A strong European equity rally fuelled by President Donald Trump’s speech to congress at the beginning of the March struck a softer tone than normal. Meanwhile a rate increase at March’s US FED FOMC meeting pushed the dollar higher and Eurozone manufacturing PMI continued to rise.
Flash February Eurozone inflation was up 2 percent on the year after increasing 1.8 percent in January leading many to question the need for additional monetary support by the ECB. While European markets continued to advance following the encouraging Dutch elections, where voters rejected populism.
Towards the end of the month, the UK formally handed over notification of its intentions to leave the European Union following the infamous Brexit referendum last June, with the expected date to leave the union being set at 19 March 2019. The event was a clear headline grabber but did nothing to rattle the markets, as it had just become a formality, with valuations clearly pricing in this likelihood. The European Equity Benchmark index added an impressive 5.5 percent over the month.
Credit markets across both sides of the Atlantic, and beyond had a mixed month and had muted returns within some regions, notably in European High Yield and Emerging Market High Yield markets, both registering gains of 0.08%. Investment Grade credit and sovereign markets ended the month in negative territory in March, both in Europe and the US, for varying reasons.
The sharp cost savings by high yield issuers as witnessed by the recent wave of refinancing of bonds previously issued with large coupons placed such high yield bonds in a better footing in terms of credit metrics.
This coupled with the abundance of liquidity in the market and the persistent search for yield kept prices supported albeit the carry trade was a major contributor for European High Yield returns during the month.
In the meantime, fixed income markets focused instead on renewed expectations that the ECB will maintain a dovish tone for longer, and sovereign yields dropped quickly again. Unsurprisingly, the longer they remain low, the better supported credit remains.
The positive momentum witnessed in emerging markets in the first months of the year rippled into the month of March as the pick-up in global economic activity in the developed and emerging economies spurred demand for EM assets. Trade activity picked up as did inflationary data points across selective emerging market economies whilst investor appetite improved on the back of a marked weaker US dollar.
EM were unshaken by the rate hike by the US Federal Reserve earlier on in this month, as this move was pretty much priced in, whilst the weakness in the US dollar towards the end of the month over failed healthcare negotiations pushed EM higher. The meat scandal in Brazil did little to deter the positivity in the asset class as investors swiftly shrug off the negative news and tread along with the continuous global search for yield.
This article was issued by Antoine Briffa, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article 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.