Volatility remains an opportunity

Mark Dowding, Partner & Co-Head of Investment Grade Debt at BlueBay Asset Management gives his latest view on the markets

Events in Paris have cast a shadow over financial markets during the past week, though risk aversion in financial markets proved relatively short lived with equity markets trading higher after opening lower on the Monday after the attacks.

Government yields in Europe pushed lower with the ECB continuing to sound dovish ahead of their policy meeting on 3rd December, where a cut in the deposit rate and an addition to QE bond purchases are now fully expected by market participants.

With little push back coming from ECB speakers it seems that Draghi is unlikely to want to disappoint and we see renewed evidence of the ‘dark star’ effect with investors chasing returns further out the curve as yields disappear.

US yields were also biased lower due to renewed falls in commodity prices, with oil flirting with support at $40 per barrel.

Corporate bond spreads were broadly stable last week, as investors eye a slowdown in new issuance, which should occur as we move into Thanksgiving week. In currency markets, the US$ failed to add to prior gains during the week before, with growing evidence that the consensus trade is to be long dollars.

This positioning gives us cause for caution and consequently we closed a long US$ position versus Yen last week, booking profits as it seems that we are now likely to be kept waiting until Q1 next year before the BOJ deliver the needed monetary easing, which appears necessary with the economy back in recession and sliding back to deflation.

In emerging markets, lower commodity prices have been a source of concern and where core government bonds have rallied, EM sovereign names have failed to keep pace leading to wider spreads in the past couple of weeks.

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