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To say that credit markets have had a rough start to the year, would be, putting it mildly, an understatement. Bond investors had a flurry of market events to contend with, with the volatility witnessed as a result of the Italian political stalemate being the latest source of edginess. With the dust from the past couple of week’s volatile period slowly settling down, markets have recovered timidly as market conditions remain fragile and fluid to say the least.
Credit spreads have tightened somewhat, and in the absence of any key major event, are expected to recover from the recent bouts of weakness, albeit remain turbulent and volatile in the presence of endless sources to cause market uncertainty.
With the end of the first half of the year drawing to a close we do not expect H2-2018 to be any easier than the first. First and foremost, markets will be eagerly and closely monitoring developments as to how the monetary policy in the Eurozone is going to evolve from this point forth. We should be getting more colour about the ECB’s intentions on terminating or reducing its CSPP program later on this week, when the Monetary Policy Committee is scheduled to meet in the June rate-setting meeting. As things stand, the market is expecting the program to be halted completely by Q4-18, however nothing is written in stone yet, so this week’s meeting is key. What will be even more sensitive to the markets is the announcement and the exit strategy, and how interest rates will react, not only in the short-term but also from this point forward.
The global economy, particularly in the developed world, seems to be slowing down whilst company leverage is well into its upward trajectory, as corporates worldwide have sought to take advantage at cheap levels of financing. Add the ongoing trade wars and sovereign uncertainties in the already boiling pot and we’ve got quite a concoction to rack our brains about. However, in the immediate term, we are not of the opinion that credit metrics will worsen, especially in the emerging world. On the contrary, corporates are at present benefitting from low financing costs. It’s when yields and credit spreads rise, in such a fashion that the health of the global economy will not be able to withstand this rise in rates which could result in a widespread shift in risk aversion.
Over the weekend, Italy’s Economy Minister Giovanni Tria reassured the market that Italy would remain within the single-currency region, resulting in a resurgence in the prices of Italian bonds and equities during yesterday’s trading session. However, we are of the opinion that the Italian saga is far from over and await more announcements on what the new government plans are. It is sure to keep investors on their toes, if not side-lined, for the time being.
Meanwhile, this week, the market’s main events are the ECB and Fed meetings, but there are a few economic data releases to watch out for, such as key inflationary data prints as well as employment and sentiment indicators in both the Eurozone and the US.
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