Corporate Credit Snapshot – 30 June, 2018

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  • Global credit performance was mixed for the month with US high yield and loans generating positive returns and EM high yield and US investment grade corporates declining the most
  • The Federal Reserve (Fed) raised rates this month and announced its continued commitment to rate policy normalization assuming economic data remains supportive
  • EM corporates continued to feel the effects of exogenous events largely in relation to the US – namely rising rates, a strengthening dollar and a re-ignition of trade wars
  • The European Central Bank (ECB) continued to play catch up with the Fed in monetary policy terms and announced a definitive end to quantitative easing by the end of 2018 – a move widely expected by the market and thus already priced into European credit spreads

US
US credit performance was mixed for the month with high yield and loans generating positive returns and investment grade declining. The first half of the month was generally positive for both high yield and investment grade but sentiment began to deteriorate on the back of escalating trade war rhetoric. Risk assets, like high yield, experienced outflows and Treasuries saw inflows in a flight to quality in reaction to mounting trade war concerns. Loans remain popular with investors concerned about rising rates and so experienced net inflows for the month. On the supply side, we see a limited pipeline of high yield bonds coming to market, suggesting the supply-side technical picture remains supportive. It is a different story in investment grade, however, as a positive M&A outlook post the government approval of the AT&T deal has led to a heavy investment grade new issue pipeline. The Federal Reserve (Fed) raised rates this month and announced its continued commitment to rate policy normalization assuming economic data remains supportive.

Europe
European credit market performance was mixed in June with investment grade bonds outperforming high yield, although both ended the month in negative territory. The European Central Bank continued to play catch up with its US counterpart in monetary policy terms and announced a definitive end to quantitative easing by the end of 2018 – a move widely expected by the market and thus already priced into European credit spreads. In Germany, political risk returned as Merkel’s recently-formed coalition struggled around the contentious issue of immigration (although this was resolved in early July). Political risk also remained elevated in Italy due to ongoing concerns around the country’s new Eurosceptic coalition government. This was reflected in higher yields on Italian sovereign paper and an increased level of market volatility – something that is likely to remain for some time. European banks continued to be penalised by the politically-induced volatility, due to their implied link to the sovereign.

EM
Emerging Market (EM) corporates continued to feel the effects of exogenous events largely in relation to the US – namely rising rates (with the US Federal Reserve implementing a further hike), a strengthening dollar and a re-ignition of trade wars. This resulted in a mixed performance from the asset class with positive returns from investment grade credits while high yield underperformed. Elections featured high on the agenda for Emerging Markets in June. In Turkey, incumbent president Erdogan was re-elected for another term, weighing on sentiment due to fears the impact of his increasingly autocratic regime and unorthodox views could have on the country’s economy. In Mexico, the victory of left-wing-candidate Andrés Manuel López Obrador appeared a given at month end (confirmed by results announced in early July), with his election viewed as a protest vote against corruption that has blighted the Mexican political landscape for some time. Colombia also witnessed the election of a new leader in the presidential elections after the success of right-wing candidate Iván Duque to which the market took as positive news due to his orthodox approach to economic reform. Trump’s trade war rhetoric returned to the fore, with a US$50bn of tariffs on Chinese imports and threatened tariffs on a further US$200bn worth of goods, leading to fears of the impact it could have on the global economy. China also faced concerns over a perceived slowdown as domestic demand weakens, and as the government attempts to tighten credit conditions.