< Back to Trader Blog Articles

The recent market rally and European HY valuations

Jp_blog

This week’s market rally emerged as a key indicator of the sensitivity markets hold vis-à-vis the trade war saga and monetary decisions. Just as a reminder, in the last week of the year, markets crashed on the US Federal Reserve’s monetary decision of hiking for another time in 2018. Indeed, the Federal Reserve (Fed), as it should be, ignored the pressures imposed by Trump not to hike interest rates given the turbulent markets. Let’s not forget that the Fed is an independent body and its prime mandate is price stability and employment. In this regard, in my opinion its decision was based on the lagging indicators, such as inflation data and low unemployment, which were within their range. To a certain extent, looking at the probability for that hike, markets were pricing-in such decision. So why did markets crash?

In my view, markets were more conditioned by not getting some sort of comfort in the Fed’s statement following the hike decision. Indeed, the Fed ignored the empathy preposition, which markets were looking for following a very harsh year, a year in which markets tumbled to levels last seen in 2008.

On the contrary, last Friday despite the very strong jobs report, Powell, the Fed’s chairman added the word ‘patient’ in his statement, a move which market participants digested very positively. Furthermore, this week’s trade war meeting was another comforting outcome for investors who are expecting a positive outcome, following the very unexpected statement from Apple, which emerged as another shocking news for market participants which increased pressures on politicians to strike a deal.

Looking at today’s valuation within the credit space, we are at levels close to those witnessed in March 2016. In fact, European High Yield is now offering a spread of circa 520p, following the remarkable widening in the second half of 2018. Indeed, looking at these spreads one might be tempted to dip-in selectively at these attractive levels. However, the fear of the unknown is undoubtedly still haunting investors following a very distressful 2018.

In my view, despite the fact that we might experience further volatility in the interim, we should see HY spreads stabilise at the 550p levels based on a number of supporting factors. In my opinion, we might see a macro slowdown, but I do not concur with the view that we’re heading into a recession. A slowdown in the economy doesn’t automatically imply we’re moving into a recession. My rationale is based on my sole view that the Fed and the ECB should ease their stances (being more emphatic vocally), while China as promised should continue to stimulate the economy. Indeed last week it cut its reserve ratio requirement for banks. Thus, all in all we should see some support, unless being faced with a very negative outcome from the US-China trade war front.

This week, for the first time since October 2018, we were convinced buyers of European HY names as we opted in dipping into selective names, which were more hit as a sector rather than on specifics. At these spreads we opted to take the plunge as historical averages are showing a buying opportunity. So yes, it might be appropriate to dip-in for those smart investors who sat on cash for the past months.

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

Important(Notices)
The information provided on this website is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Similarly any views or opinions expressed on this website are not intended and should not be construed as being investment, tax or legal advice or recommendations. Investment advice should always be based on the particular circumstances of the person to whom it is directed, which circumstances have not been taken into consideration by the persons expressing the views or opinions appearing on this website. Calamatta Cuschieri & Co. Ltd. (CC) has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website. You should always take professional investment advice in connection with, or independently research and verify, any information that you find or views or opinions which you read on our website and wish to rely upon, whether for the purpose of making an investment decision or otherwise. CC does not accept liability for losses suffered by persons as a result of information, views or opinions appearing on this website.
This website is owned and operated by Calamatta Cuschieri & Co. Ltd (Co. Reg. No. C13729) of 5th Floor, Valletta Buildings, South Street, Valletta VLT 1103, Malta. CC is licensed to conduct Investment Services in Malta by the Malta Financial Services Authority.