Europe

Last Friday we were surprised that a comment from a G7 finance minister, which should have been taken highly positively, was somewhat skipped over by the markets.

Our attention this morning was grabbed by a headline from Italy’s La Stampa, which reported that Finance Minister Giovanni Tria is preparing a 2019 budget that will result in a 1.5% deficit/GDP ratio for the indebted EU nation.

Last year, with credit spreads tightening close to historic levels, it seemed appropriate to us to take a more prudent stance and move to a more balanced portfolio.

Following on from the release of solid Q2 numbers, and no longer in a closed-period, Barclays were quickly out of the blocks and announced the issue of a new AT1 this morning; a $2bn transaction with initial price talk of 8%.

Now that the summer lull has finally kicked in, it seems an ideal time to review the ABS market so far this year and try to make a prediction for the remainder of 2018.

It’s been nearly five months since the Italian general elections, with the result and the process of forming a coalition government eventually leading to the steepest selloff in BTPs we’ve seen for a long time, and the spread to bunds touching levels not seen since 2013.

Even in the midst of a busy earning season, discussions on central bank policy never seem to go away.

Looking at the state of the Turkish economy since President Erdogan decided to meddle in the affairs of its central bank; with the Lira down about 20% vs the US dollar, inflation running at 15%, and the yield on the 10yr government bond running at almost 17%, you might be tempted to think that most leaders would stay well away from the subject.

So far the US earnings season has been positive, with the major US banks being the outperformers to date – both Goldman Sachs and Bank of America strongly beat profit estimates and JP Morgan posted record Q2 profits.

In the past two years the diversity of supply in the ABS market has been restricted by the availability of cheaper funding alternatives, both in the Eurozone through the TLTRO and in the UK, where the BoE Term Funding Scheme has suppressed issuance from the traditional banks and building societies.

Today sees the launch of the first dedicated Additional Tier 1 Exchange Traded Fund. As first mover, Invesco Powershares gets to claim the simplest ticker, AT1 LN.

Following on from our recent comment on the level of Italian BTPs and how this has a potential to impact the transmission mechanism, it is interesting to note the subtle but important changes that have been applied elsewhere across the global economy.