“While investors look for clues about the health of the global economy, a research and analytics unit under S&P Global said a “hidden” segment of debtors is flashing early signs of trouble.
“Those borrowers are small companies that are not rated by S&P Global Ratings, according to the agency’s sister division, S&P Global Market Intelligence. A credit rating is an assessment on a government or company’s ability to repay its debt.
“There are many reasons why borrowers choose not to seek a credit rating, including cost savings, infrequent bond issuance and investors’ familiarity with the brand. Well-known companies that have in the past opted against a credit rating include Italian luxury fashion house Prada and German sportswear brand Adidas.
“Generally, though, many entities without an S&P credit rating are small companies that are likely to be the first victims in an economic downturn, said Michelle Cheong, director and global product development lead for credit solutions data at S&P Global Market Intelligence.
“That group is “very much a hidden, under the radar” segment, Cheong told CNBC in a phone call on Monday. That’s because unrated borrowers are much smaller in size collectively: Their total assets have consistently been less than 10% of their rated peers’ over the last five years.
““The unrated entities are like the canary in the mine. They are the ones that usually start to default first — before you see trouble happening among the rated entities — because they are the weaker link,” she added…
“A reason behind that is over-investment in less profitable projects due to the availability of cheap credit in the last few years, she explained.
“Analysts have long warned about the dangers of rising debt fueled by low interest rates globally. The low-rate environment came about after central banks around the world adopted easier monetary policies to stimulate the economy after the financial crisis.”
“…cutting rates could hasten exactly the outcome that the Fed is trying to avoid. By further driving up the prices of stocks, bonds and real estate, and encouraging risky borrowing, more easy money could set the stage for a collapse in the financial markets.
“And that could be followed by an economic downturn and falling prices – much as in Japan in the 1990s.
“The more expensive these financial assets become, the more precarious the situation, and the more difficult it will be to defuse without setting off a downturn.”
“Economic data in Mexico this week will all but certainly show the nation fell into recession, tipping the scales on market bets for an interest rate cut by the central bank as soon as August. Mexico’s TIIE swap curve has already priced in at least a 25 basis point reduction in three months.
“That suggests that Banxico, as the central bank is known, will start easing either on Aug. 15 or Sept. 26.”
“The cumulative decline of the Venezuelan economy since 2013 will reach 65 percent, among the deepest five-year contractions around the world over the last half century, the International Monetary Fund has announced…
“…the Venezuelan decline is historic because it is unprecedented in the hemisphere and also because it is the only one among top global five-year contractions that is unrelated to armed conflicts or natural disasters.”
“Communist-run Cuba on Tuesday imposed sweeping price controls on all state and private businesses as it battles a deepening economic crisis and mounting U.S. sanctions.
“Resolutions published in the official gazette banned all retail and wholesale price increases except for products imported and distributed by the state where already-set profit margins cannot be increased.”
““The participants were in agreement that every part of Nigeria is today bedevilled by one form of extremist violence or the other and that these conflicts are increasingly having corrosive effects on the Nigerian state. The causes of the insecurity include poverty arising from the economic crisis in the country and bellicose political activities, environmental scarcity in the far North, and the rising perception of injustice by ethnic and religious groups which are escalated by fake news and hate speeches.””
“South Africa’s unemployment rate jumped to its highest since the global financial crisis more than a decade ago, data showed on Tuesday, piling pressure on a shrinking economy and President Cyril Ramaphosa’s pledge to deliver a turnaround… Job cuts across a host of sectors are set continue into the next few years. On Tuesday, state power firm Eskom reported a more than 20 billion rand annual loss, making mooted staff cuts in the region of 7,000 almost inevitable.”
“Zimbabwe’s government said it distributed almost 190,000 metric tons of maize to households in rural and urban areas, marking the first time ever it’s had to distribute food to people in cities.
““There’s increasing hunger in both rural and urban areas,” Sekai Nzenza, the country’s public service, labour and social welfare minister, told reporters on Tuesday.”
“The political repercussions of a deadly shooting in Lebanon have paralyzed government at a critical moment and risk complicating efforts to enact reforms needed to steer the heavily indebted state away from financial crisis…
“Efforts to mediate a way out of the standoff are deadlocked over which court should hear the case.”
“[Indian] banks, which have been pushing retail credit for more than five years because of a surge in defaults in corporate loans, have built up risks in that segment due to slack underwriting standards.
“There is an uptick in defaults by individuals as their incomes are stagnating and some are losing jobs due to companies shrinking their sizes due to poor profitability and bankruptcies.”
“President Donald Trump early Tuesday said it’s possible the United States would reach “no deal at all” with China, putting significant pressure on talks set to kick off in Shanghai less than a day later.
“”I think China is willing to give up a lot, but that doesn’t mean I’m willing to accept it,” he said before boarding Marine One for a trip to Virginia.”
“China’s factory activity shrank for the third month in a row in July, an official survey showed, underlining the growing strains on the world’s second-biggest economy as the Sino-U.S. trade war hits business profits, confidence and investment.”
“For the first time, the risk that a large bank could lose all or part of its investment in a smaller financial institution was introduced into the market.
““Baoshang marked a watershed moment for the banking industry,” analysts at advisory firm Trivium China said. “That’s called counterparty risk – something the Chinese financial system hasn’t known much about in recent years.””
“The ongoing trade dispute between Japan and South Korea has begun to affect businesses across sectors and could potentially even make a dent in the global economy.
“The political disagreement stems from an argument about Japan’s conduct during the second World War, but it’s recently spilled into the economic arena.”
“A University of Melbourne study released today found that Australians have less to spend now than they did a decade ago, with incomes stagnating.
“Despite the lowest home loan rates in decades, more than a million Australians are estimated to be in mortgage stress. The numbers of those falling behind on loan repayments is now at its highest since the end of the Global Financial Crisis.”
“The pound fell to its lowest level on record against a collection of other top currencies as fears over a no-deal Brexit continued to build.
“Sterling fell to an all-time intraday low on the Bloomberg British Pound Index, which tracks the performance of sterling against a “basket of leading global currencies”. The index has been running since 2004.”
“Alec Pillmoor, of RSM, said: “Of greatest concern is the rise in personal insolvencies among young adults [in the UK].
““In this climate of low interest rates and relatively easy access to credit, it is entirely feasible that young people without financial experience or literacy may be more susceptible to the temptations of easy money.””
“The automotive industry took a hit in the wake of the 2008 Lehman Brothers crisis. It took about two years to stabilise and saw good sales for 7-8 years after that. Since mid-2018, however, there has been a downturn which is likely to continue in 2019-2020.”
“Trade tensions and concerns around growth potential are unlikely to subside anytime soon.
“The slowdown in economic growth in the second quarter of 2019 was significant.
“The historical parallels of similar slowdowns as well as incoming data both point to a prolonged slowdown that is unlikely to reverse course with a 25 bps rate cut.”
Read the previous ‘Economic’ thread here and visit my Patreon page here.