Navigating Near-Term Volatility Amid Long-Term Optimism
European and US equity markets delivered positive returns in August, with the EuroStoxx 50® Total Return advancing 0.64% and the S&P500® Total Return gaining 2.03%. Market sentiment remained relatively stable, as evidenced by the VStoxx® volatility measure closing flat at 17.6%, while credit markets showed resilience with the iTraxx Crossover® (S43) holding steady at 268bps.
Convertible Bond Arbitrage
European convertible issuance remained subdued, limited to a modest €98m Tag Immobilien retap. Secondary market activity tilted toward the sell-side as investors positioned ahead of an anticipated fourth-quarter primary market revival, supported by a robust ECM pipeline.
US convertible markets demonstrated unexpected vigour in August, driven by first-half earnings releases and sustained new issuance activity. The yield environment proved supportive, with five-year rates declining from 3.97% to 3.70%, while HY CDX spreads maintained stability around 325bps. Earnings results were largely in-line with expectations, though consistent new supply and expectations of increased post-Labor Day activity exerted modest downward pressure on secondary valuations throughout the latter half of the month. Our US convertible portfolio concluded the period with modest gains.
Volatility Trading
Markets sustained their risk-positive trajectory with both realised and implied volatilities under continued pressure. Notable vega supply, primarily from structured product flows, characterised the period. This environment enabled participants to capitalise on persistent demand for index implied volatility and skew while single-stock skew remained compressed. Dispersion strategies benefited from enhanced carry generation during August's earnings season, which produced more pronounced individual stock movements than recent historical norms.
Equity Strategies
Market activity remained measured, though risk arbitrage opportunities continued to develop constructively. The Assura takeover by Primary Health Properties reached completion after extended competition with KKR, with shareholders favouring the strategic acquirer's sector-focused proposition over private equity's cash alternative.
The Canal+ acquisition of MultiChoice progresses smoothly, having cleared all regulatory hurdles with only procedural formalities remaining. Similarly, the BMPS acquisition of Mediobanca approaches completion, though Mediobanca shareholders rejected the defensive Banca Generali offer which was intended to disrupt the BMPS deal. BMPS has subsequently enhanced its proposal with a 4.5% cash sweetener to optimise acceptance rates.
Meanwhile, the spread between Subsea and Saipem has continued to tighten as the deal process moves forward, following the improved terms announced in July.
Outlook
In the immediate term, we anticipate potential market volatility driven by critical economic data releases, particularly US non-farm payrolls, against a backdrop of apparent market complacency regarding the pace of economic deceleration. Current market pricing reflects substantial expectations of Federal Reserve dovishness, influenced by political pressures and anticipated changes to the Fed's composition.
Looking beyond the near term, we expect rate cuts to provide meaningful relief to corporate debt burdens. Combined with prospective fiscal stimulus measures, this monetary accommodation could establish favourable macroeconomic conditions. Such an environment would likely benefit equity markets more broadly, potentially enabling underperforming sectors to narrow their performance gap with technology leaders.
However, emerging stress in sovereign debt markets warrants attention. Thirty-year yields have risen markedly across major economies, with Japanese 30-year yields approaching multi-decade peaks and 20-year debt reaching levels unseen since 1999. UK gilt yields have similarly climbed to 1998 levels, likely reflecting market concerns surrounding the forthcoming budget announcement. This phenomenon extends beyond individual jurisdictions, signalling broader market unease regarding fiscal sustainability and central bank independence.
Gold's continued surge through August, reaching fresh all-time highs, appears to corroborate these sovereign risk concerns. The precious metal's rally reflects mounting apprehension about potential Federal Reserve independence under changing political dynamics and wider fiscal deficit anxieties.
While the confluence of accommodative monetary policy and fiscal support could foster an increasingly constructive economic environment—contingent upon positive data confirmation—rising sovereign yields present a meaningful countervailing force that could temper this otherwise favourable outlook.
Risk Warning
The views and opinions expressed are the views of Boussard & Gavaudan and are subject to change based on market and other conditions. The information provided does not constitute investment advice and it should not be relied on as such. All material(s) have been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy of, nor liability for, decisions based on such information.
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Past performance is no guarantee of future results and the value of such investments and their strategies may fall as well as rise. Capital security is not guaranteed.