Download full article

Trade war fears set the stage for a tense second half

Key points:

  • Spreads continued to widen in June, this time led by US credit, as trade war fears stole the limelight away from Eurozone political instability. Eurozone risk premia remain elevated despite the near term resolution of political issues (Italian brinkmanship, German coalition) because the September Italian budget looms large as a risk event.
  • The silver lining to the almost 50% widening of euro spreads year to date is that excess return expectations 12 months forward have turned positive for the first time in a year. The repricing since May has created tactical opportunities in a number of index pair trades: high yield/investment grade decompression, Europe/US recompression, Financials/Non-Financials recompression.
  • The underperformance of the euro high yield market in comparison to dollar high yield has narrowed the yield advantage of the latter net of foreign exchange hedge costs while dollar investment grade maintains a 40 basis point ield advantage over euro investment grade.

Spreads widen in June but trade wars are now the culprit

Spreads continued to widen in June, this time led by US credit as trade war fears stole the spotlight away from Eurozone political instability (Exhibit 1). The dovish announcement regarding the tapering of the European Central Bank’s asset purchase program did not feature as a key driver of spreads. This is not surprising given the time asymmetry present in the announcement effect (abrupt upon inception vs protracted ahead of eventual exit). Furthermore, the asset purchase programme has resumed a higher share of credit market purchases, climbing to around 18% of the total in June (compared to a peak of 21% reached in March).


This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.

It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date. All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document. Furthermore, due to the subjective nature of these opinions and analysis, these data, projections, forecasts, anticipations, hypothesis, etc. are not necessary used or followed by AXA IM’s portfolio management teams or its affiliates, who may act based on their own opinions. Any reproduction of this information, in whole or in part is, unless otherwise authorised by AXA IM, prohibited.

This document has been edited by AXA INVESTMENT MANAGERS SA, a company incorporated under the laws of France, having its registered office located at Tour Majunga, 6 place de la Pyramide, 92800 Puteaux, registered with the Nanterre Trade and Companies Register under number 393 051 826. In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries.

© AXA Investment Managers 2018. All rights reserved