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Credit resilience persists as market focus shifts to earnings season

Credit markets have had a somewhat resilient start to the year, particularly high yield markets with no particular large swings in risk aversion witnessed so far since the start of the year.

Investment Grade bonds however have had to bear the brunt of higher sovereign yields while the higher beta sectors within the fixed income asset class, such as financials, subordinate paper and also emerging markets have been posting noteworthy returns so far to date.

It is too early to call the recent performance of the higher beta sectors as a rally, because it has been merely a grind tighter and the carry trade is so far a large contributor to returns, as the higher coupon bonds have been better bid for the better part of the first weeks of 2017. This could well be a theme which could begin to pan out, at least in the first six months of 2017.

Short maturity high-coupon bonds are expected to be in greater demand than the low-coupon longer maturity bonds, such as sovereign bonds, and hence short term credit, even the higher beta stuff, despite being dragged by the wider mover in sovereign yields, could prove to be an alternative for investors wishing to trim their investment grade holdings.

Last Friday saw newly elect US President Donald Trump's inauguration event, and despite having a flurry of economic data and earnings releases to contend with for the next couple of week, we would expect market sentiment to take cue from last week's speech.

In addition, the chess moves Trump makes in the days ahead will be closely scrutinised and compared to his pre and post-election chatter (on strong fiscal expansion to boost the economy) and market will decipher whether all this hype was mere gibberish or whether he indeed will be putting his money where his mouth is, as the tone and policies over the next couple of weeks are expected to shape a big chunk of market sentiment over the months to come.

Brexit negotiations have not yet started but with PM May clearly indicating that she wants out of the EU gives us reason to believe that the process is going to be anything but smooth.

Chuck in French presidential elections into the mix during April and May, which we believe the market will be shortly turning its attention to as well as the German federal election towards the end of the summer and we can say we have a tricky concoction of events to keep us well on our toes this year in the Eurozone.

Not to mention the possible ramification of strengthening ties between Russia and the US and how this could impact Brexit negotiations. Watch this space, it is expected to be anything but dull in 2017 and could well shape credit markets, particularly in the Eurozone.

In the meantime, with earnings season in full swing in the US (European issuers always lag their US counterparts by a couple of week and will be in full force during the first week of February), and high yield issuers expected to follow suit in the weeks to come, we have a busy week of economic data ahead, across both sides of the pond. Confidence indices, PMIs, US GDP data and housing stats as well as profitability out of Chinese industrial companies should set the tone for investor sentiment. Earnings season has so well surprised to the upside, but it is yet too premature to say that the remainder of the US and European earnings season will follow suit.

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 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. 

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