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Daily Archives: 10th April 2018

10th April 2018

Brushing the risks under the carpet

MARKET CLOSE:
iTraxx Main

57.1bp, -0.8bp

iTraxx X-Over

280.4bp, -4.2bp

10 Yr Bund

0.51%, +1bp

iBoxx Corp IG

B+106.3bp, -0.5bp

iBoxx Corp HY

B+326bp, -4bp

10 Yr US T-Bond

2.80%, +2bp

FTSE 100

7,877.45, 18.28
DAX

13,169.92, 92.20
S&P 500

2,724.44, -8.57

Let’s worry not…

Judging by the level of the market, we would be forgiven in thinking that the immediate economic and geopolitical risks facing us are being viewed as background noise – again. We have had an extended period of market volatility from mid-February through to last week, as fresh event risk threw some uncertainty into the pot. However, just as we have faced a variety of potential banana skins over this past couple of years – which failed to derail the markets, there are a few more that we’re looking to see off in the same way. And judging by the last few sessions, it’s increasingly looking like we are going to trade through them as well.

The risks remain in the context of that US/China trade feud, the Middle East atrocity and the Western response to it – and then we just might be in the early throes of a potentially devastating economic slowdown in the Eurozone as evidenced by the recent crop of data emerging from the region (French and Italian industrial production the latest to disappoint).

The former is going to be all about months of headline risks until a clearer picture emerges on how the global trade dynamic will eventually play out. We were helped in Tuesday’s session by the tone of President Xi’s conciliatory words at the Boao Forum (so-called Asian Davos) as he talked about reducing car import tariffs, increasing imports and improving intellectual property protection. The Syrian situation is the most immediate serious risk that we face, with the US and its allies likely to react with force and/or with further severe economic sanctions.

As for the Eurozone, central bank policy response is going to be increasingly ineffective if it does turn out that Q4 was the peak of the latest economic cycle. Not that it was working one the ECB governing council has, as Nowotny suggested he would have no problem with raising the deposit rate from -0.4% to -0.2%. The euro currency jumped on the news and Eurozone government bond yields edged a touch higher. The ECB council members frequently comment – usually being careful with their language. And, of course, they want to get the financial community off the ‘QE drug’ to avoid it going cold turkey market reaction – so need to do it as gradually as possible. We have been warned!

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