Despite the bloodbath in corporate credit markets, talking heads remain cognitively dissonant as to the reality lurking under the surface of this colossal leap in cost of funds for every firm. However, Credit Suisse is "worried" about the implications of these two disheartening charts expose, suggesting a default environment that might abort the Fed hiking cycle - which in this case is not a market-reassuring outcome.
As Credit Suisse's William Porter explains, the percentage of North American companies losing money on an LTM basis in Q3 rose to a cycle high, while the ratio in Europe stayed stable, at the low end of its recent range.
The burden of this is the correlation with the default rate. Moody's 2016 forecast is 3.8% but the relationship with this ratio now suggests something much higher, and we watch that outcome as a risk. Arguably the only market remotely priced to a much higher default rate as an outcome is US rates.
This is not a forecast, but an observation and a watching point. With the ECB now apparently less friendly as we examine below, we become more cautious ahead of the presumed Fed hike on 16 December, particularly in terms of total return dynamics.
Ironically, if defaults were to rise to anything like the degree this analysis suggests, it might abort the Fed hiking cycle which is a source of concern for the credit market. But we would hardly take this as a reassuring outcome.
There is a theme at present that credit is leading other markets, and is predicting "recession." We are worried...