Snapshot of the corporate lending market (July 2022)

Global credit markets experienced a particularly difficult month with negative returns across all asset classes.

Important points:

  • Global credit markets experienced a particularly difficult month with negative returns across all asset classes as spreads widened and the market weighed in on slowing growth and a possible recession
  • In the United States, economic indicators (including consumer confidence, personal spending, etc.) came in worse than expected, prompting investors to speculate about when the Federal Reserve System (Fed) might stop raising rates (or even cut them) to support the economy
  • In Europe, assets were also overvalued due to fears of inflation and gas shortages
  • In emerging markets, looking for some return of market confidence, we look to Asia, where regional growth drivers may benefit from stimulus measures in China and Japan, combined domestic spending from accumulated savings after the wave of COVID-19 Omicron. Rising activity in Asia could also help unblock supply chain bottlenecks, one of the causes of hyperinflation

Productivity

US

US fixed income had a particularly tough month, with negative returns across all asset classes as spreads widened and market prices slowed growth and a possible recession. US markets ended the month in risk-on mode as liquidity dried up ahead of the holiday weekend and economic signals and earnings revisions pointed more strongly to a slowdown. Economic indicators (including consumer confidence, personal spending, etc.) came in worse than expected, prompting investors to speculate about when the Federal Reserve System (Fed) might be forced to stop raising rates (or even cut them) to support the economy. Treasuries rose at the end of the month (prices rose, yields fell), ending June almost where it started. Importantly, the current deteriorating economic climate has allowed rates to remain broadly stable (with the exception of short rates) over the two-month period. Commodities are well above their highs and inflation expectations have fallen significantly.

Europe

European fixed income posted negative returns for the month as spreads widened and the market priced in slower growth and a possible recession. Revaluation of assets was also carried out due to fears of inflation and gas shortages. Given fears of gas shortages from Russia in the second half of the year, investor sentiment remains mixed, and the question remains of what central banks can do. It looks like the market will continue to wait until the summer. Investment-grade bonds saw a modest uptick in interest during the month as rates began to fall as investors doubted the ECB would be able to deliver on planned hikes. News of a proposed anti-fragmentation tool (AFT) to support peripheral sovereign spreads is likely to be needed to reorient the market to significantly higher rates in Europe.

I

Emerging markets posted negative returns as credit spreads widened and economic signals and earnings revisions pointed to slower growth and a possible global recession. In the United States, economic indicators (including consumer confidence, personal spending, etc.) came in worse than expected, prompting investors to speculate about when the Federal Reserve System (FED) might step in to stop raising rates (or even lower them). ) to support the economy. Prices for industrial products fell, reaching a more stable level. Oil prices peaked in March and closed lower in June compared to May as global authorities prioritized stability of energy prices at the consumer level.

Pending market confidence to return, we look to Asia, where regional growth engines could benefit from stimulus measures in China and Japan combined with domestic cost savings following the Omicron COVID-19 wave. Preliminary data on housing sales in China for the month of June increased significantly, which is a positive indicator of economic recovery. The easing of quarantine restrictions and the ban on using state social health insurance to fund testing suggest that mass quarantines in China are less likely in the future. Rising activity in Asia could also help unblock supply chain bottlenecks, one of the causes of hyperinflation.

2022.07.15.  Credit indicators
Index Returns (YTW)


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