Good morning!

Investors’ risk appetite increased yesterday after headlines on a ceasefire agreement in Ukraine provided markets with a respite and the Swedish Central Bank (Riksbank) cut its policy interest rate to -0.1% and introduced a bond buying program. Riksbank’s decision will serve to remind investors that liquidity is on the rise and that several banks slashed their rates this year aggravating the scarcity of higher yielding instruments. Indeed, the 10 year Swedish yields dipped by some 10 basis points with similar moves seen for the Danish bonds which are fast approaching nil levels after repeated monetary easing over the last month.

Meanwhile, the German yields declined with the 30-year rate reaching a record low and now returning less than 0.9%. Such trends bode well for fixed income as they enhance returns and nudge investors into the riskier instruments such as BBB rated corporate bonds, subordinated paper or even below Investment Grade bonds. Later during the day sentiment was somehow boosted by ECB’s decision to increase the Emergency Lending available to Greek banks (although this decision will be reassessed on Monday).

Against this backdrop, the news that the retail sales in the US fell by more than expected in January appeared to be overlooked by the equity markets. The disappointing figures had however some effects in the bond markets where the US Government yields edged lower after several sessions with sizable gains, which in turn were brought about by the strong employment statistics published late last week.

As investors try to reconcile the strong labour data with the below expectations figures relating to consumption and manufacturing, the US sovereign yields are bound to trade range-wise. It would thus seem advisable to move towards longer term corporate bonds as the shorter end of the yield curve (i.e. 1 to 5 years) is traditionally more correlated with the Federal Reserve’s key rate. Having said that, a case can be made that in the US high yield market the spreads have room for tightening after widening significantly in the last part of 2014 and such a reversal would serve to offset the volatility in government yields. Hence in my opinion, barring a renewed decline in oil prices, the returns for this asset class over the next six months should equal approximately the coupon rates (6%).

The outlook for the US high yield is further supported by the significant improvement in fund inflows seen so far this year; the Lipper data published yesterday showed that the US high yield retail funds attracted USD2.9 billion over the previous week, bringing the year-to-date total to USD8 billion. In contrast, the US equity funds experienced outflows as the high valuations and the low dividend yield appear to gradually weight on the investors’ appetite although the strength of the USD serves as a balancing force for now.

On another note, the earnings season is progressing and with it bringing sizable movements in single names. Yesterday after market L’oreal, Rio Tinto and Kraft Foods reported their earnings, while today we will be looking into the results posted by ArcelorMittal, Anglo American and Rolls Royce among others.

In the energy market, expectations for some an increase in M&A activity following the fall in oil prices were met yesterday with rumours that ExxonMobil might attempt to take over BP. The demand for the names in this sector was further supported by the uptick in oil prices (as we are writing, Crude oil is quoted 6.5% above Wednesday close).

The economic calendar for today is as well rich including the GDP read for Eurozone and the US consumer sentiment (University of Michigan survey). The figures for the German growth were already published early this morning and they provided a positive surprise (the preliminary figures for the fourth quarter of 2014 showed a 0.7% growth versus expectations for a 0.3% gain).

Have a nice day!