FXStreet (Delhi) – Research Team at Deutsche Bank, notes that in spite of recent disappointments (ECB) and a soon to be tightening Fed, global monetary policy still remains extraordinarily accommodative.
Key Quotes
“With inflation this low, and commodities weak, this is not the time to doubt central bank market support. We don’t think the Fed’s plan to normalise will get very far.
US looks late cycle on a macro and micro basis but 2017 might be more likely to see the end of the cycle than 2016 as the lagged impact of Fed policy and yield curve flattening bite. Europe still looks way behind the US cycle and credit fundamentals are superior.
Supporting the late cycle theme, spread dispersion and negative outliers are on the rise, especially in the US. It’s not just Energy/Materials but across other sectors. If 2016 goes badly for European credit it’s most likely going to be due to contagion from US HY capitulation. The price action as we go to print worries us, especially with news of a US credit fund freezing withdrawals. The hang-over from this will linger and is a big risk but Europe is in better shape technically and fundamentally.
Given we are late cycle, it is possible we turn much more bearish in 2016 though. Liquidity is so bad that when the cycle ends it could be savage for spreads. However for now we expect a positive year for European credit based on valuations, superior fundamentals and huge ECB support.
We are constructive on European banks in an environment of moderately recovering economic activity and very supportive central banks. At the same time, we may finally be near the completion of the post-crisis regulatory overhaul, with diminishing negative surprises. While fragile growth and tight regulation may not make bank equity investors cheer, the continued build-up of capital and de-risking of balance sheets should be supportive of bank credit. Overall, we like banks in the credit space, including T2s and AT1s as a high-beta play.
In 2015 technicals have been supportive for EUR HY and GBP IG with net issuance minus coupons actually negative. For EUR IG this has not been the case with issuance at record levels (with the exception of 2009) and a YoY drop in redemptions. In 2016, EUR HY sees heavy coupons and redemptions in Q1 while GBP IG may benefit from rising redemptions. For EUR IG issuance will likely remain elevated and redemptions lower than they were in 2013/2014 for the next few years.
We end on some potential curveballs to watch out for in 2016. These include the US election, China/EM deteriorating further, another China devaluation, and Brexit concerns. 2016 is not without significant risks and given where we are in the cycle it is prudent to monitor these carefully.”
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