Snapshot  |  July 31, 2022

Corporate Credit Snapshot – 31 July 2022

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  • In a healthy reversal from June, global credit markets ended the month of July with positive returns across the asset classes. Spreads tightened significantly in HY and less so in investment grade (IG)
  • Although economic data showed generally softening trends, the market seemed to shrug off weaker data points, responding instead to the Federal Reserve’s (Fed’s) rate hike in-line with expectations, and rallying on the seeming willingness of the Fed to pivot on incoming data
  • In Europe, the European Central Bank (ECB) increased key interest rates by 50 bps (basis points) on 21 July and dropped the use of forward guidance for now. The shift to a meeting-by-meeting approach reflects ongoing challenges such as inflationary pressure, energy supply insecurity, political instability in various countries, and a weakening currency
  • In EM, risk sentiment improved as central banks toned down their hawkish commentary, Russian gas flowed to Europe, and China looked to open a property development fund

US:
In a healthy reversal from June, US fixed income ended the month of July with positive returns across the asset classes. High yield (HY) led the risk asset rally as all rating tiers moved higher led by the duration sensitive BB tier. Spreads tightened significantly in HY and less so in investment grade (IG). Although economic data showed generally softening trends, the market seemed to shrug off weaker data points, responding instead to the Federal Reserve’s (Fed’s) rate hike in-line with expectations, and rallying on the seeming willingness of the Fed to pivot on incoming data. The markets entered earnings season with very low expectations due to various macro considerations including inflation, Fed policy, recession fears, the Ukraine war, and a strong dollar. However, at the midpoint of earnings season, we have found many companies have reported better results than expected. Inflation continues to present an issue, but in our view, industries are learning to manage, and many still have the ability to pass along cost increases. Balance sheets appear in good shape with limited stress and capital allocation policies seem reasonable. While systemic and idiosyncratic factors can change industries, we are seeing that most consumers outside the lower end are in decent shape at this point due to the jobs situation, allowing us to end July with very strong performance across risk assets.

Europe:
In a healthy reversal from June, European fixed income ended the month of July with positive returns across the asset classes. The European Central Bank (ECB) increased key interest rates by 50 bps (basis points) and dropped the use of forward guidance for now. The shift to a meeting-by-meeting approach reflects ongoing challenges such as inflationary pressure, energy supply insecurity, political instability in various countries, and a weakening currency. Survey data throughout the Eurozone continue to confirm investors believe recession, not inflation, is now the larger risk. However, with recessionary risk already arguably priced in, and with rates heading lower, investor confidence has improved, and flows have stabilized. In our view current entry points remain historically attractive. Unsurprisingly, lower overall market liquidity, combined with significant headlines, contributed to volatility. This month the ECB also announced its new tool, the Transmission Protection Instrument (TPI). The first test may come sooner than expected, as Mario Draghi resigned as Italy’s prime minister, throwing the country into political uncertainty, and putting it on course for an election in early October.

EM:
Emerging Markets (EM) generated positive performance in July, both in high yield (HY) and investment grade (IG). EM benefitted from spread tightening in the US as the market looked beyond generally softening economic trends and shrugged off weaker data points. Risk sentiment improved as central banks toned down their hawkish commentary, Russian gas flowed to Europe, and China looked to open a property development fund. This continued to be a challenging month for Chinese credit—press coverage centered around homebuyers threatening to stop mortgage payments to developers that had stopped or slowed construction. The Chinese regulators stated their intention to help deliver property projects, but confidence was further dampened by a rise in COVID cases in Shanghai. The consequences of the previous lockdown are obvious with Q2 Gross Domestic Product (GDP) reported below expectations. On the positive side, Shanghai avoided a lockdown and economic data reported from the previous month remained strong; credit growth, trade, and retail sales all came in above-consensus and point in the direction of economic-acceleration from Q2’s low growth levels.