Global Weekly: Cool in rough times

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There was a lot of political hassle this week with the trade war lingering on, ambiguity about Brexit and arguments about the level of contributions to NATO. However, markets were not impressed and most major stock markets were even slightly up this week; Chinese stocks rebounded from their yearly low of last week.

Investors are eying the upcoming quarterly earnings season and are confident that continuing global economic growth has helped company revenues and profits.

The earnings season already started this week, with Pepsico reporting solid quarterly figures, driven by growth of its snack activities, Doritos and Lays. Also, US banks – such as JPMorgan and Bank of America - are traditionally early to report. Other US companies that will release their earnings next week, include Netflix, Blackrock, Johnson & Johnson and Microsoft. In Europe, ASML, SAP, ABB and Unilever are among the reporting companies.

Broadcom’s shares lost more than 15% on Thursday, after the semiconductor company announced its intentions to acquire CA Technologies, the network infrastructure software player formerly known as Computer Associates, for almost USD 20 billion.

Bonds: reassured by the Fed

This week, fixed income markets have remained relatively upbeat, despite global trade tensions, the NATO summit in Brussels and the ongoing Brexit saga. The Fed minutes were encouraging and gave investors the impression that the Fed will stay on its gradual rate hike path, while the trade risks increase

In an interview held last week, Italian Finance Minister Giovanni Tria stated that the new populist coalition will stick to its tax cuts and a universal tax plan. Italian bond spreads hardly reacted. German 10 year Bund yields hovered somewhat below 40 basis points this week. Corporate bonds, however, had a positive week, where lower risk premiums translated into higher prices. Investment grade corporate bond investors now demand 1.2% on top of German government bonds for the risk.

A corporate bond segment that increasingly is catching our attention, is the senior loan market (bank loans sold in the market). This segment has been flourishing for the last few years, and in terms of size, it has passed the high yield market. Senior loans are first lien, which means they are the first to be paid in case of a default. However, if the queue of first-lien bond holders is growing and the later-in-line queue is shrinking, the senior loans position has not necessarily improved.