When digital currencies act as safe-havens, we can’t help but think markets might be having a moment of madness.
In Europe, comments from Salvini hurt the BTP market at a time when risk assets were already under some pressure. In the run-up to EU elections next week, Salvini has been brandishing his populist credentials, emphasising the importance of delivering growth and jobs over needing to respect fiscal discipline.
Dovish path for the ECB
Ten-year spreads have widened above 275bps, though looking on an absolute basis, outright yields haven’t moved particularly far, with much of the spread widening accounted for by a rally in Bunds, which has left 75% of the German bond market trading at a yield below the ECB deposit rate.
Nevertheless, we believe that Salvini and others in La Lega understand that the spread is important as elevated funding costs mean less scope to use fiscal proceeds to stimulate demand.
We doubt there is any desire to create conflict with Brussels over the budget and look for the comments to be toned down after next week’s vote.
Moreover, we continue to see EU break-up risks and an Italexit outcome as highly unlikely in the next couple of years, given that lack of domestic support for this.
With BTPs trading at a wider credit spread than many emerging markets, we believe that valuations are attractive and we see credit ratings and debt-to-GDP statistics as broadly stable, with EU cash rates firmly anchored and the ECB likely to pursue a dovish course in the months ahead.
Indeed, Japanification is a growing theme in the eurozone and we observe that such an outcome has tended to be constructive for credit investors, while being challenging for equity markets. This would be another factor to look to for Italian and Greek bond spreads to rally, as hunger for yield sees investors needing to add risk in order to achieve yield targets.
Goodbye Mrs May?
Meanwhile, the past week has seen a step closer to the demise of Theresa May. A resignation and a Conservative Party leadership campaign now seems likely in June and with Farage’s Brexit Party set to record strong gains in next week’s poll, it seems highly likely to us that May’s replacement will be more of a staunch Brexiteer.
We believe that it is highly unlikely that the existing Withdrawal Agreement will pass and equally unlikely that the EU will open up to new negotiations with a new Tory prime minister. This suggests that paths are increasingly pointing to either a hard Brexit or no Brexit whatsoever, should there be a second referendum.
However, this particular scenario seems unlikely unless there is a general election first and a Labour victory – although both of which may be more likely than many currently seem to appreciate.
Riding out the social storm
As we assess where we stand, we believe that it is important to try to look through the noise and not fall into a trap of over-trading, trying to chase the latest Twitter headline. This would seem like a sure-fire way to lose performance and we continue to assert an approach that focusses risk taking on our conviction views, which are well anchored in our proprietary research.
Without such an anchor, it would be easy to be driven off course in choppy and turbulent markets, though ultimately we can feel confident that fundamental factors, more than technical, should determine the trend in prices for any assets which we own.
In short-term bouts of volatility, markets can be prone to exhibiting periods of irrationality and perhaps Bitcoin – up 30% this week and trading as if it was the ultimate safe-haven asset – has been something of a testament to this in the past few days.