WEEKLY MARKET OUTLOOK NOVEMBER 9, 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. Fewer Defaults Favor Even Pricier Equities Credit Markets Review and Outlook by John Lonski Fewer Defaults Favor Even Pricier Equities. » 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 5 The Long View Check our chart here for forecast summaries of key credit market metrics. Full updated stories, “The recent high-yield bond spread is inordinately narrow,” begin on page 17 . » FULL STORY PAGE 17 Ratings Round-Up by Njundu Sanneh Mostly Upgrades in Europe, Downgrades in the US. » FULL STORY PAGE 22 Market Data Credit spreads, CDS movers, issuance. » FULL STORY PAGE 24 Moody’s Capital Markets Research recent publications Links to commentaries on: credit/stocks, China, yields/prices, debt/growth, Spain, upside surprise, 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. » FULL STORY PAGE 28 Credit Spreads Investment Grade: Year-end 2017 spread to exceed its recent 106 bp. High Yield: After recent spread of 370 bp, it may approximate 410 bp by year-end 2017. Defaults US HY default rate: Compared to October 2017’s 3.2%, Moody's Default and Ratings Analytics team forecasts that the US' trailing 12-month high-yield default rate will average 2.2% 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 7.3% to a new zenith of $1.515 trillion, while US$-priced high-yield bond issuance may increase by 23.5% to $421 billion, or less than 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 Veasna Kong +61 (2) 9270-8159 Veasna.kong@moodys.com Editor Dana Gordon 1.212.553.0398 dana.gordon@moodys.com CAPITAL MARKETS RESEARCH 2 NOVEMBER 9, 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. Fewer Defaults Favor Even Pricier Equities The benign outlook for high-yield defaults now supports the US equity market. Moody’s Default Research Group recently projected a decline by the US high-yield default rate from October 2017’s 3.2% to 2.1% by October 2018. Intuitively, a lower high-yield default rate should lend support to equity market performance and vice versa. Granted that not all corporations have speculative-grade credit ratings, but the direction taken by the default rate offers valuable insight regarding the direction being taken by corporate credit quality in general. Lending support to this view are the high-yield bond spread’s strong correlations with Moody’s long-term Baa and single-A industrial company bond yield spreads of 0.92 and 0.87, respectively. Moreover, the month-long averages for the investment-grade and high-yield bond spreads supplied by Barclays Capital show a somewhat stronger correlation of 0.95. (Figure 1.) 2204206208201,0201,2201,4201,6201,820100150200250300350400450500550600Jan-89Jul-91Jan-94Jul-96Jan-99Jul-01Jan-04Jul-06Jan-09Jul-11Jan-14Jul-16Long-term Baa Industrial Company Bond Yield Spread ( L )High-Yield Bond Spread ( R )Figure 1: Strong Correlation of 0.92 Between High-Yield and Moody's Long-Term Baa Bond Yield Spreads ... Recent Baa Spread of 156 bp Favors a 446 bp Midpoint for High-Yield Spread in bp Coincidentally, the recent Baa industrial company spread of 156 bp has been statistically associated with a 446 bp midpoint for the high-yield spread, which is much wider than the now 370 bp composite high-yield bond spread. Similarly, Barclay Capital’s recent in