Plenty of market players think that the pain for stocks in Europe isn’t over yet.
“When do we believe it’s going to stop? Not yet,” Giulia Clot, senior portfolio manager at Sycamore Asset Management told Samaria Jaisinghani and Lisa Pham. “We are not there from a valuation standpoint and we’re not there from an earnings standpoint.”
Clot, who’s European fund has beaten 90% of its peers so far this year, said the uncertainty that surrounds the US tariff policy has made forecasting more difficult. “In this scenario as a portfolio manager, we cannot know what to put in models. Do we put a recession in our assumptions? We just don’t know.”
e mentioned yesterday that markets are likely to increasingly watch for widening credit spreads -- the difference in yield between benchmark bonds and a corporate bond. That has started to happen this week.
Barnaby Martin, head of European credit strategy at Bank of America, said corporate debt has been in a “really long bull market” underpinned by central banks cutting rates. Now, “the hubris that’s been in corporate bond markets for the last two to three years is finally cracking a little bit.”
At present, a move in government bonds is offsetting a shift in credit markets but yesterday it was the move in credit that led the downturn in equities, Martin said, flipping from the prior week.
The key thing to watch for, Martin said, is money actually being pulled from credit as an asset class, which would cause “much more disorderly price action.” That hasn’t happened as yet.
But underlining why credit needs to be on the radar, Martin said that in the global financial crisis “credit was your canary, it was your lead indicator for greater corporate stress.”
After initially falling, gilts are now rebounding, with sharper moves at the short-end of the curve.
Two-year yields are now falling by around six basis points, while 10-year yield are about four basis points lower.
At the longer end, the 30-year gilt yield is also a touch lower now, reversing its initial climb.
For the shorter-dated bonds, that appears to be driven by a ramp up in bets on BOE rate cuts, which now sit at about 79 points for 2025.
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