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- Global credit’s strong start to the New Year continued into February with high yield, loans and investment grade corporates generating positive returns and high yield and loans outperforming
- Credit benefitted from solid US economic data, generally decent corporate earnings/outlooks and dovish US Federal Reserve (Fed) comments
- The Fed (as per their minutes) announced they would remain “patient” with future rate hikes and that balance sheet reduction (quantitative tightening) would likely come to a close at year end at the current pace
- There were continued signs of economic weakness across the Eurozone, with the manufacturing sector’s flash PMI reading falling to its lowest level in six years
US credit’s strong start to the new year continued into February with high yield, loans and investment grade corporates generating positive returns and high yield and loans outperforming. The US 10 year Treasury declined. Credit benefitted from solid economic data, generally decent corporate earnings/outlooks and dovish US Federal Reserve (Fed) comments. The Fed (as per their minutes) announced they would remain “patient” with future rate hikes and that balance sheet reduction (quantitative tightening) would likely come to a close at year end at the current pace. We believe that this means less upward pressure on longer term rates and the continuation of an environment of central bank driven liquidity.
January’s rebound in credit markets continued into February, although there were some signs of ongoing deterioration in macro fundamentals. Signs of less restrictive central bank monetary policy from the US Federal Reserve and the easing of trade tensions between the US and China lifted investor sentiment on a global basis. As a result, valuations returned to more normalized levels following the cheapening we saw in the final quarter of 2018. Within high yield, the technical backdrop appeared to strengthen, as investors returned to the market after last year’s outflows, although the primary market was quieter with only the higher quality names issuing new paper. Within investment grade, corporate fundamentals continued to appear robust after a solid round of fourth-quarter earnings reports, which has resulted in a fall in net leverage and an increase in interest coverage ratios. The earnings blackout period was followed by strong primary issuance by investment grade rated issuers that was well digested by the market. However, at the macro level, there were continued signs of economic weakness across the Eurozone, with the manufacturing sector’s flash PMI reading falling to its lowest level in six years. Other areas of the Eurozone economy did provide some support, with the unemployment rate remaining low and a continuation of wage growth. The Italian economy returned to the spotlight after the European Commission (EC) cut the country’s growth forecasts for 2019 to 0.2% from 1.2% following criticism of the government’s fiscal policies. The EC also highlighted that Greece and Spain were suffering “excessive economic imbalance,” adding further complexity to the region’s macroeconomic picture.
Emerging market (EM) corporates put in another month of solid returns, benefiting from the pause in US Federal Reserve rate increases and positive signs in the US/China trade dispute. However, an increase in Pakistan/India tensions and lack of resolution in the US/North Korea summit on denuclearisation somewhat negatively impacted positive sentiment towards month end. Both rating segments did well, although higher yielding paper was the standout performer in this risk-on environment, as credit spreads tightened. In China, there were further indications of an economic slowdown, with the manufacturing sector contracting for the third month running. Nevertheless, there were signs the country’s monetary policy stimulus measures were starting to take effect with Chinese bank lending reaching an all-time high, which should help boost the real economy. Meanwhile, growth in Indonesia appeared solid after full-year GDP numbers were released, coming in at 5.17%, beating expectations. There were also hopes for improvement for Brazil’s economic recovery after newly-elected President Bolsonaro announced a program of wide-ranging economic reforms, starting with the country’s pension system. Political events dominated elsewhere in emerging markets, with Turkey’s long-running attempts at EU membership appearing in further doubt following calls by the European Parliament to end talks on the matter.