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May 2017 - Waiting for new catalysts

European credit markets tightened moderately in May with a lack of significant catalysts to drive the price action in a meaningful way
Eurozone govies were range bound with Bund yields broadly flat; the German 10-year and the 5-year yields were down 1 bp and 4 bps to 0.30% and -0.43%, respectively
Cash credit indexes were up again, with positive returns around 0.50% – broadly similar as the US market; the iTraxx Main, Xover and Financial Subordinated CDS indexes tightened by 4 bps, 13 bps and 9 bps, respectively
The second round of the French Presidential election was a non-event for markets as there was little uncertainty with regards to the outcome
Political risks did not disappear though, with rising political concerns in the US, the likely prospect of early general elections in Italy and new negative developments affecting the current Brazilian administration
We continue to see the negotiation and implementation phase of Brexit as a significant source of risk as evidenced by the uncertainty around the outcome of the UK general elections
Despite such political headlines, steady ECB bond purchases under its various QE programs combined with cautious comments from Fed and ECB officials with regards to future policy normalization helped maintain investor risk appetite at high levels
The macro data momentum from Europe and the US continues to be supportive to risk taking, although some recent activity releases have been below market estimates
We keep a close eye on commodity markets – energy in particular – as renewed price volatility and an uncertain market outlook could be sources of credit concern and negative investor risk aversion in the event such turmoil amplifies
On the technical side, high activity levels in primary markets, healthy liquidity and positive investor flows all remain supportive drivers for credit markets
We continue to see many segments of European credit markets as being tightly priced in light of the risks already highlighted
However, given the uncertain timing, the absence of powerful catalyst at the moment and our positive outlook for credit fundamentals, we have maintained our focus on our core idiosyncratic long positions with a limited overall portfolio deployment

Published on 10 June 2017