Good Morning,

Despite the recent bumpy ride, credit markets are proving to be resilient once again. The question looming on investors mind is – for how long? Market direction becomes ever more important when you consider that year-end performance forecasts for this asset class have been achieved within the first half of the year. Despite low yields, spreads remain historically wide – with fundamentals still in tact, credit is expected to grind its way.

While the ECB’s actions have been the focus of the market in the past couple of months, the US Federal Reserve’s policies and US data are expected to regain centre-stage in the remainder of the year. With the Fed emphasizing that its future actions will depend on the evolution of economic data, the market will continue to take cue from any surprises (in any direction) to leading US economic indicators. The Fed will then be able to afford to stay on hold for longer in the event that it faces less of a trade-off between growth and inflation.

Meanwhile, recent economic data from the euro-zone continue to suggest that its recovery has already lost some momentum. The final manufacturing PMI for the euro-zone was revised downwards, albeit slightly, remaining stubbornly at a 7-month low. Labour market data, show that the unemployment rate edged down to 11.6% in May, still historically elevated meaning that unemployment will continue to be impinge on growth of household consumption. On the contrary, the UK’s manufacturing recovery seems to be going from strength to strength whilst in the US, numbers indicate that it is putting its poor first quarter performance behind it. Elsewhere, yesterday’s PMIs suggest that China’s manufacturing sector has continued to hold up well. The official manufacturing PMI edged up to a seven-month high in June and the final HSBC/Markit manufacturing PMI rose from 49.4 in May to 50.7.

Elsewhere, BNP Paribas has been officially banned from engaging in US dollar transactions for up to a year, and is expected to utilise a 6-month grace period to set up alternate payment systems for clients to keep them from shifting their monies to another location. BNP Paribas, France’s largest bank, pleaded guilty on Monday to violating U.S. sanctions and has in fact agreed to pay €5.8 billion. The ban on dollar transfers, better known as dollar clearing, will come into force on 01 January 2015, giving the bank ample time to devise and explore other options. While the use of third parties to handle transactions will cost BNP Paribas millions, the bank faces greater damage if it ends up losing clients. BNP however have confirmed that they will be matching last year’s dividend of €1.50 a share and has reiterated its three-year growth targets, stating that it does not intend to raise capital.

Within the Emerging Markets space, Argentina is currently taking centre stage and on the brink of a technical default, as it enters a 30-day grace period today, following failure to wire funds for a coupon payment on time. Argentina’s Minister of Economy Axel Kicillof has recently announced that the government planned to make the coupon payment but without complying with the pari-passu sanction. The U.S. Supreme Court on the other hand refused to hear Argentina's appeal challenging the claims of holdout investors who refused to participate in the restructuring deal. Lower court rulings bar Argentina from making payments to investors who went along with the restructuring deal unless it pays holdout investors at the same time.

Have a nice day!