WEEKLY MARKET OUTLOOK JANUARY 4, 2018 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. Profits Growth and Benign Default Outlook May Offset Higher Interest Rates Credit Markets Review and Outlook by John Lonski Profits Growth and Benign Default Outlook May Offset Higher Interest Rates » 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 Full updated stories and key credit market metrics: The recent ultra-low VIX index favors a high-yield bond spread of less than 350 basis points. Begins on page 12 . » FULL STORY PAGE 12 Ratings Round-Up by Njundu Sanneh Rating Change Activity Recedes » FULL STORY PAGE 16 Market Data Credit spreads, CDS movers, issuance. » FULL STORY PAGE 18 Moody’s Capital Markets Research recent publications Links to commentaries on: Greece and Spain, dangers in the outlook, high-yield borrowing, Saudi Arabia, defaults, credit/stocks, China, yields/prices, debt/growth, Spain, upside surprise, bulls, less fear, Fed & BoJ, inflation, market triggers, hurricanes, data in sync. » FULL STORY PAGE 23 Credit Spreads Investment Grade: We see year-end 2018’s average investment spread exceeding its recent 103 bp. High Yield: Compared to a recent spread of 357 bp, it may approximate 400 bp by year-end 2018. Defaults US HY default rate: Compared to November 2017’s 3.4%, Moody's Default and Ratings Analytics team forecasts that the US' trailing 12-month high-yield default rate will average 2.4% during 2018’s third quarter. Issuance In 2016, US$-IG bond issuance probably rose 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 probably rose by 6.7% to a new zenith of $1.507 trillion, while US$-priced high-yield bond issuance may increase by 31.1% to $450 billion, thereby surpassing 2014’s previous high of $435 billion. 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 Analytics 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/U.S.: Ryan Sweet 1.610.235.5000 Ryan.Sweet@moodys.com Moody's Analytics/Europe: Suzanne Schatz 1.610.235.5342 Suzanne.Schatz@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 Editor Reid Kanaley 1. 610.235.5273 reid.kanaley@moodys.com CAPITAL MARKETS RESEARCH 2 JANUARY 4, 2018 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. Profits Growth and Benign Default Outlook May Offset Higher Interest Rates Corporate bonds and equities got out of the gate quickly in 2018. Though benchmark interest rates are likely to climb higher, the combination of corporate earnings growth and a benign outlook for corporate defaults should be enough to prevent a deep and extended slide by share prices. Except for late 1987’s stock market crash, the historical record shows that since 1982, interest-rate inspired declines by the broad equity indices have been relatively brief and shallow. A fundamentally unwarranted surge by the 10-year Treasury yield from the 7.00% of mid-January 1987 to roughly 10.25% just prior to the market plunge of October 19, 1987 deserves a good deal of blame for that calamity. The month-long average of the market value of U.S. common stock plunged by 27.4% from July 1987’s peak to December 1987’s bottom and not until July 1989 would this metric return to its July 1987 high. Note that the market’s collapse from July 1987 through December 1987 occurred despite overlapping real GDP’s average quarter-to-quarter annualized increase of 5.2% and an average yearly increase by pretax operating profits of 23.0%. Moreover, the equity market effectively ignored a drop by the high-yield default rate from April 1987’s then 16-year high of 7.0% to September 1987’s 3.8%. Leading Indicator of Defaults Drops to Lowest Close since May 2015 A benign outlook for corporate defaults weighs against a deep and prolonged slump by earnings-sensitive securities in 2018. The average expected d