The European Credit Strategist Relationship problems

BofA Merrill Lynch Global Research - Jueves, 17 de Julio

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1H bizarro 1H was all about monetary policy, "melt-ups" and "manias" in European credit. The combination produced some eye-catching 1H statistics along the way. Not only did credit outperform equity in the first half, but HY bonds were issued with a 2.25% coupon, CoCos returned almost 7%, the Numericable/Altice financing received a reported $100bn order book and $42bn of retail money flowed into European credit - 4x the 1H 2013 figure. In 2H, we think the story for European credit remains that of a highly active ECB. Our core view therefore remains for tighter spreads and for high-beta credit outperformance by December-end. We remain overweight credit. 

Relationship problems: bonds vs equities 

However, within this broad outlook, we also see reasons to be more cautious than euphoric in the near-term. As growth doubts appear in Europe, the equity market is embarking on a painful rotation of performance and positioning, from cyclicals to defensives. For equities, QE has not been the savior in terms of earnings growth. We don't think that credit markets will be immune from this equity turbulence, sadly, but neither do we think that the credit market will be sunk by it. Our work shows that amid the dominance of central banks lately, credit sensitivity to the equity market has been falling in Europe. 

Beta beaters? 

In credit, the compression trade has been an almost constant feature of market performance since mid-2012. But recently it has become unstuck as equities have corrected and growth momentum has stumbled a bit. High beta parts of the credit market have performed very incoherently over the last few months. But where is the beta still for credit investors? Our rolling beta trackers show less beta now in corporate hybrids and high-yield, while beta seems to have made a return in the periphery. 

2H playbook - themes to watch 

Away from ECB dovishness, credit investors should keep an eye on some of the following data points and themes in 2H, all of which could alter the status quo in European credit (for better and for worse).  

Watch peripheral bank lending rates in Europe for clues as to TLTRO efficacy. If they fall then loan demand may rebound and ECB rhetoric may be much less dovish (i.e. bond negative) in early 2015.  

Watch Asia growth momentum and China M1 data. If Asia growth expectations rise then the cyclical into defensive equity rotation in Europe may calm down sooner rather than later. 

Watch Eurozone slowdown data. Weak data may mean more ECB, but it may also raise deflation concerns too much, resulting in peripheral debt worries again.  

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