Credit markets seem to be at inflection point

Trade wars. Global Central Bank Monetary Policy. Italian budget negotiations.

Those 3 factors. In no particular order of relevance nor in any order of the potential impact they could have, in isolation, to single-handedly derail markets, are currently at the forefront of capital markets.

The Italian budgetary concerns have ‘only’ been concerning investors for 2 months. The current team of Italian policy makers have until the 16th of October to convince its watchdog, the EU, to come up with a credible plan to being the Italian economy back on its feet, without breaking the bank. The EU was in fact not impressed by the draft budget plan, writing to Italy’s populist government, warning it of serious concerns that the country draft budget plan will break eurozone spending rules. There have not been many development over recent trading sessions, but heading towards the 16th October budget day, we expect the market to become edgier and tensions to intensify between the EU and Italy’s current administration.

The trade wars which the US has embarked upon with the world’s largest economies/blocks, such as China, Russia and the EU is a relatively new phenomena for markets in its recent history, say the past 10-15 years, though the tete-a-tete and toing and froing of words between the Trump administration a number of the world’s most prominent leaders/politicians is well into its ninth month. We all know however what a lasting impact it has had, primarily on market sentiment across the board, on asset prices. From the EU to EM, to weaker currencies to a great deal of uncertainty. Many expected 2018 to be a challenging year but most were caught off guard by the trade wars, as they and the lasting impact they had on the markets definitely were not on the cards.

Then we have Global Central Bank Monetary Policy. Market’s main focus lies on the US Federal Reserve, the European Central Bank, the bank of England, bank of Japan and Central Bank of China, but one must not oversee the impacts that monetary policy set by the Brazilian or Turkish Central banks have on market sentiment and direction. Over the weekend, China's central bank announced a steep cut in the level of cash that banks must hold as reserves, in its attempt to lower financing costs and spur growth amid concerns over the economic drag emanating from an escalating trade dispute with the US. In all fairness, central bank monetary is something which is ever present, now even more so when we are seemingly at the end of global ultra-accommodative stances by leading central banks as the wave of measures such as quantitative easing, to name a few, are being phased out as the respective economies appear to be showing a glimmer of robust growth. In fact, benchmark yields have risen markedly as a result of this, with the US 10-year trading above the 3.20% level.

Trade wars. Global Central Bank Monetary Policy. Italian budget negotiations; in no particular order. But when combined together into an already fragile market, we expect volatility to persist, credit to remain under pressure, risk aversion to rise in a ubiquitous manner. For those who can stomach the volatility and put more money, hang in there and do so cautiously, we do not see any imminent cause to be concerned albeit valuations could well come under pressure in the short term.