Keeping calm and carrying on: European corporate credit markets trundling along nicely

Although European corporate credit markets are "priced for perfection" with yields low and spreads tight, there is "little ground" to expect a fundamental deterioration in corporate credit conditions in 2017, according to S&P Global Ratings.

In a note to clients, the ratings agency said it was not advocating throwing caution to the wind, especially as medium term questions about Europe's political and economic outlook persist, accompanied by growing protectionism.

"Central to the benign corporate credit outlook in Europe is a supportive fundamental mix of modest but improving non-inflationary growth, ample stimulus and plentiful liquidity," the agency noted.

"But the degree of synchronous improvement in global economic trends has perhaps been the decisive antidote to market anxiety."

S&P observed that – even in the UK – the sharp rebound in business confidence since the initial shock of the Brexit vote on 23 June 2016 "appears to have held up, despite the surprise and uncertainty of the Conservative government's decision to call an early election for 8 June."

It added that the likelihood that the May government will return to power with an enhanced majority is seen as helpful for the Brexit negotiations.

Offering a pan-European perspective, S&P Global Ratings analyst Gareth Williams said: "Improving growth, cheap and abundant money and low inflation do provide hugely supportive fundamentals and political risks may have been more noise than reality so far this year."

The old Arab proverb – "the dogs bark but the caravan moves on" – seems an appropriate characterisation of the current state of the European corporate credit market, he said.

"Despite a cacophony of threats to sentiment from factors including elections, Brexit, protectionism, uncertainties around US economic policy and the risk of conflict with North Korea, European credit markets continue to trundle along apparently unconcerned."

In such a setting, S&P Global Ratings opined that the core fundamental concern for the corporate sector is whether "too much financial risk" has been accrued in relation to the prospects for cash flow, inflation and interest rates.