Market commentary: EU, US divergence continues

The criteria for a rate hike by the Fed continue to be market and data dependant. The latter was stressed by the Fed in their statement last night. It is now more obvious than ever that Europe and US are moving at different tempos.

During the last ECB meeting which incidentally was held here in Malta, Draghi continued to reiterate his dovish rhetoric. No major surprises there. On the other hand, Chairman Yellen did not exclude a possible rate hike in December.

Many analysts have as of late struck off the idea that there will be a rate hike this year but yesterday’s comments were a reminder that this is indeed a possibility. Yellen restated that this is subject to economic and market conditions.

Whether a rate hike will actually happen or not, we will have to wait and see, as given the fragile states of other economies and data out of the US being strong but not consistent this is everyone’s guess and a subject of voting within the Fed Committee. No matter what, central bank economics continue to be the main theme to trade these markets. All eyes on the Fed and the ECB.

European equity futures are trading slightly higher this morning as analysts gear up for a busy day in corporate earnings. The Euro moved lower against the US last night on the back of comments by the Federal Reserve. This is a positive for Europe and perhaps the indirect lending help from Yellen to Draghi. 

In terms of strategy on fixed income, we continue to be overweight EU investment grade bonds given that they should benefit from the Quantitative Easing programme that is already in place by the European Central Bank and is expected to be accelerated further in December. The latter should send yield to lower levels if it is successful.

Over in the US, we are neutral on investment grade bonds as although IG spreads have become more attractive, the market has to be content with deteriorating credit metrics. In the High Yield space we have a Neutral stance on Europe and a favour US names as we continue to acknowledge that both economies are at differing stages of the investment cycle with the US clearly at a more advanced stage, and therefore we favour US domestically focused issuers.

Disclaimer:

This article was issued by Darin Pace, Capital Markets Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt .The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.