Credit markets in August

Markets have been relatively muted for the greater part of August. Bar the geopolitical tensions between the US and North Korea, the terrorist attacks in Barcelona, Spain and Turku, Finland as well as the situation in Venezuela being as edgy as ever, markets remained particularly robust. Earnings season momentum was maintained from previous quarters and economic data did not surprise. True, there have been notable bouts of profit taking during August, but that is justified following the rally in equites and credit in the first 7 months of the year. More recently, North Korea’s announcement of a missile launch in Japanese waters did not aid the cause and risk off mode prevailed towards the end of the month.

Having said this, credit still managed to clock in yet another solid month, as the grind tighter in spread persisted. The asset class remains better bid in the thick of the summer month were trading volumes are characteristically and seasonally thin.

With activity in secondary markets on the low side, investors found no solace in the primary market either as it was close to inexistent for most of the month, with only a handful of Investment Grade and High Yield bonds issued being printed towards the end of August. But this is expected to change in September, with a flurry of new issues expected to be at the fray of investor activity. Bond issuance (net of any maturing bond issues) is one of the critical elements within credit markets which can influence the trajectory of credit spreads, apart from the movement in benchmark yields.

It all depends on the rate and size of net issuance in the first few weeks, however credit spreads are not expected to come under great pressure, for the time being, as the CSPP remains intact. With CSPP purchases slowing down in the summer months, an acceleration of CSPP could keep bonds supportive, despite an increase in supply from the primary market.

Over recent weeks, there has been great hype over last week’s events, notably the 2017 Economic Policy Symposium in Jackson Hole, an annual event held towards the end of August whereby the world’s leading central bankers join their emerging market counterparts as well as academics and leading bank chief executives. Those market participants who expected some form of clear indication as to what the next move by both the European Central Bank and US Federal Reserve will be, more importantly in terms of timing, were left more than disappointed, and felt like a status quo scenario unfolded, leaving investors frustrated and ignored.

ECB’s Draghi failed to provide any form of updated on euro area growth in his attempt of trying to control the euro from strengthening any further. Even Fed Chair Janet Yellen’s Jackson Hole speech did little to excite investors and cause any great shakes, in either direction, to the markets, particularly because close to none of the statements were forward looking.

Intermittently there have been bouts of risk aversion whereby investors flocked from the riskier asset classes to the safer low yielding investments, sending yields European Sovereign bonds lower during the month