Macroeconomic Backdrop for Credit:
April got off to a shaky start as geopolitical tensions increased rather dramatically during the month. First, on April 5th, North Korea conducted an intermediate range ballistic missile test just days before the scheduled summit between President Trump and Chinese President Xi Jinping in Florida. Fortunately, the missile only travelled 37 miles before falling into the water. While the failure of the test provided good material for late night talk show hosts, the instability out of North Korea is no laughing matter. Then, just a few days later, President Trump authorized a missile strike against a Syrian airbase in response to a chemical weapons attack carried out by Syrian President Bashar al-Assad’s forces that killed at least 85 Syrian civilians. This was a major foreign policy shift from President Trump who just a week earlier had stated that Syria was not a priority. While the Syrian government denounced the attack, they did not immediately retaliate against the United States or any of its allies. The strike also angered Russia, who is an important ally of President Assad. Notwithstanding the short term uncertainty, we believe this show of force will have a longer term positive impact on international stability as it clearly states that the United States will no longer tolerate these types of inhumane actions.
Despite the rise in geopolitical tensions, the market proved to be remarkably resilient. It was only after a surprise surge in the polls from the far left French Presidential candidate Jean-Luc Melenchon did Treasuries start to rally and risk assets begin to sell off. The increased uncertainty around the election outcome combined with the geopolitical tensions pushed U.S. Treasury yields to the lowest level since the U.S. elections with 10-year yields reaching 2.17% on April 17th. However, the market took comfort when Emmanual Macron and Marine Le Pen advanced to the next round as most polls suggested the market friendly, pro-Euro, centrist candidate Macron would easily defeat the anti-Euro candidate Le Pen in the second round of elections on May 7th to become the next French President.