We’re well into the second week post Greek deal and one would rightly think that the Greek crisis is slowly fading, with credit responding to this through a marked tightening over recent weeks. However, we must be aware that we are not completely in the clear.
Investment Grade bonds in euros have, on average, tightened by close to 15 basis points since the deal was announced whilst credit indices tightened by 20 basis points since, with the markets now seemingly focused on the lull activity (trading) in the summer months as well as the prospects of high activity (issuance) in the primary markets till September. We would be cautious on this, however, especially on the credit side, as we are of the opinion that corporations would be somewhat reluctant to approach the primary market during the summer months, especially after the turbulent six weeks or so we’ve had of late.
Primary market activity has picked up however since the Greek deal was announced two weeks ago, most notably in HY, but we would expect this momentum to abate in the days/weeks ahead, especially given that European earnings season is about to be in the spotlight. This is why we think that volumes will not be as strong and the market will comfortably absorb the new issues given the ample cash asset managers seem to be sitting on, and hence credit spreads could well grind tighter, albeit at a slow pace, through to the end of summer.
Markets will now be taking a breather from Greek related news and begin to focus on the economic data to be released this week, including the inflation figures in the Eurozone as well as the FOMC in the US. With earnings seasons pretty much in the limelight, we would continue to focus on spread direction and the impacts the general tone would have on different asset classes within the credit space. Never the less, yields have continued to drop in recent weeks on the back of the Bund yields performance.
On the contrary, US credit spreads have widened and trailed their European counterparts, and is expected to continue to underperform on the back of heightened expectations of an imminent rate hike in the US. However, US HY also had its fair share of adverse performance vs EUR HY.
At first glance, one could argue that it could be on the back of an overall stronger US dollar vs the euro or perhaps blame the under-performance on the sharp correction in the price of gas and oil (15 per cent of US HY issuers operate within the energy sector) and the implications this correction could have on the profitability of these energy-related issuers.
Oil and gas have clearly been the worst performing sectors within the US HY space, but to those we would add the basic materials sector, which also had its fair share of weakness. This is due to the fact that a large number of basic materials issuers (despite benefitting from a cheaper oil price) are mining companies, and given the fact that a lower price of oil could render oil as an optimal substitute for, for example, coal, coal producing issuers are impacted also by a lower oil price.
We have also had a sharp correction in gold and subsequently gold miners, who pre-dominantly issue debt in USD, have also done poorly since the price of gold lost 8% since mid-June alone and by 15 per cent since its 2015 high in mid-January.
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.