ECB AND MARKETS

The minutes of the last ECB meeting in January show how the Council considered any change in communication as "premature", as “inflation developments remained subdued despite the robust pace of economic expansion”. In any case, the sensitivity of markets to perceived changes in central banks communication has increased, resulting in a strong volatility of interest rates and Euro in recent weeks. Unexpected inflation is likely to be the main risk factor for financial markets, especially in US, where the economy has grown significantly for the last 9 years, while much more theoretically and less likely in Europe, where we are at the beginning of a growth phase .

THE ELEPHANTS IN THE ROOM

In the current context there are some elements that cannot be ignored: the first is that historically the European market has been positively correlated with the US market; the second is that, both in the US and in the European market, redemptions have been observed, having hit almost all the asset classes indiscriminately. However, it is worth mentioning that there are profound differences between the EU and US markets, where the latter appears to be characterized by longer duration, higher financial leverage and ongoing rising rates. Finally, the last element that deserves to be underlined is that, if it is true that a decompression of credit spreads is inevitable, what we saw was mainly an Equity sell-off, where the main indices lost between 7% and 10% of their value in the period between 26 January and 8 February, compared to a loss of only 0.7% of the € HY segment in the same period.

RETURNS

It seems an eternity has already passed since the publication of the credit outlook for 2018 by the main research houses, but retrieving those forecasts, most analysts saw an increase in the yield of the 10-year Bund to 0.85% by the end of the year, with a consequent increase of volatility in the European fixed income market. At almost two months into 2018 we can acknowledge that 1) the market seems to have anticipated this upward movement (initially expected only in the second half of the year) and therefore that b) with the yield of the Bund at 0.7% the upward trend could have a weaker push from now on, hoping for a continuation of the year, if not without events that could cause isolated peaks of volatility, at least without abrupt repricing.

CONCLUSIONS

In the first two months of the year, the European financial markets were characterized by volatility imported from the US. The EU HY asset class has proved to be resilient compared to others in both the bond and equity sectors. Solid fundamentals, a non-inflationary macro environment and new issues with significantly more interesting yields are all factors that today determine a good entry point for the EU HY market, especially for strategies with low duration that help to contain occasional peaks of volatility.