Credit and risky assets have had a month to forget, so far, reinforcing the seemingly self-fulfilling Sell in May and go away dilemma investors face this time of year.
Before the infamous threatening tweet by US President Trumps over additional tariffs on imported goods from China, both credit and equity markets were sitting on decent gains registered over the course of the first four months of the year. However, for the past two weeks, uncertainty crept in, and markets weakened markedly, selling off indiscriminately across the board.
News over the trade war was anything but positive last week, as it seems pretty evident that the trade conflict will persist for some time.
No updates, signs of improvement nor any shimmer of hope of some positivity to propel markets higher in the short term. The Huawei dispute is doing little to contribute to market sentiment in a positive manner, so the risk averse investor outshone last week, with high grade credit outperforming high yield for the week.
However, or so it seems, the selloff seems to have somewhat plateaued and sizeable amounts of bonds on the international primary bond market were comfortably absorbed, which is a sign that investors are positive on the medium-term outlook of credit markets. Towards the end of last week, credit spreads in EUR and USD stabilised, both Investment Grade and High Yield, albeit recovering timidly.
Undoubtedly, the US-China trade war is expected to continue to weigh on markets, especially heading into election year in the US in 2020. In addition, earnings seasons across both sides of the Atlantic is nearing its end, and with just a handful of economic data releases this week, market focus will remain on the ongoing trade war as well as European parliamentary elections over the coming weekend.
With China announcing new tariffs on US products and the US on the other hand threatening to impose tariffs on all Chinese products, risky assets inevitably came under pressure.
We are of the opinion that ultimately a deal between both parties will be reached, but it could drag on for longer than one would have hoped for. And with this spirit in mind, we did see buyers emerge once again, with spreading marginally reversing the widening of spreads since the start of the month. This fact coupled with the way investors absorbed primary bond issues leads us to believe that the cash investor has not thrown in the towel yet and reinforces our view that risky assets, both equity and credit, should recover from this point forth, well into the second half of 2019.
Current spread levels could therefore be a good entry point with spreads expected to tighten heading into the summer period.
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 are 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.