There are reasons to be bullish over the medium term
By Mark Dowding, Partner & co-head of Investment Grade at BlueBay Asset Management gives his latest view on the markets
The past week has witnessed losses with respect to many financial assets, with stress felt acutely within credit markets. Following on from the VW debacle, last week saw headlines being made by commodity specialist, Glencore, whose CDS spread widened by 400bp before recouping some of these losses. More broadly, liquidity in corporate bonds was heavily impaired into the quarter end with small trades seeming to have a disproportionately large impact on prices.
An example of this was US drilling company, Ensco, whose IG rated bonds fell by 10 points in price following a $3m bond sale, as recorded on TRACE (Trade Reporting and Compliance Engine). Apparently a fund manager was selling a small holding via a BWIC list, which went to 7 banks and this was responsible for the move, which re-priced spreads by 200bp in the absence of any material news flow.
With fear and risk aversion rising, government yields pushed lower, taking Bund yields to a 3 month low. However, the climate of fear showed some signs of relenting at the end of the week following data from China, which seemed to hint at some stabilisation in activity. In Europe, Catalan elections failed by deliver a strong mandate to the incoming regional government with pro-independence parties gaining most of the seats, though less than 50% of the vote.
Portugal goes to the polls this coming weekend, but broadly speaking, reduced political noise has continued to support risk appetite in the periphery. Emerging markets remain far more unstable and despite some marginally positive headlines, Brazil continues to weigh heavily on investor sentiment. Our assessment is that political change there, will only occur slowly and so the fundamental backdrop may continue to get worse, before it can get any better.