Mark My Word

Current market conditions continue to pave the way for a persistently positive bout of credit market performances, as, with inflationary pressures close to inexistent, government bond yields remain at low levels, with no indications of any imminent rise. Bond default rates too remain and historic lows (and this is expected to decline further in the months to come) whilst both individuals and corporates continue to sit on pretty healthy cash levels. Despite the flurry on new bonds issues over the first four months of the year, the demand to put money to work more than offset bonds issued on the primary market, which explains why spreads continue to grind tighter and bond’s overall total returns continue to rise. Having said this, risks are present, such as the stand between Russia and the US and EU over Ukraine, coupled with the Chinese slowdown and low inflation levels, amongst others. Event risk is also present in the form of recent M&A activity, such as the so-called battle between GE and Siemens for Alston for example, and Pfizer’s quest for AstraZeneca. However, what is different this time is that European firms are not re-leveraging to accommodate their M&A activities, as had been done in the past, and therefore, that somewhat careless M&A that stretched leverage ratios and caused downgrades in the past is no longer the norm and the large corporations are more intent on preserving their credit ratings.

2014 has been a challenging year so far for many investors; the uncertainty regarding macro data as well as emerging market weakness during the first quarter of 2014. Despite this, markets seem to be buying the idea that the global economic recovery is on track and that equity markets will gradually grind higher. So far, economic data has been somewhat mixed, however, the macro backdrop remains supportive. The drivers of returns may have shifted away from some areas such as US growth and European periphery towards more of an overall focus on getting a clearer picture on a developed-markets macro recovery.

On the data front, the coming week will be busy in terms of data releases in the developed markets; expected highlights include an improvement in US consumer, Q1 US GDP growth, US non-farm payrolls, UK Q1 GDP, coupled with the US Federal Reserve’s FOMC and Bank of Japan meetings, whereby no change in monetary stance is expected from these two meetings.

Meanwhile, yesterday the US imposed additional sanctions on yet another seven high ranking Russian officials as well as 17 corporations known to have close ties with Russian President Vladimir Putin. The travel bans and asset freezes announced by the US were imposed in close collaboration with the European Union, who themselves also announced that 15 more individuals will be faced with sanctions, the identities of whom were not yet disclosed as at the time of writing. Both the EU and the US are insisting that Russia has not lived up to the April 17 Geneva Accord, which was intended at somehow resolving and calming down tensions between pro-Russian separatists and the Ukrainian government.

Have a nice day!

Mark

The Calamatta Cuschieri Traders Blog is available daily on CC WebTrader. Other market coverage including coverage of the International Bond Markets is also available.

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