Weekly Market Update – 04.04.2019

 

Bond Markets Weekly 04.04.2019

 

US and Asian PMIs are up ticking: High yield spreads do not show sings of stress

• Newspapers and research reports are full of Q1 reviews and Q2 outlooks. Most are astonished by the strong performance of both bonds and equities. One newspaper shows in a summary of 10 local investment strategies that all are neutral on equities and underweight bonds. Further more they expect a further slowdown and a selloff in bonds.
• We would like to stress that recent PMI data out of Asia and the US ISM non manufacturing PMI are all showing up ticks. In Europe the picture looks different, but for instance Germany’s industrial production is strongly correlated to the development in China. Both Chinese PMI indicators are rising. The massive stimulus seems to be working out.
• The PMI of other important countries such as India, Brazil, Russia or Mexico is still falling. Overall the picture is rather positive as China and the US continue to grow. Both account for more than 50% of global GDP.
• As a consequence market participants expect now that the Fed might cut rates in 2019. The positive US economic data (apart from disinflation) is not supporting this view. I.e. a tight US labor market and rising PMIs are rather pointing to a rise in rates. Therefore, we expect the Fed to stay on hold until December 2019.

 

 

• The recent turmoil’s in Turkey have not affected the high yield markets. The European and US high yield option adjusted spreads have not moved over the last two weeks. Compared to Q3 2018 there is even room for a further spread tightening. We would argue that during a global slowdown without a recession in the US or China a sideways trade of these spreads is a reasonable assumption.
• We don’t expect to earn substantial capital gains over the coming months and concentrate on coupon income.
• Additional to the slowdown central banks have to deal with disinflation and with various political uncertainties, i.e  Brexit and tariff conflicts. Both however could push central banks to further stimulate the economy with unconventional measures. “Don’t fight the Fed” is therefore a sensible guide for asset allocation during the coming months.
• For the time being that means risk on. During such a phase both corporate bonds and equities should deliver positive returns.
• In case of bad company results bonds and equities will react sharply as on average bonds are expensive. However, they can stay on this elevated levels as long as the economy is growing at a moderate pace and political events (e.g. Brexit, China/US trade or European/US tariff) conflicts will be smoothly solved.

 

 

Covered Bonds
Telefonica Celuar del Paraguay 6.75% 2022 (Telefonica Celuar del Paraguay 2022 6.75%)

 

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