and Asia/Pacific regions. » FULL STORY PAGE 6 The Long View Check our chart here for forecast summaries of key credit market metrics. Full updated stories, “3Q 2017’s outstandings of US corporate bonds rose by +8.2% yearly for IG (to $5.853 trillion) and fell by -4.3% yearly for HY (to $1.285 trillion).,” begin on page 17 . » FULL STORY PAGE 17 Ratings Round-Up by Njundu Sanneh Default Rate Reflects Global Economy — Both Improving » FULL STORY PAGE 23 Market Data Credit spreads, CDS movers, issuance. » FULL STORY PAGE 25 Moody’s Capital Markets Research recent publications Links to commentaries on: Bulls, less fear, Fed & BoJ, inflation, market triggers, hurricanes, data in sync, Harvey, inflation, yields, Korea, jobless rate, spreads, Saudi Arabia, lending, El Salvador, liquidity, CreditEdge, European credit, rates, sov risk, Qatar. » FULL STORY PAGE 29 Credit Spreads Investment Grade: Year-end 2017 spread to exceed its recent 105 bp. High Yield: After recent spread of 355 bp, it may approximate 400 bp by year-end 2017. Defaults US HY default rate: Compared to September 2017’s 3.3%, Moody's Default and Ratings Analytics team forecasts that the US' trailing 12-month high-yield default rate will average 2.3% during 2018’s third quarter. Issuance In 2016, US$-IG bond issuance grew by 5.6% to a record $1.412 trillion, while US$-priced high-yield bond issuance fell by -3.5% to $341 billion. For 2017, US$-denominated IG bond issuance may rise by 5.6% to a new zenith of $1.491 trillion, while US$-priced high-yield bond issuance may increase by 27.3% to $434 billion, or a tad under 2014’s $435 billion record high. Click here for Moody’s Credit Outlook, our sister publication containing Moody’s rating agency analysis of recent news events, summaries of recent rating changes, and summaries of recent research. Moody’s Capital Markets Research Weekly Market Outlook Contributors: John Lonski 1.212.553.7144 john.lonski@moodys.com Njundu Sanneh 1.212.553.4036 njundu.sanneh@moodys.com Franklin Kim 1.212.553.4419 franklin.kim@moodys.com Yuki Choi 1.212.553.0906 yukyung.choi@moodys.com Moody's Analytics/Europe: Tomas Holinka +420 ( 221) 666-384 Tomas.holinka@moodys.com Barbara Teixeira Araujo +420 (224) 106-438 Barbara.TeixeiraAraujo@moodys.com Moody's Analytics/Asia-Pacific: Katrina Ell +61 (2) 9270-8144 katrina.ell@moodys.com Faraz Syed +61 (2) 9270-8144 Faraz.syed@moodys.com Editor Dana Gordon 1.212.553.0398 dana.gordon@moodys.com CAPITAL MARKETS RESEARCH 2 OCTOBER 12, 2017 CAPITAL MARKETS RESEARCH / MARKET OUTLOOK / MOODYS.COM Credit Markets Review and Outlook Credit Markets Review and Outlook By John Lonski, Chief Economist, Moody’s Capital Markets Research, Inc. Special Events Supply an Upside Surprise Corporate credit is seeing one of the more unusual business cycle upturns since the Second World War. Not only have corporate bond yield spreads narrowed and default probabilities declined despite steeper leverage, but special events have gone from dragging ratings lower, on balance, to, once again, being of a net benefit to US corporate credit ratings. In a break from the past, mergers, acquisitions, and divestitures (M&A) now prompt more upgrades than downgrades amid a well-established upturn. Moreover, the latest 12-month sums show upgrades stemming from infusions of common equity capital exceeding the number of shareholder-compensation driven downgrades. Conceivably, the current upturn’s subpar revenue growth and lack of pricing power have deterred companies from indulging in debt-funded acquisitions, LBOs, equity buybacks, and dividends, all of which substantially weaken credit quality. Corporations still strive to enhance shareholder returns, but not to the point where doing so imperils the long-term viability of the firm’s capital structure. The sudden and widely distributed earnings slump of 2015-2016 warned businesses against surrendering too much financial flexibility to heightened leverage. It would be a mistake to attribute the entirety of an earlier -10.3% plunge by the moving yearlong average of nonfinancial corporate pretax operating profits from Q2-2015’s record high to energy industry woes. According to the National Income Product Accounts, profits from industries other than petroleum and coal also sank by