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Capital Markets Weekly: US tariff threat raises equity uncertainties; Hong Kong preparing Green Bond debut

13 May 2019 Brian Lawson


Equity markets face renewed volatility after US threats to proceed with increased tariffs against China, although continuing negotiations left the markets hoping these might be avoided or prove short-lived. The increased uncertainty dampens confidence in share valuations and is badly-timed for Uber's planned jumbo flotation. On 6 May the CSI300 index dropped 5.8%, its worst one-day performance since 2016.

In debt markets, Hong Kong's debut Green Bond - under a HKD100 billion (USD12.74 billion) program - is designed to boost Hong Kong's role as a regional financial hub and attract more Green bond issuers from mainland China. Moves to harmonize Chinese standards with those applied internationally also should boost Green financing in the region.

Another highlight was long-dated issuance planned for Ireland and Portugal, along with the European Commission's forecast that Italy will reach a deficit in 2020 of 3.5% of GDP, versus its negotiated compromise commitment of 2.04% for 2019. This breach of the Maastricht Treaty limit is expected, and we have warned repeatedly of the downside risks for Italian debt.

Lastly, Bristol Myers launched its USD19 billion acquisition bond package, this year's largest corporate sale. The nine-tranche deal gained over USD70 billion of demand during 7 May.

Green Bonds/ Eurozone Debt

Hong Kong started marketing its initial Green bond this week. In June 2018, Hong Kong Monetary Authority announced plans for a HKD100 billion Green Bond program, subsequently ratified in its annual budget. This was presented as encouraging more Green bond issuance by mainland Chinese companies through Hong Kong, along with other regional Green borrowing.

On 7 May Ireland's National Treasury Management Agency announced plans to sell debt maturing in 2050. According to the Irish Times a EUR3 billion size is likely. Ireland's previous long bond was sold in 2014: with 25 years remaining it yielded 1.347% on 7 May. Launch is expected imminently.

On 8 May, Portugal also will sell longer-dated Euro-denominated debt. It is auctioning an indicated range of EUR1-1.25 billion of taps for its 1.95% June 2029 and 2.25% April 2034 issues.

On 8 May, the European Commission forecast that Italy's budget deficit will reach 3.5% of GDP in 2020, versus the 2.04% limit for 2019 reached after extended negotiations. This breaches the Maastricht Treaty 3% limit. So far, market reaction has been limited, with Italy's 10-year bond barely changed at 2.6% yield. In late 2018, it traded well over 3.5%, with a peak of 3.81%, while in 2019 it reached a mid-April floor of 2.37%.

Our Take

Hong Kong's debut Green bond comes against a favorable background for issuance of Green, Social and Sustainable bonds, and efforts to bring China's Green framework in line with international standards.

  • Q1 2019 was a record-breaking quarter for Green, social and sustainable debt, with 233 deals that raised USD63.8 billion, 47% above Q1 2018 issue totals. The Euro was the most popular currency with 49%, followed by the US dollar (19%).
  • Issuance in Hong Kong already has reacted strongly to the government initiative. In 2018, USD11 billion of Green bonds were sold through Hong Kong, versus USD2.3 billion in 2017.
  • According to Sean Kidney, CEO of NGO Climate Bonds Initiative, Chinese regulators are taking measures "to further open up the market", and to "harmonize what they are doing with international requirements".
  • Hong Kong's sovereign Green bond is unusual, in that the key driver appears to be the preservation and development of its role as a financial hub.

Overall, we assess that Chinese issuance of Green bonds should expand, given the country's increased focus on environmental issues. Tighter regulatory standards will be helpful.

The move by Ireland and Portugal to undertake longer-dated issuance is unsurprising. With European bond markets having rallied, the revived "search for yield" generates greater appetite for long-duration securities, with Cyprus having enjoyed notable recent success. Favorable risk appetite should encourage more borrowers to lock in extended duration, or to advance their funding plans. Greece remains a likely candidate for issuance in the coming weeks as well. Italy's deficit over-run is no surprise, being forecast repeatedly in our prior coverage. We remain cautious on the prospects for Italian bonds. We view them as clear potential under-performers within the EU bloc and facing risk of future market dislocations.

Posted 13 May 2019 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit


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