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The credit market in August

=Reflecting on the performance in credit markets for the month of August, one should not be surprised that the asset class per se continues to be pressured due to both monetary decisions, and the political turmoil, which seems to be non-exhaustive.

The month of August was characterized by the asset class trading sideways as investors were partially comforted by the trade agreement reached between Mexico and the US, in addition to some hope that the China-U.S. trade war issues might pave the way for more promising discussions. On a year-to-date basis, the asset class maintained its negative momentum as investors still view the asset class to be pressured possibly further from a monetary perspective.

The only exception within the asset class is U.S. High yield, which continues to be supported by better than expected data in the U.S. In fact, data released over the summer showed that the US economy accelerated to 4.2% on an annualized quarterly basis in Q2, its fastest pace in nearly four years.

These positive numbers and other macroeconomic indicators remain broadly supportive for the Federal Reserve’s plan in tightening its policies. In fact, as expected the comfort being brought forward from an economic front is cheering investors who are exposed to U.S. High yield debt which to-date registered a just below 2 percent gain, while in the month of August it traded flat at 0.053 percent gain. As expected, U.S. Treasuries continue to be pressured by the perceived interest rate hikes.

The euro-zone area is experiencing a different path, despite an initial second quarter GDP growth print of 0.3% quarter-on-quarter, in line with the pace seen in the first three months of the year.

This was supported by a rebound in economic activity in Germany as well as the Netherlands and Portugal. By contrast, economic growth in Italy was weaker relative to the first quarter. Italy’s political and banking instability continues to loom on Italian assets, which lately pushed Fitch to revise its outlook on the sovereign to negative, while reaffirming its BBB rating.

On a year-to-date basis European HY is down 0.13 per cent, medium dated sovereign bonds are down 1.1 percent, while long dated sovereign debt closed flat in the month, while on a year-to-date basis are up by circa 1.4 percent.

In Emerging markets (EM), the month of August was characterized by China’s weaker economic print- a marginal year-on-year slowdown to 6.7% in the second quarter, although more recent data pointed to further weakness in Q3. In addition, the ongoing external concerns, stemming from the escalating trade dispute with the US, the Chinese government announced a range of targeted economic support measures.

Furthermore, the strengthening in the US dollar continued to be a drag on emerging markets, despite the notable improvement in fundamentals when compared to the tapering tantrum in 2013.

Turkey was another drag for the asset class per se, when considering that major EM benchmarks constitute circa 7 percent exposure. Turkey saw a sharp sell-off in its currency amid rising geopolitical tensions with the US and concern over domestic policy.

On the flip side, some positive news for global markets was the agreement of a bilateral trade deal between Mexico and the US in late August. On a year-to-date basis the asset class is down 4.3 percent following a very strong performance of 8.8 percent in 2017.

It is no secret that from a monetary tightening perspective, credit markets dislike interest rate hikes and this is why we believe that the asset class will suffer in the short-term. In this regard, is it also imperative to be very selective within the fixed-income asset class. However, we still believe that the recent volatility

is at times overshooting when considering that the market is being very sensitive not to decisions or rumors, but mainly to tweets.

This article was issued by Jordan Portelli, investment manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view 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.

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