Ever since the much anticipated ECB QE announcement (and subsequent market moves following the announcement) last month and the Greek parliamentary elections a few days later, there have not been any major, market moving or market changing events in terms of key economic data releases, except for the fluctuations in the price of oil; for the largest part of the recent two weeks, oil has been highly volatile and trading in the $40-$50 range, albeit trading above $55 over recent trading sessions. Earnings season in the US turned out to be broadly in line with expectations and the European appears to be following suit.
The biggest news is undoubtedly Greece, and the stands both the newly elect government and the Troika will take in the wake of the mounting debt issues being faced by the Hellenic government. It has been clear so far that it is no one’s interest at this stage for Greece to exit the eurozone, but any news from Greece for the time being will continue to dominate the headlines.
Wednesday’s (last week) extraordinary Eurogroup meeting, the first forum where formal negotiations began, was inconclusive as efforts to agree on a joint statement, which would have included the possibility of “extending” the programme, were aborted at the last minute, with the Greek side raising objections to this wording. Nonetheless, the market took this last minute change as a signal that the two sides were close to reaching a deal and reacted positively, with risky assets posting slightly positive returns on the news.
Yesterday’s Eurogroup finance ministers’ meeting seems to be inconclusive as comments from officials on both sides suggest that even a short-term deal has not been. In an emailed statement, a Greek “government official” indicated that Eurogroup Chairman Jeroen Dijsselbloem is insisting that Greece should continue to meet the terms of its existing bailout, which seems to corroborate the message from German Finance Minister Wolfgang Schäuble that the only way forward for Greece would be to continue with the terms of its existing bailout. However, Greek Finance Minister Yanis Varoufakis has stated that the proposals put forward are claims “absurd” and “unacceptable”, resulting in abrupt halt to negotiations, sending markets in disarray, ending the day in negative territory.
Meanwhile, as Greek tensions persist, the markets expect to see a bottoming of negative economic data in the eurozone, with the possibility of the forthcoming February’s ‘flash‘ eurozone PMIs and the German ZEW survey to surprise to the upside, on the back of positive effects of lower oil prices and the EUR depreciation. Should these numbers indicate a possible beginning of a recovery, investor sentiment could well point towards an upward trajectory, containing potential negative effect of Greek concerns on sentiment, which bodes well for European fixed income markets.
Furthermore, the cease-fire in eastern Ukraine will also be supportive for sentiment in Europe. The agreement was signed by the leaders of Ukraine and Russia as well as Germany and France. The deal gives hope for immediate conflict de-escalation. The agreement is clearly good news, but it remains to be seen whether it ensures sustainable peace in eastern Ukraine.
As for the situation in the US, a number of Fed speakers have recently noted that June is still “in play” for the first Fed rate hike, although it is becoming increasingly evident that the scenario is unlikely to unfold before this date. The latest payrolls data showed the economy added a million jobs in the three months to January, but the lower headline and core inflation continue to give the Fed doubts about its story that core inflation will rise in the way it predicts, resulting in an expected backtracking by the Fed in this regard. On a similar note, the UK has also been recently struggling with maintaining inflation within the BOEs comfort zone, as the decline in the price of oil coupled with muted economic activity kept price pressures at bay.
Against this economic backdrop, credit spreads are inching tighter at a very slow speed, mostly as yields are falling further. The yield on EUR IG is closing at its lowest level ever, and it is apparent that it is only a matter of time before it falls further. HY is also doing well, with spreads here still relatively “wide” vs their IG counterparts. There appears to be scope for further tightening in HY too as the hunt for yield is set to intensify even more. However, we do not expect a strong rally at least until the ECB liquidity injections hit the markets. It is only when monies find their way to credit markets where we will see the market squeeze tighter, as more cash will be finding a home within the fixed income space.
Disclaimer:
This article was issued by Mark Vella, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, views and opinions provided in this article are 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. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.