TwentyFour

The year 2018 will go down in the history books as one of the most challenging we have faced in recent times, with price action in the fourth quarter being particularly brutal and difficult to respond to. When we wrote our outlook for 2019 at the start of December, we were reasonably cautious and felt it possible that prices could dislocate from fundamentals during the year, if markets started to price in the increasing likelihood of a more meaningful downturn or recession in 2020. We were not expecting this to happen in December, but it did, and it has left investors wondering whether this is the beginning of the end of the cycle, and whether months like December will be commonplace in 2019.

“…everybody’s having fun. Look to the future now, it’s only just begun.”

The dust is slowly settling after Wednesday’s FOMC rate decision, and more importantly the following press conference where Chairman Jerome Powell literally talked the market down.

“This time next year, Rodney…”

Bloomberg reported on Monday that since the European Central Bank started its Corporate Sector Purchase Program (CSPP) in June 2016, it has purchased €177bn of investment grade rated corporate bonds. Initially, as expected, spreads tightened rapidly, but since the first quarter of 2018, they have been gradually widening back out to pre-CSPP levels.

It is that time of year when we traditionally look ahead to the new year and make predictions on the performance of various asset classes, sectors and industries.

We have been discussing for a while what the quantifiable impacts of Italy’s populist government have been for the country’s economy.

There were sharp declines across global risk assets on Tuesday, led by tech stocks but with barely an asset class left unscathed.

On Monday my colleagues on TwentyFour’s Multi-Sector Bond desk published a blog on rising default risks in high yield credit. Dummen Orange, Douglas, Boparan, Moby, Galapagos and CMC Ravenna are some of the obvious under-pressure names held in loan funds and CLO portfolios that are trading at a significant discount in the market.

A quick look at the dashboard of 16 fixed income indices I track clearly shows the amount of pain experienced by investors so far this year. Of the 16 indices I follow, which include IG corporates, government bonds and high yield all denominated in sterling, euros and dollars, Bank CoCos, £ and € Sub Insurance, three hard currency corporate EM indices and the G7 govvie index, only two had a positive total return for the year at the end of October.

Fixed income managers never like to start their week reading headlines about potential defaults in the high yield sector, but sadly this has been one of those Mondays.

Changes in regulations are typically long and drawn out, but their impact can often be felt quite quickly. There is every chance that this could soon be the case in ABS markets.