Market Commentary: Equity markets lose further ground, bond markets trading higher after Crimea referendum

The on-going macro and geopolitical developments continue to take centre stage. The recent stand-off between the West (the US and EU), Ukraine and Russia has so far been somewhat relatively contained. However, if conditions deteriorate and get out of hand, economic sanctions could be imposed, causing an uncertain economic outlook in all regions which would likely result in markets reflecting the fear of a weak economic backdrop.

Credit markets could prove resilient as it is by nature a defensive play, however this does not necessarily mean that they would not be adversely affected. However, this is on-going and this scenario could take some time to unfold. Markets this week are expected to take cue from GDP figures out of the US which will give the markets a view of the economic recovery, with a number of analysts making fresh forecasts on the timing of the eventual interest rate hike. It appears that sanctions imposed by the US and EU are pushing Russia towards a recession as the intensity of the economic sanctions is expected to increase.

What a difference a week makes in credit markets. Just over a week ago, concerns over the referendum in Crimea resulted in a marked increase in investor risk aversion. One week on and bond markets, most notably Investment Grade (IG) and High Yield (HY) corporate bonds, seem to have shrugged off that initial risk aversion and are trading higher over the past few trading sessions. The referendum in Crimea was only a formality, with the outcome known well in advance ever since the day Russian troops entered the region.

The danger is now what type of retaliation is yet to be seen and how bad the economic standoff may develop and how this could eventually impact and impinge on economic growth. Having said that, this seems to be another crisis that credit markets are set to overcome. What is more impressive this time around is that things in credit markets are unfolding at a time of record low yields. Despite having a remarkable year-to-date performance so far, the asset class continues to enjoy strong demand as evidenced by the performance of the new bond issue primary market last week and yesterday.

Meanwhile, equity markets lost further ground for a second day in succession as a report showing subdued growth in manufacturing in the US as well as weak manufacturing data in China too (as evidenced by the Purchasing Manager’s Index) further accentuated the relative weakness in the global economic recovery, fuelling speculation that recessionary pressures in Russia could also infiltrate to a large number of developed economies.

Elsewhere, the Venezuelan administration allowed the bolivar to weaken by 89% after loosening currency controls in an attempt to increase dollar supplies and bridge the gap between the demand for and supply (in the form of imports) of basic necessities such as medicine, food and toilet paper. This move is clearly a structured devaluation of the domestic currency as the government is trying to curb black market trading, a move which analysts are interpreting as crucial for the revitalisation, survival and sustainability of the Venezuelan economy.

This ‘new’ currency market, known as Sicad II, is expected to cover 7-8% of the country’s foreign currency requirements. Corporations and individuals were, for the first time in four years, allowed to buy and sell US dollars in cash and bonds, in a market regulated by the central bank, whose exchange rate will be determined by demand and supply forces.

This article was issued by Calamatta Cuschieri, visit www.cc.com.mt for more information.

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