April was a relatively muted month for credit, in terms of economic data releases, insignificant swings in earnings announcements of high yield issuers, whilst the primary market, despite showing some signs of revival, remained tepid.
Geopolitical tensions have not escalated; on the contrary they got swept under the carpet, at least for the time being. Both Korean countries have agreed to begin some form of communication and vowed to tackle nuclear issues; Trump has toned down his instigative tone.
The volatility witnessed during the month of March and beginning of April seemed to have somewhat subsided towards the end of the month and markets reacted positively.
In the Eurozone, the economy seems to have peaked in the last quarter of 2017, however ECB’s Draghi’s tone remained upbeat about the outlook for the Eurozone.
Having said that, yields are expected to rise from current lows, and we did in fact witness the German Bund edging higher for the month. Also, we expected QE and CSPP to be terminated by the end of the year, and the market seems to be commensurate with this view.
Risks are present however, as both European and US corporate have re-leveraged significantly over the past few years, taking advantage of historically low yields. In the event of a marked economic slowdown on either side of the Atlantic pond could result in a significant risk off mode and widening of spreads.
But we believe we are not there yet, and hence credit should remain supported in the interim. It therefore comes as no surprise that large swings in the euro/dollar currency pair, benchmark yields and economic data prints will be given close scrutiny by market participants in the second quarter of 2018.
In its rate-setting meeting, the ECB remained market friendly as Draghi issued no major announcements at the end of the QE program, or any major shifts in policy with the ECB President performing keeping his neutral tone.
Elsewhere in the US, earnings season is in full swing and this is infiltrating in the performance of credit and equity markets over recent sessions. But the investor’s key focus was the FOMC meeting which the markets will be given a great deal of importance to the committee’s inflationary expectations, particularly following the spike in the US 10-year Treasury to above the 3.00% level as well as the marked strengthening of the US dollar of late.
Overall, fundamentally, not much has changed. And this could prove supportive for credit, in the shorter term, aiding spreads tighter slowly across the board. We do not expect issuance volumes to pick up from here and all looks set for a smooth transition into the quieter summer months, but nonetheless, we do acknowledge that credit markets remain extremely fluid.
Disclaimer: This article was issued by Mark Vella, Investment Manager 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.
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