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Trader Talk: An Analysis of the Markets this Morning

  • Risk Manager
  • Blog post submitted on 3rd March 2014

Last week stocks and high yield bond markets resisted the worrisome Ukrainian events but we are most likely to now face a week in which investors’ sentiment will be driven by emerging market events ranging from geopolitical challenges to China’s annual Congress. Indeed, the Asian markets experienced a drop after Russian-Ukrainian events over the weekend escalated and increased anxiety with the recurrence of disappointing Chinese manufacturing data aggravating the negativity. We also note that Slovenia’s biggest bank, Nova Ljubljanska Banka (which received state aid in December 2013) reported a net loss of EUR1.44 billion for 2013.

Against the backdrop of increasing risks in Ukraine, there was also a growing drive for assessing possible spill over effect with some Austrian and Russian banks standing out in view of their exposure to the country. These include Raiffeisen Bank International, Unicredit Bank of Austria, VTB and, to a lesser extent, Sberbank; OTP is also known to be present in Ukraine. While these names might see some weakness, the exposures are deemed manageable relative to the groups’ equity.  However, in Russia vulnerability goes beyond the financial sector and has triggered sizable selloffs and the equity market tumbled. The plunge in the rouble on the other hand prompted the Central Bank to act decisively by surprising the markets with a 150bps rate hike. As we mentioned previously, last week’s slump comes after an already sizable depreciation since this year’s start and risks unsettling confidence and inflation.

Meanwhile, Ukrainian corporates might find some support in Moody’s comment regarding the generally benign effect of the local currency depreciation on the rated corporates; specifically, the agency found that the higher exchange rate would be credit positive for Ferrexpo Plc, Metinvest B.V., Fintest Trading Co Limited, neutral for MHP and negative for DTEK.

The high yield market has outperformed the stockmarket so far this year but as risk aversion turns again they could to be positioned for a weaker week although the last months’ outflows from Emerging markets appears to have benefited the HY sector which saw continuous and record-high fund inflows.  In any case, as the mix of EM uncertainty and weather-impacted economic data from developed markets complicates forecasts and heightens rates’ volatility, we would continue to favour HY bonds over IG securities in view of the shorter duration of the former. In the Euro High Yield market, last month brought about a 30bps spread tightening which left spreads slightly below this year’s opening. The CCC bucket however lost ground while the B-bonds over-performed the BBs; we expect the B-BBs return gap to continue. USD HY spreads saw as well a tightening. So far this year, IG overtook HY in terms of total return but this reflected the appreciation in the treasury prices.