Market Views

GLOBAL CREDIT BULLETS | Monday, 10th May 2021

Positioning for a more volatile 2H21.
We expect volatility to rise over the coming months, potentially triggered by near-peak economic momentum, already-long positioning in credit and gradually less dovish central banks, as we wrote in our latest Silver Bullet | Dog Money. We would use this opportunity to redeploy capital in beta-markets, including high yield debt and emerging market hard currency. We continue to be strongly invested in securities linked to real assets or real cash-flows, like convertible bonds and commodity sectors, while we maintain a neutral duration and a very selective allocation to credit. Credit overall offers limited opportunities, as spreads are tight and positioning is long. Hence, we remain 50% invested and maintain a good degree of credit protection.

US NFP – Surprising miss but bigger picture remains intact.
Friday’s non-farm payrolls of 266k missed the consensus economist forecasts of 1mn significantly. 330k jobs were added in leisure and hospitality sectors as the economy reopened, however, the lower net figure indicated job losses in sectors such as trade, transportation and utilities. Unemployment increased by 0.1% to 6.1%. This was the first weaker macro data-point and shows that momentum in the US is slowing, earlier than we expected. The market initially took it as a return to QE, with US 10Y yields up to 10bps tighter, gold higher and tech stocks up, as expectations for early tapering and hikes faded. Nonetheless, we believe the bigger picture of the economy reopening and inflation rising amid higher commodity prices remains intact.

Latin America – Social unrest can be contagious.
Protests in Colombia against tax hikes intensified last week, as frustrations with the government led to violent clashes. Frustration in Colombia could spill over to other Latin American countries, as there too citizens are struggling with the ongoing pandemic and growing poverty through rising food prices.
An inflation spike adds to regional problems. A high share of food and commodities in the CPI basket means inflation is moving faster than in developed markets, and slow vaccine rollouts mean this happens before the economy started recovering. Brazil is a key example, with inflation now running 200bp above the central bank target, forcing BCB to some 225bp hikes this year, despite a struggling economy.
Politics, inflation and Covid set up a challenging mix for LatAm. We see Brazil as the weakest link. Peru and Chile are experiencing similar dynamics. Colombia and Mexico are more of an exception as fundamentals remain in much better shape than the rest of the region.

The Bank of England – Slowing down QE, but no tapering.
A better outlook for the UK economy, driven mainly by a faster pace of reopening than previously anticipated, allowed the MPC to signal a slowing down in the pace of QE purchases. However, this should not be interpreted as a fundamental change in the monetary policy stance and a broader tightening of the policy is not imminent in our view. We do not expect the Bank to raise interest rates nor start to shrink its balance sheet before 2023. While the reaction functions of major central banks differ slightly, the underlying message is the very much the same: monetary conditions are likely to remain accommodative for some time.

To read more on our latest views, please see our Silver Bullet | Dog Money or visit our Insights section.

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