TwentyFour

After the most hectic week of the year to date, relative calm has at least temporarily been restored to markets.

Clearly the decision by Italian President, Sergio Mattarella, to refuse the appointment of Paolo Savona as the coalition’s Finance Minister, on the grounds of him being overtly eurosceptic, has backfired badly.

During and since the global financial crisis the Federal Open Market Committee (FOMC) has done a remarkable job in navigating the US financial system under extremely challenging circumstances, setting the standard for other central banks to follow.

We are currently of the view that the market panic generated by the plan published by the new Italian government is a bit excessive.

European ABS market performance and volatility have been remarkably stable since 2016, largely weathering broader credit weaknesses so far this year.

After another week of yield curve flattening, we now have the 2s-10s curve in US Treasuries at just 43 basis points.

Paying attention to China will be even more important to investors than usual in 2018.

We have often started our portfolio discussions with clients this year with what we don’t like in fixed income. Unfortunately the list for 2018 is relatively long and quite large when measured on a market cap basis.

HSBC released its Q1-2018 results this morning which were a little underwhelming with bottom line profit before tax a touch below estimates (down 4% on Q1-17) and return on equity of 7.5% (compared to 8.0% in Q1-17), but that aside the numbers give investors little concern.

Having written recently about our thoughts on how the yield curve might flatten, we should also note that whilst this, our base case scenario, is happening at the moment, there are a number of other potential strong influences that we need to monitor as they have the ability to prolong this flattening.

Having discussed the shape of the yield curve as a recessionary indicator already last week, we would like to elaborate on what other indicators we look at as fixed income investors to determine where we are in the economic cycle, which in turn determines how we position ourselves on the yield curve and whether we look to credit risks or government bond risks.

Following on from Gary’s recent blog Credit Still Being Cycled, this week the ECB released their quarterly Euro Area Bank Lending Survey for the first quarter of 2018, and it paints a slightly different picture to the Bank of England’s report in one area in particular.