WEEKLY MARKET OUTLOOK JANUARY 8, 2015 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. Oil Price Plunge Is Not Enough to Deflate Credit Credit Markets Review and Outlook by John Lonski Oil Price Plunge Is Not Enough to Deflate Credit. » 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: “Very low bond yields will spur investment grade bond issuance at the start of 2015,” begin on page 14. » FULL STORY PAGE 14 Ratings Round-Up by Njundu Sanneh Many Changes, Mostly Downgrades. » FULL STORY PAGE 17 Market Data Credit spreads, CDS movers, issuance. » FULL STORY PAGE 19 Moody’s Capital Markets Research recent publications Links to commentaries on: RIG, issuance, iStar, WM. » FULL STORY PAGE 23 Topic of the Week will return next week. Credit Spreads Investment Grade: Year-end 2015 spread to be under its recent 135 bp. High Yield: Recent spread of 537 bp could dip to 475 bp by year-end 2015. Defaults US HY default rate: November 2014, 1.9%; 2.1% average in 1H/2015 Issuance IG: In 2013, US$ investment grade bond issuance dipped by -1.5% to $1.119 trillion. In 2014, it rose by 0.7% to $1.127 trillion. HY: 2013 US$ high yield bond issuance advanced by 11% to a record $431 billion; in 2014 it dropped by -2.7% to $419 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 Capital Markets Research, Inc. Weekly Market Outlook Contributors: David W. Munves, CFA 1.212.553.2844 david.munves@moodys.com John Lonski 1.212.553.7144 john.lonski@moodys.com Ben Garber 1.212.553.4732 benjamin.garber@moodys.com Njundu Sanneh 1.212.553.4036 njundu.sanneh@moodys.com Yukyung Choi 1.212.553.0906 yukyung.choi@moodys.com Irina Baron 1.212.553.4307 irina.baron@moodys.com Franklin Kim 1.212.553.4419 franklin.kim@moodys.com Xian (Peter) Li 1.212.553.1404 Xian.li@moodys.com Moody's Analytics/Europe: Zach Witton 44 (20) 7772-1678 Zach.witton@moodys.com Moody's Analytics/Asia-Pacific: Glenn Levine 1.612.9270.8159 Glenn.levine@moodys.com Alaistair Chan 1.612.9270.8148 Alaistair.Chan @moodys.com Editor Dana Gordon 1.212.553.0398 dana.gordon@moodys.com CAPITAL MARKETS RESEARCH 2 JANUARY 8, 2015 CAPITAL MARKETS RESEARCH, INC. / 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. Oil Price Plunge Is Not Enough to Deflate Credit Early this week, Germany’s very low 0.2% annual rate of CPI inflation for December intensified fears of European consumer price deflation. Both employment and personal income will eventually suffer if product prices soften amid rising wages. However, markets rallied later in the week despite news of a -0.2% year-to-year drop by a preliminary estimate of the Eurozone’s December CPI. Not only did markets take comfort from how December’s Eurozone CPI managed to rise by 0.6% annually after excluding a -6.3% annual plunge by energy prices, but indications of support from high-ranking central bank officials suggested that monetary policy makers will do whatever is necessary to fend off pernicious price deflation. Markets now sense that the federal funds rate will not be lifted until industrial commodity prices reverse direction convincingly. Nevertheless, it remains unclear as to whether or not central banks will be successful at maintaining sufficient inflation expectations. Europe’s Corporate Bond Market Withstands Deflation Fears for Now Thus far, the European credit market has yet to panic in response to deflation fears. The recent yield spreads of investment grade European corporate bonds were 108 bp for financial companies and 92 bp for the industrials. Both spreads were under their averages of 2013 and the crisis-plagued two-years-ended June 2012. For 2013, the spreads averaged 116 bp for the financials and 95 bp for the industrials; while, during the two-years-ended June 2012, they averaged 295 bp for the financials and 167 bp for the industrials. (Figures 1 and 2.) 1.251.752.252.753.253.754.254.755.255.756.2575125175225275325375425Oct-09Apr-10Oct-10Apr-11Oct-11Apr-12Oct-12Apr-13Oct-13Apr-14Oct-14EU Investment-grade Financial Company Bond Yield Spread: bp ( L )EU Investment-grade Financial Company Bond Yield: % ( R )Figure1: European Investment-Grade Financial Company Bond Yield Spread Fa