Predictions for capital markets in 2018 have fluctuated, but the potential for upheavals remain as we reach the second half of the year.

The impact of political changes in Europe and the US seemed to have settled down after the 2016 impact of the Trump presidency and Brexit, but other global events have now come into play.

Prime among these is the potential for a global trade war after the US imposed tariffs on imports not only from states such as China but also against countries traditionally seen as US allies. The acrimonious G7 meeting in Canada did little to calm nerves in the global debt capital market.

Burden

Add to this concerns over compliance and regulation and treasury departments will be understandably a little tense. The good news is that after a turbulent couple of years with regulators clamping down, 2018 has seen the burden imposed over the past eighteen months lessen. Consequently, observers predict the recent modest growth in the market seen over the past twelve months to accelerate during the remainder of 2018.

Regulation may be the driving force in an upturn in activity in the next six months. The US administration is keen to reduce the impact of what re seen as arcane rules, whilst the EEC is aware of the impact Brexit could have on their own markets, and the opportunities it offers. Expect an easing of regulations being put in place to attract business from the London hub.

Such deregulation will help to free capital availability and Fintech will be an area which benefits, with companies keen to invest in blockchain departments and artificial intelligence and regulatory compliance software. The jury is out on the impact this technology may bring but there is a danger that markets can be disrupted as some financial giants invest heavily.

Monetary policy is also a driver which is being examined around the globe. The recent increase in US rates suggests that there is confidence within the Federal Reserve that the US economy is strong enough to stand rising rates. Whether this is true across other economies is doubtful. The Bank of England is reluctant to raise rates from historic lows, and the same is true across Europe.

In Australia, the Reserve Bank held rates at all-time lows earlier this year and the hawks seeing an interest rate rise look set to be disappointed over the remainder of the year as the RBA emphasised its contentment with the gradual progression of inflation and wages figures.

Lending

There is little doubt that whilst increasing rates will not improve results on lending activity, they will impact negatively on fixed income securities held by the banks.

In terms of corporate bonds, European levels are predicted to fall and that has been evidenced in the first six months of the year with the notable issues in eastern Europe. This remains a difficult market, however, and the trend towards senior instruments continues across the continent.

Across Asia and the Pacific activity may increase given the low level of activity during 2017.

It has been difficult to predict issuance levels for 2018 due to the impact of global uncertainty and the policy of the US administration which is making both investors and borrowers nervous. The success of issuers in debt capital markets in 2017 across all currencies made for a record year and those levels are unlikely to be reached in 2018. The only driver is likely to be continuing low interest rates and the support of central banks. These are currently in flux and predictions are hard to make over the next six months.

There has been little sign of issuers front-loading their funding, fearing that central banks may begin to reduce liquidity in the market. There is little doubt that issuance has gone global, with China the driving engine although APAC has also been part of the growth. This year is proving less predictable with the concern over global political turmoil at the fore.

Uncertainty is bad for markets and the debt capital market is no different. Events in Italy have affected the European market, the Trump presidency has disrupted America and the fall out at the G7 is set to influence events. Predicting how central banks will react to the Fed’s hike in rates is also something to monitor.

Even so, global liquidity and appetite for risk may lead to a more vibrant market in line with that we have witnessed during the steady global recovery in recent years.

The second half of the year will tell us much about confidence, and help to pick trends for 2019.

Simon Lynch is the owner of Treasury Talent.

Treasury Talent is a specialist treasury talent, recruitment and search provider solely focussed on the treasury market with offices in Sydney covering Australia, Singapore covering Asia, and San Francisco covering California and the USA. To make contact simon@treasurytalent.net