Credit markets carried on in February where they left off in the final trading sessions of January, and that means sharp downward moves and marked spread widening.
The turbulence witnessed in risky assets in the first two months of 2016 has been unparalleled; and despite bleak bouts of what seemed to be a recovery in prices, investor's timid appetite to take spreads lower seemed to be short lived for the greater part of the month.
After having bottomed midway throughout the month, a slow albeit seemingly sustainable recovery, at least in the short term, in the price of oil, helped optimists slowly creep back into the market. Liquidity however was thin and moves in any direction were exacerbated/accentuated by the low volumes.
Bids began to emerge towards the final trading sessions of the month but only after the deeply subordinated bank bonds, better known as AT1s/CoCos had taken a severe beating across the board.
From worries in the Italian banking sector to market concerns about Deutsche Bank's liquidity to a string of negative FY15 releases by the French and UK banks, this concoction had all the ingredients to dent market sentiment for the greater part of the month.
The primary market was practically inexistent until mid-February whereby over recent sessions a number of new issues have been announced. To date, primary issuance is way below the same levels witnessed last year, and sentiment has played a key role in all this.
In fact, sentiment indicators in the more advanced economies are beginning to reverse and have indeed been adversely impacted by the large volatility in markets over the past three months.
However, despite recommending treading with caution and given the large downside risks to the global economy as a result of EM weakness, we must opine that there is no concrete evidence that economic fundamentals, at least in the advanced economies, have deteriorated materially.
US economic data has been highly resilient, much to the surprise of the market, especially the most recent wave of economic data releases. The same cannot be said about the Eurozone economy as sentiment in the region has clearly waned, albeit growth data remains somewhat supportive.
True, inflation has been sticky and has failed to pick up, much to the ECB's disappointment, and, given the current crossroads in glob capital markets, we would expect the outcome of the March 10 ECB meeting to be market and investor supportive. Anything short of what the market expects would be utterly devastating to say the least.
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.