February 2019 - Financial Conditions Dictating Market Direction - Tactical Fund Manager's Comments

15 March 2019

Cédric Daras, Clement Perrette, David Fung, Gilles Pradère, Olivier Mulin

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The continued deterioration in financial conditions in the U.S. have been seen as the main reason for corporate credit spread widening. Considering the period from January 2018 to February 2019, the two lines represented in the below graph by the GS US Financial Conditions Index and Bloomberg Barclays US Aggregate Credit Spread (avg. OAS) almost fit perfectly, with financial conditions generally leading credit spread’s moves. A longer-term analysis shows periods of divergence, but currently it appears to be one of the most significant factors guiding risk assets direction. The sharp rally in financial markets since late December is in line with the improvement in financial conditions and suggests investors should keep a close eye on that front.

US Financial Conditions and Credit

Source: Bloomberg, RAM Active Investments. Bloomberg Barclays US Agg Credit Spread (avg. OAS). GS US Financial Conditions Index.