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A Clearer Technical Picture

16 March 2017 by Eoin Walsh

The markets had an interesting day to digest yesterday, with elections in the Netherlands and an FOMC rate decision making for a potential bump in the road for the current rally. As it happens, it was only the UK government that suffered the bump, with Chancellor Philip Hammond falling victim to the Ides of March after being forced into an embarrassing U-turn of his proposed National Insurance tax rise; good news for the self-employed, if not market-moving news.

In Europe, with the Dutch elections being, as expected, a “non-event”, the technical drivers continue to underpin the market. Credit markets have experienced a mild softening recently, which isn’t a surprise given the uninterrupted rally since mid-November. However, with the horizon now clear to the French elections (first round 23rd April, second round 7th May), the technical rally should have another leg to it, particularly as the new issue market, although reasonably active, is mainly focused on the refinancing of existing debt. In fact in some sectors, such as the European HY market, the aggregate size has actually decreased, with the face value of the BofAML Euro HY index declining €1.3bn during February.

In the US, the picture was more mixed and it certainly appeared that the technical drivers had weakened appreciably. There were a number of factors behind this; last week approximately $3bn was withdrawn from the US HY market (equivalent to 40% of the inflows into HY since President Trump’s victory), in addition to this, investors had to digest a huge supply of newly issued bonds with over $17bn of new paper hitting the street taking the YTD issuance to $61.5bn. The other big event was last night’s FOMC rate decision – and while the subsequent rate rise was well reported, it was far from certain what the statement would say.

Market participants were fearful that the FOMC would be more hawkish, and maybe hint that they were “behind the curve” and push the dot plots higher. The relief following the less-hawkish-than-expected statement was palpable, with 10yr treasury yields rallying by (a surprising) 11bps to just under 2.5% and risk-on assets also reacting very positively and reversing some of the recent widening. With this event behind us, the technical picture in the US looks set to strengthen again, with focus returning to President Trump’s fiscal policies and to the details of his initial “America First” budget, due to be released today.

We have written previously about the strength of the technical picture in Europe, and this looks set to continue, and although the new issue market in the US is much more active than in Europe and should continue to act as a release valve to tightening spreads, from a technical standpoint, the US markets now seeming to be moving on to a firmer footing as well.

The rally has certainly restarted this morning, and in the absence of bad news, looks set to continue.

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