UBS has outlined seven macro themes it says will help investors position ahead of the fall, citing resilient economic data, stable credit fundamentals and selective investor demand as key drivers for European credit markets.
The analysts said the recent US-EU agreement on a roughly 15% tariff for selected goods removed the immediate risk of a full trade escalation, improving near-term prospects for EU credit spreads.
Current EU investment grade (IG) and high yield (HY) spreads, at 80 and 276 basis points respectively, have already surpassed UBS’s earlier targets, which the brokerage said reflects a degree of complacency about risks from US inflation, monetary policy shifts and fiscal pressures.
Its revised baseline expects IG/HY spreads to widen moderately to 90/300 basis points in the third quarter, before a possible Federal Reserve policy pivot in the fourth quarter could support performance.
UBS also noted that investors remain split on the macro outlook. One group anticipates a sharper US slowdown that could prompt additional European Central Bank (ECB) cuts, while another sees tariff-driven inflation limiting scope for US and EU rate reductions.
The brokerage has lifted its euro area growth forecast to 1.1% in 2025 from 0.7%, supported by stronger domestic demand, a smaller external drag from tariffs and German fiscal stimulus.
Supply conditions have been buoyant, with €220 billion in IG and €54 billion in HY issuance over the past three months, 47% and 145% above their five-year averages, without signs of market strain.
UBS cautioned that aggressive US rate cuts could spur excessive borrowing and strain primary markets.
Earnings data and low volatility have helped sustain demand, while default rates in EU HY have fallen to 0.4%.
UBS argued that the quality of the HY market has improved markedly, making current spreads less stretched than historical comparisons suggest.
It maintained a “barbell” approach, long duration in defensive, quality sectors such as insurance and real estate, balanced by short-dated exposure in higher-beta assets.
The brokerage added that exchange-traded funds (ETFs) have been consistent buyers since mid-year, providing technical support, particularly in HY, though it warned that thin liquidity in some funds could amplify market moves.
Source :
https://www.investing.com/news/economy-news/ubs-lists-7-key-macro-themes-to-position-ahead-of-fall-4185154
