Premarket: Companies are taking on another $1 trillion in debt

What’s happening: Corporate debt is poised to soar to a new record in 2020, Janus Henderson said in a report Monday. The asset manager, which analyzed 900 companies from around the world, said net borrowing could increase by as much as $1 trillion this year over 2019, when it surged to $8.3 trillion.

“As the global recession takes hold, profits and cash flow will be sharply lower,” Janus Henderson analysts said in the report. Even as companies slash dividends and share buybacks, “borrowing needs will be very large this year,” they continued.

Why it matters: More debt isn’t necessarily a bad thing, and companies need access to credit in order to power the economic recovery. The bigger concern is whether they can maintain payments to investors, Janus Henderson noted.

While large multinational companies like FedEx (FDX), Nike (NKE) and UPS (UPS) quickly tapped credit markets in March to fortify their financial position going into the pandemic, credit issuance has shifted to lower-quality borrowers in recent weeks, according to Janus Henderson portfolio manager Seth Meyer.

See here: High-yield issuance hit an all-time record in June, Meyer told my CNN Business colleague Hanna Ziady.

For now, though, investors aren’t worried. They point to unprecedented action by the Federal Reserve, which has been buying corporate bonds to help credit markets keep functioning through a period of unprecedented economic stress. That’s helped drive down yields, indicating lower perceptions of risk and higher demand.

On the radar: Corporate debt will be a focal point of earnings season as reporting kicks off in earnest this week.

Citigroup’s Hans Lorenzen said in a recent note to clients that he expects to learn that European companies borrowed €450 billion ($510 billion) between March and May, almost three times as much as they borrowed during the same three months in 2019.

Borrowing could be even higher in the United States. Janus Henderson points out that American companies now owe almost half the world’s net corporate debts, both because of their global scale and a greater willingness to borrow.

Why Netflix shares remain hot

Netflix (NFLX) has been a clear winner from the pandemic as people spend more time at home. And some on Wall Street think its fortunes could keep improving.
Take that, Disney! Goldman Sachs is super bullish on Netflix
Shares in the streaming company surged more than 8% Friday to a new record, finishing the day at $548.73. Netflix’s stock has jumped nearly 70% year-to-date.

Driving the rally: Friday’s leap came after Goldman Sachs boosted its price target on Netflix to $670 a share, the highest on Wall Street, my CNN Business colleague Paul R. La Monica reports.

Analyst Heath Terry thinks Netflix will report stronger-than-expected subscriber growth when it posts earnings later this week. He forecasts an increase of at least 12.5 million net subscribers, compared to the consensus estimate of about 8.1 million. Netflix had nearly 183 million global subscribers at the end of the March quarter.

Terry said that he thinks Netflix still has plenty of room for growth as people spend less on traditional cable TV, theater releases and other live events, freeing up money for streaming services.

“While the thesis ‘if you haven’t subscribed by now, you never will’ is an easy rhetorical, it fails to capture the reality of … a dramatically changing world that is pushing changes into every corner of consumer behavior,” he told clients.

Not all rosy: Netflix is still worried about the future. While the company’s 2020 slate of series and films was largely shot before the pandemic, 2021 could be trickier if the virus continues to thwart production. It also needs to watch out for increased competition from Disney+ and Apple TV+.

Oil production could ramp up again in August

Oil producers are poised to increase production in August. But is demand stable enough to merit such a move?

That’s the big question from investors ahead of an OPEC committee meeting this week. The cartel is expected to recommend an easing in supply cuts that have been supporting prices, according to media reports.

Under a proposal from Saudi Arabia, OPEC and its allies would ease current curbs on output by 2 million barrels per day to 7.7 million barrels a day, per the Wall Street Journal.

The demand picture has improved since April, when the producers agreed to stem production by 9.7 million barrels per day as strict lockdown orders forced people to stay at home.

The International Energy Agency said Friday that demand rebounded “strongly” in China and India this spring. The agency now expects demand to plunge by 7.9 million barrels per day this year, a slightly smaller decline than forecast in its previous report.

But the IEA also warned that accelerating Covid-19 cases in many parts of the world poses a big risk to the outlook.

Investor insight: Oil prices slipped Monday on the news, with Brent crude futures, the global benchmark, pulling back 1.5% to $42.61 per barrel.

“While the evidence suggests we are past the trough for oil and that supply and demand are rebalancing, near-term headwinds remain,” Stephen Innes, chief global markets strategist at AxiCorp, said in a note to clients.

Up next

Pepsi (PEP) reports earnings before US markets open.
Coming tomorrow: Earnings season kicks off in earnest with results from Citigroup (C), Delta Air Lines (DAL), JPMorgan Chase (JPM) and Wells Fargo (WFC).

Source Article