If you work in fixed income and are waiting for markets to rebound so that you can be assured of keeping your job in 2016 and maybe even, possibly, getting a bonus, you probably don't want to read the new report from Deutsche Bank's fixed income researchers. Therein, they lay out various reasons why they think fixed income divisions could flounder in quarters two, three and four.
These are as follows:
Remember that rally? That risk rally that suggested 2016 might turn out ok at the start of the year? Over, as per the chart below (although things seem worse in equities than fixed income, but still...) The focus has now shifted from central banks to global growth risks, say Deutsche's analysts. Sentiment is "highly sensitive to growth news," as a result.
Source: Deutsche Bank
China has some serious issues and Deutsche's analysts say markets are becoming increasingly sensitive to this: "No hard landing but risks have risen around unsustainable debt growth."
They note that Chinese credit growth surged earlier this year as China focused on aggressive monetary easing to support short term growth. This has, however, "refocused attention on China’s significant debt build-up and corresponding imbalances."
Chinese authorities are now moving to a more neutral stance and the worry is that Chinese growth could collapse as a result. - Deutsche's analysts don't think this will happen (a gradual slowdown is more likely), but the awareness of this possibility could in itself discourage risk-taking.
Deutsche's analysts say the dollar is in the process of bottoming-out after falling earlier this year. This could create buying opportunities, except they also think, "it is too soon for a rapid reversal higher."
European politics could "upset" markets for the entirety of 2016, and maybe into 2017. See the chart below.
Source: Deutsche Bank
Once upon a time, Central Banks could be relied upon to step in with some QE if things got shaky. Not any more. "The ECB and BoJ are likely to remain on hold. A further reduction in Fed expectations is unlikely to help risk assets near term, given how little is priced," say Deutsche's analysts.
And lastly, in extreme downside risks, the possibility of a corporate credit crisis hasn't disappeared. At worst, there could be a, "corporate credit crisis and wave of defaults," say Deutsche's analysts. A rising U.S. dollar and rising U.S. rates would put pressure on emerging markets corporates and on U.S. high yield issuers - especially in the energy sector.