Musings on Markets (Dated 12/06/2022)

Markets started to slide again this week, as concerns over inflation & whether the required monetary response will top the US & Europe into recessions moved to the forefront. Market sentiment is weak, but there is some resilience. Higher rates already having been priced into equity & bond markets, real-world fall out (consumer & business) will still be a bugbear down the road.

US Inflation

On Friday US CPI printed higher for May at 8.6% vs 8.3% expected, beyond that core CPI (stripping out volatile prices) came in slightly above at 6% vs 5.9% expected. Friday’s CPI figures push back on expectations that inflation would have peaked by May. Fuel oil prices have risen particularly sharply and are up 106.7% over the past year.

ECB Rates

In Europe, the ECB said it intends to raise interest rates for the first time in 11 years, with its key rates set to rise by 0.25%  in July. The latest Eurozone CPI estimate was 8.1% – again led by steep rises in energy costs. The ECB also announced that it would halt quantitative easing on July 1st. Looking forward, the interest rates are expected to rise by a further 0.5% in September, inflation is expected to average 6.8% over the year – higher than the 5.4% expected in March.

Ukraine

The war in Ukraine continues to keep energy prices elevated with the EU set to ban seaborne imports of Russian crude oil as of December 5, 2022, and ban petroleum product imports as of February 5, 2023. The situation in Donbass remains intense, with Ukraine reporting that it is losing some 200 KIA/day – a rate that is unsustainable. However, it remains unclear if we are any closer to peace with the potential for the fighting to slow post Severodonetsk, the inflow of weapons from the west, and the ongoing mobilization of significant Ukrainian reserves. 

Crude Oil Prices

Commodity prices remain elevated with Brent Crude now trading at $120/barrell (helped by tentative signs that China is now reopening).

HY Pricing

In terms of Credit GBP, HY Corporates returned c.-45 basis points (bps) on the week, with Financials under-performing Non-Financials each returning c.-62 bps, and -40bps respectively. In terms of rating, Double BBs returned -39bps, whilst Single Bs and CCCs returned –56bps and -5.74bps respectively.

Markets

At time of writing (Fri 27th, Afternoon) The FTSE is down 3.5% on the week. GBP / USD is down 1% on the week at c.1.231. The spread on the iTraxx Crossover (XOVER) – a proxy for the market’s assessment of credit risk (the greater the spread, the greater the perceived risk) increased by c.64bps over the week to 501.