Corporate Credit Snapshot – 28 June, 2019

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  • Risk-on sentiment dominated for the month, even as ongoing trade tensions and geopolitical concerns persisted
  • Credit markets continued to move tighter in June supported by a dovish Federal Reserve’s (Fed’s) comments on possible rate cuts and ECB President Draghi’s comments which left the door open to further supportive monetary policy
  • Oil prices increased on the back of Iran/US tensions, supporting the global energy sector
  • Despite the lack of progress in trade negotiation between US-China and Europe eventually, the seeming dovishness of major central banks will likely still drive credit markets in the quarters to come

US
Risk-on sentiment dominated this month, with equities and high yield outperforming.  In terms of fixed income, US high yield outperformed, followed closely by investment grade and then Treasuries.  US loans managed to generate a positive return.  Federal Reserve comments suggesting rate cuts were possible later in the year if warranted by weaker economic data, buoyed risk assets.  Economic data (for example Purchasing Managers’ Index) was weaker this month leading investors to believe that an economic malaise is setting in and that rate cuts are imminent.  Oil prices increased on the back of Iran/US tensions, supporting the high yield energy sector.  While the lack of clarity on trade remains a concern, the G20 meeting at month end did provide some hopeful moments further bolstering risk assets.  Without any serious trade resolution on the horizon though, we believe investors have little conviction to invest in less liquid but critical parts of the economy – like housing and business improvements/expansions.

Europe
Risk-on sentiment dominated for the month, even as ongoing trade tensions and geopolitical concerns persisted.  Credit markets continued to move tighter in June supported by a dovish Federal Reserve’s (Fed’s) comments on possible rate cuts, and ECB president Draghi’s comments which left the door open to further supportive monetary policy.  European economic data has been mixed; France has confirmed its recovery following the “yellow vest” episode, and Germany’s manufacturing sector seems to have stabilized (albeit at low levels).  The unemployment rate continues to fall in aggregate across the region.  Although recent data concerning inflation points to the upside, market pricing and projections have moved significantly lower in recent weeks.  Despite the lack of progress in trade negotiation between US-China and Europe eventually, the seeming dovishness of major central banks will likely still drive credit markets in the quarters to come. The ECB is expected to act on several pillars of its monetary policy, including forward guidance, rate cuts and additional quantitative easing. Although the sequence is uncertain, it is probable that the next ECB meeting on July 25th will start this process with changed forward guidance.

Emerging
MarketsRisk-on sentiment dominated in June with equity and credit rallying on the back of continued central bank support.  In addition, the G20 summit gave an indication of a de-escalation in trade tensions between China and the US, which may help to sustain the positive momentum in emerging markets.  In a strong month for Latin America, Argentina’s economy showed signs of increased activity just in time for the presidential elections scheduled ahead in the fall.  Elsewhere in Latin America, Brazil kept their interest rate unchanged and announced a lowered expected GDP for 2019, while Mexico benefitted from no US tariffs.  The election results from Istanbul featured a win by the opposition party and were largely viewed as a positive show of resilience for Turkey’s democracy.