Curmi & Partners

Q2 2018

Fixed Income 

Benchmark yields began the year on a rising trends however trade tensions, political uncertainty in Europe, softer data and a ‘dovish’ message from the ECB had an impact on the yield environment, reversing the increase. 

The ECB was interpreted as dovish following the meeting in June as it signaled that interest rates will be kept low, well beyond the end of the QE and at least through to the summer of 2019. It was also announced that subject to incoming data confirming ECB’s medium term inflation outlook, monthly purchases will be tapered further from €30 billion in September to €15 billion from October to the end of the year and end in December.

In the US, the Fed raised interest rates for the second time in 2018 by 25bps in June, to a range of 1.75%-2%. This was the 7th rate hike since late 2015 and the Fed also lifted their projections to a total of four hikes this year, from three estimated in March.

FOMC minutes indicate that policy makers remain confident on the US economy with growth and job creation accelerating; however there was also an emphasis on the potential negative effects from a trade war, which could eventually cause the Fed to question the outlook. It was also noted the emerging market turmoil could also hinder growth.

Another important trend for 2018 has been the flattening of the US yield curve as the spread between the 2-year and 10-year Treasury yields continues to decrease, dipping below 30bps in the first six months of the year. A number of policy makers noted the importance of monitoring the slope of the curve, “given the historical regularity that an inverted yield curve has indicated an increased risk of recession in the United States”.

Generally, Credit markets continued to be soft in Q2 2018, with slightly negative returns. Negative bond fund flows (particularly in the US), lower volume activity in the primary market and increased dispersion in terms of pricing.

The key risks to the current environment are the following:

·         US sovereign bond market sell off – the speed of yields increase is the main aspect to consider

·         Trade wars and protectionist measures

·         Pressure on commodity and oil prices

·         Impact of the above on global economy



The first half of the year was characterised by a return of volatility in the equity markets and an uptick in political risk, mainly in the form of trade war concerns, immigration and extreme political parties. Performance was largely mixed across equity markets, with the US outperforming Europe in general which were dragged by trade war concerns.

Unlike most indices, the S&P posted a positive return in 1H18, which was mainly driven by growth stocks. Low unemployment levels and the strong momentum should continue to provide support to the US market, however a flatter yield curve and rising inflation could increase the risk for equity market prospects.

Valuations are still elevated with indices trading on a PE that is higher than the median PE for the period 2008 till 2018. However, apart from the S&P all indices are trading at lower PE multiples at the end of the second quarter of 2018 in comparison to the end of the first quarter.

Potential risks impacting the equity market are more elevated than they were at the start of the year, with the main risks being:

·         A full-blown trade war

·         Inflation moving ahead of the curve leading to aggressive tightening by the Fed

·         Deterioration in European political situation; particularly Germany and Italy

The information presented in this commentary is solely provided for informational purposes and is not to be interpreted as investment advice, or to be used or considered as an offer or a solicitation to sell/buy or subscribe for any financial instruments, nor to constitute any advice or recommendation with respect to such financial instruments. Curmi and Partners Ltd. is a member of the Malta Stock Exchange, and is licensed by the MFSA to conduct investment services business.