Credit Continuum – November 2017

Credit fundamentals remain solid against a positive growth backdrop

Looking ahead, the next US Federal Reserve (Fed) Chair, the US tax plan and fiscal policy are expected to be the main drivers likely to dominate newsflow and markets as we move into year end. The market is already pricing in a strong probability of a 25bps rate hike by the Fed in December while, in an ideal scenario, the tax plan would also be signed before the year is out.

From a global perspective, economic growth shows few signs of abating. Recent data points have highlighted increasing strength of recovery and synchronicity across countries. This is providing a generally supportive environment for credit.

Despite expectations of a gradual tightening in US monetary policy, the European Central Bank appears largely committed to maintaining its dovish stance after confirming its asset purchase programme, while reduced, would continue well into next year. With the main central bank events being well telegraphed, tail risks appear diminished.

Credit markets remain well-supported by strong fundamentals and technicals, and supply was easily absorbed in October. An absence of any negative catalysts means we expect the positive environment for credit to continue for the rest of 2017.

Nevertheless, with valuations continuing to trade in a tight range, investors should remain vigilant and focus on bottom-up credit selection as the primary driver of returns.

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