Fixed Income Analysis /
Global

Euro Credit Pilot - Turmoil on the EU’s doorstep: The effects of the Russia-Ukraine crisis on credit (March 2022)

    Sven Kreitmair
    Sven Kreitmair

    Head of Credit Research

    UniCredit
    31 March 2022
    Published by
    • The European corporate credit market remains driven by developments surrounding the Russia-Ukraine conflict and yield volatility on the back of rising inflationary expectations. That said, in the short term, given the ongoing potential vulnerabilities, flight to quality might return and investors are likely to become increasingly concerned about credit rather than duration risk. Moreover, as we expect the ECB to reduce its APP purchases in 2Q and end them in 3Q, differentiation between cyclicals and non-cyclicals is becom-ing more immediate.
    • Macro Fundamentals: We expect eurozone economic growth to weaken to 3.1% this year and to 2.5% in 2023, and inflation to reach close to 7%, followed by a decline to about 2% in 2023. In our base scenario our macro forecasts foresee Brent prices averaging USD 110/bbl in 2022 and USD 112/bbl in 2023.
    • Valuation & Timing: Credit spreads are expected to remain volatile in 2Q, but to tighten by year end. Our base scenario foresees the iBoxx NFI Senior spread at 65bp by mid-year and at 55bp by year-end. The iBoxx Finan-cials Senior is expected to be at 75bp by mid-year and 65bp by year-end.
    • Credit Quality Trend: Despite the Russia-Ukraine crisis, fallen angels will remain low in the short term but are likely to increase in the medium term.
    • Market Technicals: New bond supply is lagging behind its level over the same period last year, however, we expect primary market activity to accelerate and continue to forecast EUR 180-200bn of gross issuance of non-financials senior bonds this year (YTD EUR 55bn).
    • Sector Allocation & Recommendation Overview: We reiterate our overweight recommendations on the Oil & Gas and Basic Resources sectors and our underweight recommendations on the Retail, Travel & Leisure, Chem-icals and Utilities sectors.