Greece at Centre Stage: Can we Expect Market Normalisation?

European Investment Grade Credit

Markets have been erratic during the first half of the year, as economic volatility has continued to the end of Q2. Alessandro D’Erme explores the potential market changes in this environment and how they could impact the asset class.

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3 Things the European Investment-Grade Fixed Income Team Talked About Last Week

 

Greek Euro Coin

1. Inflation – Down Down, Deeper and Down
Perhaps the reason that global bonds initially rallied was that the Renminbi (RMB) move was seen as a global deflationary move. A weaker RMB (and other Asian currencies) should mean weaker commodity prices, and lower U.S. and European import prices. However, oil is probably the main driver behind some of the big moves in the inflation markets. This week West Texas Intermediate (WTI) fell to a 6.5 year low. The reason? In our opinion, not so much a lack of demand, but rather a surplus of supply. The International Energy Agency described global oil supply as growing at “breakneck speed”. Coupled with modest demand growth, the situation might suggest further downward pressure on the oil price before a bottom is found. Little wonder then that inflation breakevens globally are falling back towards recent lows. The market appears to be moving away from expecting a pick-up in inflation, to expecting falling inflation again. That could happen in the short-term, but longer-term we believe inflation will move higher.

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Making sense of the Chinese devaluation

Flag of China. Downtrend diagram on background.

Last week’s headlines were dominated by China. But why did China devalue? We shared our initial thoughts in this piece, China Devaluation: Initial Thoughts. Here are our key observations if you have not seen this piece yet:

 

What happened?

China’s currency fell sharply after three adjustments to the local fix, taking it to a new four-year low against the U.S. Dollar in offshore markets and fuelling expectations of further sustained weakness in the Renminbi (RMB). Having lowered the daily fix on Tuesday by 1.9%, the People’s Bank of China (PBoC) again lowered the daily fix by a further 1.6% on Wednesday – the second largest one-day adjustment since the country abandoned its hard currency peg in 2005. The official fix now stands at 6.3306, with the offshore rate weaker still at 6.5. Continue reading

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Greece – Troubles and Hopes

greeceThe bailout negotiations for Greece are indeed progressing. Headlines report that Greece has reached an agreement with creditors on a EU86bn bailout. At the time of writing, talks are still private and no details are available; the agreement will probably include actions that Greece must pass immediately plus more measures to follow in October. Once Athens and several European Governments pass the proposals, the ESM would be in the position to disburse the first tranche of the loan before August 20, when the EU3.2bn debit with ECB matures.

What Are The Major Open Issues Around The Agreement?
The main open issues are how much debt relief will be incorporated as part of any agreement, and what form it will take. The IMF (International Monetary Fund) is strongly arguing for broad action on debt. The Fund published an updated DSA (Debt Sustainability Analysis) on June 26, and a brief but toughly worded further update on July 14. Here the IMF explicitly said: “Greece’s debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far.”
In this link we’ve included a table with the main figures from the IMF’s end of June analysis.
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Diversified Income Investing: Managing Volatility in an Environment of Rising Yields

Reema Desai, Client Portfolio Manager, analyses the pertinent question: As bond volatility remains high, how can income investors manage drawdowns as markets adjust to an environment of higher yields?

This video outlines the outlook from the Global Multi-Asset Target Income Portfolio Management team going into the second half 2015.

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