Europe

Data out of Europe over the past few weeks has pointed to both lower growth and lower inflation, and rate expectations have shifted accordingly with market pricing now implying a 96% chance of another 25bp cut from the European Central Bank (ECB) on October 17, up from around 25% on September 20.

The building trend of consolidation in the European banking sector is important for several reasons, and could create further opportunities for bondholders.

The quantity of cash parked in money market funds has been at the forefront of investors’ minds for some time now. The surge of inflows for these short term risk-free instruments as rates rose was no surprise considering they now yield more than a single-B rated high yield corporate was offering just a few years ago.

Ten years ago this month, Mario Draghi gave a speech to the European Central Bank’s (ECB) Eurofi Financial Forum making the case for reforming securitisation regulation in order to revive the asset-backed securities (ABS) market in the wake of the global financial crisis.

Recent economic news may have created a sense of uncertainty across Europe, but Ellie Aylen from our Asset-Backed Securities (ABS) team offers a more optimistic view. According to low-level data from the Bank of England (BoE) and the European Central Bank (ECB), the actual performance is much more reassuring than what the headlines might suggest.

In his latest update on the European high yield market, a member of our Multi-Sector Bond team discusses two key topics: the Maturity Wall and Default Rates. He highlights that as interest rates continue to rise, default rates are projected to increase from 2.5% to around 3%.

Pauline Quirin, Portfolio Management, provides an update on the global Collateralised Loan Obligation (CLO) market, highlighting why we think CLOs are positioned to deliver the strongest performance across fixed income markets for the rest of the year.

We have consistently highlighted the benefits of higher interest rates for the European banking sector. However, the current outlook suggests that lower rates are anticipated going forward.

Yesterday the European Central Bank (ECB) delivered a 25 basis point (bp) cut, their second in the current easing cycle and in line with market consensus.

Earlier this week the Australian Prudential Regulation Authority (APRA) proposed scrapping Additional Tier 1 (AT1) instruments and not replacing them with any other form of junior debt, with the consultation paper suggesting that instead Australian banks could fill their 1.50% AT1 allowance with a combination of Tier 2 (1.25%) and Common Equity Tier 1 (CET1) capital (0.25%).

Any market participants hoping for a quiet few days to ease back into “work mode” after the summer break have had to rapidly adjust their expectations.

Given almost half of the world’s population resides in a country staging an election this year, 2024 was always likely to throw up a series of political headlines.