CROSS-SECTORSECTOR COMMENT 28 June 2016ContactsBenjamin S. Garber 1.212.553.4732 Asst Dir-Economist benjamin.garber@moodys.comABOUT CAPITAL MARKETS RESEARCHAnalyses from Moodys Capital Markets Research, Inc. (CMR) focus on explaining signals from the credit and equity markets. The publications address whether market signals, in the opinion of the groups analysts, accurately reflect the risks and investment opportunities associated with issuers and sectors. CMR research thus complements the fundamentally-oriented research offered by Moodys Investors Service (MIS), the rating agency.CMR is part of Moodys Analytics, which is one of the two operating businesses of Moodys Corporation. Moodys Analytics (including CMR) is legally and organizationally separated from Moodys Investors Service and operates on an arms length basis from the ratings business. CMR does not provide investment advisory services or products.View the CMR FAQ Contact the CMR team Follow us on TwitterMoodys Analytics markets and distributes all Moodys Capital Markets Research, Inc. materials. Moodys Capital Markets Research,Inc. is a subsidiary of Moodys Corporation. Moodys Analytics does not provide investment advisory services or products.For further detail, please see the last page.Market CommentUS Corporate Downgrade Warnings Take a Breather Negative rating watch actions have eased back considerably since their deluge in the first quarter. Though credit conditions still point to rising downgrades and defaults, these trends are moderated by the limited recovery in corporate profits and more favorable market conditions. Industries that serve the US consumer stand out globally as a beacon of strength yet the tendency for positive income trends to turn rapidly when a slump impends cautions against investor complacency.Upgrade reviews tick higher The early weeks of this year were marked by a deep sell-off in global markets that notably sent the price of oil to its lowest point in over a decade at $26 per barrel. That commodity sector carnage fueled a wave of warnings from Moodys Investors Service about potential downgrades to energy and mining firms. In the first quarter, 121 US firms were put on review for downgrade the most in seven years. Yet thanks in part to the rally in credit markets and an improved US economic outlook, downgrade reviews are on pace to total just 24 in the second quarter, equaling the five-year low (Figure 1). Remarkably, the projected total of 25 second-quarter upgrade reviews would exceed downgrades for only the third time in the current recovery.Helping drive the multi-year high in upgrade reviews has been relatively brisk M&A activity. Small firms that are acquired by well-established higher rated corporations are getting a lift in credit quality. That M&A boost has factored into a least 50% of all upgrade reviews for nine consecutive quarters. Yet the positive credit effects of M&A do not have an especially large presence i...
