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Keeping Up the Pace

  • Head of Capital Markets
  • Blog post submitted on 26th February 2014

So far the markets have fared modestly well. Equities are back in the green after losing some steam in January whilst Credit continues to be supported with IG gaining a modest 1.6% and HY returning 1.7% year to date.

January was pretty much more of the same, a pure continuation of where we left off last year. Analysts were discussing what could be the next catalyst to set markets alight or add that little extra and much needed volatility, from a trading perspective. The catalyst did come and perhaps sooner than expected. Data coming out of China triggered the weakness but the EM mini crisis caused the sell-off.  But to call this a sell-off is indeed an overstatement. So far it is best to be labelled as weakness. Equities were hit the hardest but have now even managed to recoup the losses. Once again, European credit proved to be resilient with prices on both HY and IG retreating over a few sessions. The Fed did not comment and at no point seemed to be worried about this sell off. With hindsight this was an opportunity to add more risk and many in fact chose to do so.

The trend in the US remains consistent and GDP growth is expected to be above 3% for 2014. Europe on the other hand is not at the same advanced stage as the US but the outlook still looks bright. And as long as the outlook remains benign and the ECB remains accommodative, European credit should remain supportive. One has to however manage duration risk, as once interest rates start rising this will undoubtedly have a negative effect on prices especially for the longer dated paper.

From a credit perspective, I prefer Europe over US particularly because the Fed is more hawkish than the ECB. Whilst in Europe, the ECB still has to do more to facilitate credit and money creation, the Fed seems to be more convinced with positive incoming data. The latest Fed minutes were dubbed as hawkish, particularly because they are optimistic on employment data with any weakness blamed on bad weather. The minutes also indicated that to some extent the Fed is no longer worried about the markets’ reaction to tapering therefore there is a possibility that a rate hike may come sooner than we think.

 

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