With the falls in equity markets over the past week, there has been a modest uptick in corporate bond spreads with US investment grade spreads up ca.20bps to 120bps or so. However, these are still at the lower end of recent history, with US investment grade spreads frequently trading over 150bps in the last 10 years and reaching over 300bps in the aftermath of the Lehmans default. I think the markets are not properly pricing in the risks associated with Corporate Bonds, and there is a risk of a collapse of this market on a par with the aftermath of Lehmans.

Even before the onset of Covid-19, the IMF was warning of the risks posed by rising corporate burdens and potential issues with corporate bond illiquidity in its 2019 Global Financial Stability Report [1]. On the former, the IMF estimated that in a mild slowdown, about half as severe as that suffered during the Global Financial Crisis of 2007/09, debt owed by firms unable to service the interest could...

Living in the UK, it’s easy to get wound up in the chaos of Brexit, but the possibility of a hard Brexit is just one of many geopolitical risks faced just now. Broadly heading east to west:

Spain – while things seem to have gone quiet in Catalonia, the fact remains that a greater proportionate of its electorate voted for independence than the proportion of the UK electorate voted for Brexit, even though opponents boycotted the vote [1]. The prosecution of Catalan politicians behind the vote is likely to exacerbate tensions, as will the emergence of the right-wing Vox party vehemently opposed to Catalan self-determination. While the UK faces the prospect of a break up with the possibility of a second referendum on Scottish independence and/or a border poll in Northern Ireland, it is not the only one that faces the threat of secession.

Italy – while Matteo Salvini may have recently been outmanoeuvred out of power, he is...

I have been meaning for some time to post a blog on how the risks I called last year matched up with reality. I appreciate it’s a bit late in the day but I would cite work commitments and the fact that events continue to develop. As that old Chinese curse goes, we live in interesting times.

Speaking of China, the first risk I called out was a trade war between China and the US [1]. Thankfully this has not come to fruition, partly because the US needed Chinese help to put pressure on North Korea, but this is still a live issue. There have been American grumbles about sanctions busting by Chinese companies, while attempts to cut Chinese companies with ties to North Korea off from the US dominated global financial systems were only rebuffed by China applying similar pressure to US firms with operations in China. It may be that we are in a “phoney war” phase just now but this could get hot.

As it is, US trade relations with the EU are going through a rocky...

At the end of August 1914, the French Army was in disarray. Its disastrous Plan XVII offensive had cost it over 300,000 casualties in one month, its bloodiest toll in all of WWI. The German commander Helmuth von Moltke the Younger sensed the possibility of a rout. Putting aside the detailed Schlieffen Plan they were supposed to be following, he gave two armies the command “Pursue Direction Epinal” for them to chase the beaten French towards the town of Epinal. The counter-stroke was an abject failure with the Germans suffering over 60,000 casualties in the following weeks. Many historians feel this diversion may have contributed to the failure of the Schlieffen Plan and the prospect of a quick victory on the Western Front.

So where am I going with this says you ? well I was put in mind of this by the recent snap election decision by Theresa May. Like the French Army, the opposition Labour Party is in disarray. Just as von Moltke sensed a modern day Cannae, no...