Market commentary: Selling is the game

So it would seem, as good news in this market is becoming an increasingly scarce commodity. The decline in stocks came even as Fed Chair Janet Yellen sought to reassure investors in her Congressional testimony late on Thursday. Of course some sectors have been performing well, notably core Eurozone sovereign bonds, US Treasuries, Japanese government bonds and precious metals. In currencies, what goes down must necessarily come up somewhere else – specifically the Euro and the Yen which were the main beneficiaries of the selloff in the US dollar.

So if you sold your dollars to buy German bunds you’re probably doing all right – but what if you’re not? Should you buy the dip, wait it out or sell short? There is never a correct answer but clues may lie in sector-index correlations according to some strategists. Amid the current volatility, with worries shifting frequently from global growth to oil prices, from deflation to banking sector worries the bottom may not come until “everyone heads for the exit”. That argues for another leg lower, be a sharp selloff or a few more days of grinding.

CoCo Concerns

In the meantime, European stocks tumbled and a gauge of the banking sector slid to its lowest level since 2012, reflecting a lack of trust in banks to be as profitable as they once were. European lenders are being pummelled as concern about credit markets seeps into equities. Investors have rushed to buy credit default swap, or CDSs – protection against banks’ declining bond prices. A popular credit derivatives index that tracks the likelihood of default of investment-grade debt of European companies and banks was trading at 118 basis points on Tuesday, near its highest level since June 2013.

Deutsche Bank and Credit Suisse’s poor results have fuelled concerns over the health of the European banks, sending their shares and bonds lower. With hindsight, losses unexpectedly imposed on some senior creditors at Portugal’s Novo Banco at the end of December are now exacerbating worries over bank debt. Bank selloffs are especially more worrisome in Europe than in the US since capital markets are not as developed and many enterprises depend on bank funding for their day-to-day running and, ultimately, their survival.

Deutsche Bank is particularly in focus as concerns rise about its ability to pay coupons on so called CoCo bonds. These post-financial-crisis contingent convertible capital instruments allow banks to skip interest payments without defaulting, and are designed to convert to common equity or suffer a principal write-down if a bank runs into trouble. This provides a buffer in times of stress while inflicting losses on CoCo investors, and not just depositors.

The German lender’s equity was trading 4% lower on Tuesday morning, having fallen 9.5% on Monday. The stock recovered somewhat in the past days. The bank’s senior CDS had risen to 238bp in Tuesday morning trading, wider than at any point during the 2008 financial crisis. Germany’s finance minister stated “Deutsche Bank is rock-solid” in an attempt to stem the damage.

Technology IPOs Pause

The tech sector has had it rough during the past few months. The NASDAQ, the index where most tech companies are listed, is the worst performer of the year in the US, down by almost 13%. After deal valuations comparable to the dot-com era in 2014 and negative IPO returns versus the NASDAQ in the last months of 2015, this year looks like a no-go for companies wishing to go public.

Indeed they may not have to. Big tech startups like Uber and Airbnb have successfully raised billions through the private market. Companies are now more mature and may not necessarily need an IPO to raise the necessary capital. Going public also means opening up your books and valuations to investors globally. Despite these issues an IPO is still the ultimate destination for most start-ups and that is for reasons beyond raising money and cashing out early investors.

The pros of going public include the publicity associated with the listing, which can help legitimise a small company. Employees get a market for their stock while management gets currency for acquisitions, one whose value resets constantly on an exchange versus periodically in private deals.

IPOs are usually launched during stable or bullish periods in the market as investors are usually more willing to participate when the times are good. While the current situation seems therefore unsuitable, analysts expect demand to catch up with supply later on in the year.

This article was issued by Andrew Martinelli, Trader at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.