Global Weekly: Fairly calm

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It has been a bit of a strange week in financial markets. On Monday, markets in the US (Memorial day) and the UK (Spring Bank Holiday) were closed. Yesterday, markets were open but trading was fairly light due to Ascension Day. In terms of macro-economic news it has also been a quiet week. And the company earnings season is almost over.

Stock markets were in ‘wait-and-see’ mode and remained fairly calm. The escalation of the trade war and the blacklisting of Huawei have been partially digested. With regard to the trade conflict, important dates on the agenda are 28 and 29 June. During these days, the G20-summit will be held in Osaka, Japan, where US President Trump and Chinese President Xi Jinping are expected to meet. We acknowledge that the economic and political relationship between the US and China further deteriorated recently. However, we still expect a trade deal to be made eventually. We maintain our neutral stance on equities.

Important company news this week came from the car industry, with Fiat Chrysler proposing a merger with Renault. Both shares closed higher after the announcement. Renault is expected to take a decision next week on the merger proposal. A merger of Fiat Chrysler and Renault is expected to yield EUR 5 billion a year in cost savings, including economies of scale in the area of purchasing. The two car makers have a combined market value of EUR 32.6 billion. The headquarters of the combination would be situated in the Netherlands.

Bonds: Negative yields (almost) everywhere

The EU elections ended up in both weaker centre-left and centre-right groups, that need to work more closely together. However, the overall threat from rising populism was less pronounced than many had feared. Nevertheless, populists across advanced economies have been successful in pointing the finger at bad policy decisions and slower growth perspectives, and accusing others for their domestic problems instead of addressing these issues themselves. All these signs will keep core government bond yields low for longer – maybe even longer than we are anticipating.

The continuous decline in government bond yields (in most countries) since October 2018, due to the lacklustre economic performance in many advanced economies and the lack of inflation, will keep investors’ expectations muted ahead of the next ECB Governing Council meeting on 6 June. The key focus for covered bond investors will certainly be the announcement of the final rate that will be applied to the TLTRO 3 funding programme announced by the ECB a few months ago. Through TLTROs (targeted longer-term refinancing operations), the ECB offers funding to European banks at a low interest rate.

The TLTRO 3 programme could affect the covered bond market. Without this programme, some European banks would have opted to issue covered bonds in order to attract funding as demand for these bonds is still very strong. But if the interest rate level of the new TLTRO programme is sufficiently attractive, these banks (mostly banks in the European periphery) may prefer borrowing capital from the ECB instead of issuing covered bonds to meet their funding targets. This might impact covered bond spreads which do already trade at tight levels.

While yields in both core and semi-core countries are already in negative territory up until nine years in the maturity bucket, peripheral government bonds, corporate bonds as well as emerging market bonds still offer a positive yield. As long as fundamental data remain constructive globally, we maintain our overweight position in these subsegments in order to reap yields there. We think the current market environment – with low volatility – is still supportive for spreads.