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

 1. UK – Some Easter Egg-citement

No sooner had we recovered from the chocolate hangover of the Easter weekend than UK Prime Minister Theresa May pulled her own bunny out of a hat by announcing a surprise general election to be held on June 8th. We’ve seen some serious U-turns from U.S. President Trump since his election, but this was arguably as big as any made by Trump, as May had consistently ruled out going to the polls early. So what caused her to change her mind? Firstly, it was a consummate political act. Her Conservative party have a massive 20-point lead over the opposition Labour party in the opinion polls, meaning she is likely to increase her majority in the parliament from the current 15 seats to somewhere in excess of 50 seats. Secondly, there’s a feeling in markets that the UK economy might be about to suffer a significant loss of momentum, and last Friday’s retail sales backed up that feeling. We’ve spoken in past blogs about how the UK consumer has been driving the UK economy, but that much of that spending was being financed by credit card debt. As inflation rises, and wages remain stagnant, real incomes are being squeezed, signalling a slowdown in spending. So from a politician’s point of view, the current economic backdrop is about as good as it gets going into an election. Thirdly, and probably most importantly, we believe there is a growing acceptance amongst UK government officials that a Brexit deal will take longer than 2 years and will probably entail some significant concessions by the UK. Given that the next election was originally pencilled in for Spring/Summer 2020, that timeline could have caused difficulties for PM May and the Conservatives. Assuming they win this election, May has until the Summer of 2022 to agree a deal with the EU before she next faces the electorate. Sterling rallied significantly on the news, given that most people think this could lead to a “softer” Brexit and also given the size of the short position in Sterling, which has built up since before the referendum in June 2016. We are pretty agnostic on Sterling at these levels, and can find reasons to be both bullish and bearish in the short-term, so we prefer to stay on the sidelines.

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Champagne for Risk Assets

It was an absolutely unprecedented first round, with four contenders quite close in the polls and just one of them (not ranked among the strongest) belonging to a traditional party. This unpredictability added to the scares and fears of the market.
At the moment, markets can breathe a (brief) sigh of relief that the outcome of the vote was largely as expected (although an element of uncertainty will likely remain for the next two weeks ahead of the final round of voting): Emmanuel Macron (at 23.86%) and Marine Le Pen (at 21.43%) won the first round of the presidential elections; Macron has already gained the support of both Fillon (the gaullist candidate, who obtained 19.94% of the votes) and Hamon (the socialist candidate that got only 6.35% of the votes) for the second round. Continue reading

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Volatility and Tail Risk on the Rise: What to Do?

After months of complacency, volatility is coming back amid concerns about the escalation in the Middle East and Asia and the upcoming presidential elections in France. The VIX index has surged to the level of 16, an almost 50% rise compared to the minimum touched last month and the highest level since last November.

This move is once again a signal that we are living in a world with multiple geopolitical risks, symptoms of which materialize as sudden spikes in volatility, as we have highlighted in the recent paper “Geopolitics and Investing: The Normality of the Unexpected”. Continue reading

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French Election Countdown

On Sunday April 23, the eyes of millions of Europeans will be on the outcome of the first round of French Presidential elections, as the vote is considered a test for the future of the European Union. A potential victory for Marine Le Pen and the National Front party would be perceived as a key geopolitical risk for the Eurozone as a whole, raising the risk of a Euro break up.

Ahead of this event, we believe that investors should consider five things: Continue reading

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Market Values Tighten: What’s Next for US Investors?

Ken Taubes is Chief Investment Officer, US.

We continue to believe credit sectors offer modest value compared to government securities. Although global yields have risen from their July lows, many short-term non-US developed market sovereign debt continues to trade at negative nominal yields, and 10-year bonds offer zero to modest positive yields. US Treasuries continue to offer negative or modest real yields, adjusted for CPI inflation.

We hold a neutral view with respect to the agency mortgage-backed securities (MBS) sector. While we believe housing fundamentals remain strong, the Federal Reserve’s (Fed’s) significant ownership of the asset class presents increased risk. Strong employment should continue to support the housing market. Although housing affordability has declined with rising rates and higher home prices, the index indicates steady levels of affordability. Continue reading

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