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3rd June 2018

If you can’t beat ’em, join ’em

MARKET CLOSE:
iTraxx Main

67.4bp, -2.8bp

iTraxx X-Over

295.1bp, -14.1bp

🇩🇪 10 Yr Bund

0.39%, +5bp

iBoxx Corp IG

B+129bp, -3.5bp

iBoxx Corp HY

B+384.6bp, -10bp

🇺🇸 10 Yr US T-Bond

2.90%, +8bp

🇬🇧 FTSE 100

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🇩🇪 DAX

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🇺🇸 S&P 500

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False dawn or not, it feels better…

Liquidity. There is too much of it in the world and the cash needs a home. Unless the ‘event risk’ actually materialises, the lesson of the past week is that the pullbacks are buying opportunities. There have been so many occasions over the past couple of years where trouble has loomed, the markets recoiled, but then recovered sharply. And they’ve done – are doing – it again. Only a few days ago the markets were on the way to pricing in financial Armageddon. Not any more!

Italy has a new government, but as yet, we are none-the-wiser as to what/how its policy programme might evolve. Spain has a new PM after the incumbent Rajoy was ousted following a vote of no confidence and replaced by the socialist PSOE party leader Pedro Sanchez, but few are expecting much to be different for the moment there. As for the US import tariff spat, the afflicted parties have thrown their toys out of the pram, but in the words of Wilbur Ross, the US Secretary of Commerce “… the markets will adjust (to any trade sanctions)”.

So, there we have it. It looks like the markets have adjusted already to all the aforementioned event risks, with an attention span measured in days, rather than weeks or months. The expectation must be that the Italians will huff and puff, the recovery in the Italian debt and equity markets will be seen as a sign that the new administration isn’t going to follow through with the worst of the previously touted policies and that Brussels will have won the day again. The Eurozone goes on, in its current format.

As for a global trade war, we might have to see how events evolve, but this is going to be one of those long-term, slow unwinding issues, with some impact on global growth but without knowing exactly how much of an impact any tit-for-tat retaliatory tariffs might have had. Some sort of fraction of a percentage point will be neither here or there. The EU has already fired back, taking some sort of moral high ground but refusing to enter into any further negotiations as bourbon whiskey and Harley-Davidson amongst other items look like becoming a little more expensive in Europe!

Really upsetting the apple cart probably requires some sort of global conflagration. That’s as far away as we might reasonably expect. So, once again, we’ve gone from thinking of June requiring a cautious investing mentality to one which might see a more positive outlook for risk assets. We just keep swatting away all the emerging/potential event risk situations that might lead to a sustainable fall in risk assets.

However, before we get carried away, we would proceed with caution. After all, we are just a headline away – likely emerging from Italy – from another blowout.

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