In the Eurozone, short-term expectations are for additional quantative easing measures to be announced in the September MPC meeting.

Markets are pricing in a high likelihood that this will occur, especially given the robustness of European credit, particularly Investment Grade and High Yield corporates. The fact  that the now-stronger Euro needs to be depreciated following strong QE measures in the UK further bolsters this. 

We continue to favour a short-term bias to European High-Yield credit (not on valuations but on technicals coming out of the European Central Bank) as well as the longer date European Sovereign Yield curve, where peripheral yields are trading well above negative territory.

The summer has been relatively benign for European credit. Uncharacteristically, August has proven to be a month whereby spreads across all sections of the credit curve tightened, and appear to be testing the lows witnessed in 2014. Demand for the asset class remains supportive, the ECB’s bond-buying programme remains intact and supply is, so far, nowhere to be seen unless for re-financing purposes.

With September around the corner, we expect ECB purchases to be back in the fray, with European terms having possibly tighter valuations. It will be interesting to see whether investors will cash in, protect year-to-date performance and switch to other alternative currencies or other higher yielding asset classes. In fact, there are a number of US dollar bonds which trade at a significant yield premium over comparable euro-denominated paper.

Elsewhere, we expect US credit markets to come to terms with last weekend’s symposium at Jackson Hole, where the overall hawkish tone has led to a re-pricing in US denominated assets, particularly the short end of the US Treasury Curve. Markets could be slightly volatile this week, as trading liquidity is expected to be thin in anticipation of the 5 September Labour Day holiday, with credit market sentiment taking its cue from any shift in either expectations or tone by the Fed.

Heading into the Jackson Hole meeting, markets were somewhat jittery but credit remained relatively robust, with both high-yield and investment-grade bonds better bid. The drop and below-par supply on the primary market has also aided credit markets from a technical perspective, with short-term direction expected to be dictated by the Federal Reserve.

In fact, the tone and comments from several Fed officials heading into the symposium gave reason to believe that Fed chairwoman Janet Yellen would skew towards an inclination of a September rate hike, and this keeping its options open regarding hiking by year-end.

Should we expect the next rate hike in September or December? The situation is quite fluid, and uncertainty remains high. However, it is almost certain that at least one rate hike will come before the year’s end, and this was reflected in the re-pricing of Fed Futures rates.

Expectations for a September rate hike rose to over 40 per cent from just 20 per cent, in just a week, whilst expectations for a December rate hike rose to well over 60 per cent from slightly above 50 per cent over the same period.

Clearly, nothing is set in stone at this stage. What is certain is that the Fed will base its policies on incoming data, and this Friday’s payroll will be one of the key highlights to look out for this week. The market is now starting to seriously price a hike. This is also being reflected within the dollar currency which gained circa 1.4 per cent over the past days.

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 Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.