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Mark My Word

  • Investment Manager
  • Blog post submitted on 20th May 2014
Mvblog

Good Morning.

Despite the glitches witnessed throughout most of last week, the case for credit markets and further spread tightening, at least within the eurozone remains as overall market conditions remain in tact. With the ever increasing pressure on the ECB to act next month, either in the form of a rate cut or asset purchases, demand is expected to remain supported, as growth remains subdued and inflation remains anchored at low levels.

In the subordinated financials space, Barclays announced an exchange offer towards the end of last week on a number of their existing Tier1 securities for new Additional Tier 1 securities to be issued by Barclays. The un-limited offer (in terms of size) is perceived to be the next phase in the Group’s transition of its capital structure, contributing to its leverage ratio target and managing the interest cost associated with legacy non-CRDIV compliant securities.

Meanwhile, Deutsche Bank announced its plans to raise €8bn in new capital late on Sunday, with the Qatari royal family a major new investor, in an attempt by the bank to allay fears on the bank’s capital strength. Four years ago, the bank had already raise over €10bn, with an additional €3bn in 2013, but that was seeming not sufficient to tone down investor concerns about its capital position as it faces increased regulatory demands. This fresh cash injection now gives the bank the ammunition it requires to expand its investment banking unit.

Elsewhere, Portugal officially exited its €78bn bail-out programme over the week-end after 3 years of receiving financial support from the EU and IMF. The current administration now plans on financing itself through capital markets, and is now in a position to boast €15.3 billion in cash reserves worth of financing requirements for up to a year. This achievement, which seemed impossible until recent months, has been as a result of persistently positive economic indicators as well as a declining trend in peripheral bond yields, 10-year yields are now considerably lower than the ca. 5% that Portugal paid on its bail-out loans. However, having said that, growth figures disappointed last week as GDP fell for the first time in a year in Q1, by 0.7%.

With the Emerging Market’s space, the prices of new-homes in China rose at the slowest pace and in the fewest cities in a year and a half as developers offered discounts, placing margins under pressure, whilst the economy continued to show signs of growth albeit at a decreasing rate than previous readings. Following four years of constant government effort to cool the housing market, home sales and property construction continued their decline and the real estate, which was once considered to be a pillar in China’s economy is now becoming a drag.

A year from the US Federal’s Reserve FOMC famous tapering announcement, which concerns about the withdrawal of monetary stimulus by the Fed sent shock waves through EM financial markets, the vulnerabilities that put several of these economies in the spotlight persist. Taking stock of the situation, stability has returned over the past few months, however, concerns about the impact of Fed tapering triggered sharp sell-offs in EM markets in May, August and November last year, as well as in January of this year, keeping investors rather weary about the recent rally in EM.

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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