23rd January 2020

🗞️ Coronavirus’ unknown dimension

iTraxx Main

44.7bp, +1.1bp

iTraxx X-Over

218bp, +5.8bp

🇩🇪 10 Yr Bund

-0.31%, -5bp

iBoxx Corp IG

B+102bp, unchanged

iBoxx Corp HY

B+345bp, +6bp

🇺🇸 10 Yr US T-Bond

1.72%, -5bp

🇬🇧 FTSE 100 [wp_live_scraper id=”17″], [wp_live_scraper id=”24″] 🇩🇪 DAX [wp_live_scraper id=”19″], [wp_live_scraper id=”25″] 🇺🇸 S&P 500 [wp_live_scraper id=”21″], [wp_live_scraper id=”26″]

Anxiety rattles markets…

The rally and recent upbeat tone in the markets has come to a screeching halt due to the increasingly serious nature of the coronavirus’ spread is being felt. Markets are taking fright.

Hopefully it can eventually (and quickly) be contained. However, the unprecedented lockdown of the cities of Wuhan, Huanggang and Ezhou – with more added to that list by the day, and curtailing of other activities/travel and so on across China at this important lunar new year celebratory period, is going to have markets in a defensive mood.

There’s also going to be a big macroeconomic hit, and although the IMF recently downgraded its forecasts for global growth (pre-coronaviras), others are going to follow suit.

Risk markets recoiled on Thursday, after that big drop overnight in Chinese equities (-3.1%). Investors moved swiftly into defensive mode and the level of activity declined. So it was a case of equities in the red, rates sharply better bid and credit stable with primary lighter.

There were enough deals on the screens nevertheless, from high yield/more unusual borrowers. Telecoms duo Altice and United Group were the biggies, but we also had Ellaktor (tap) and Mowi alongside several financial borrowers.

The ECB’s first meeting of the year didn’t throw up any surprises and obviously would have contributed to the lower levels of market activity. Economic risks remain tilted to the downside according to the central bank – but ‘somewhat less pronounced’, although we think they will quite possibly reassess that in due course depending on how events unfold in China.

Credit has been holding up. And it will likely continue to exhibit lower levels of volatility versus other markets just because technical and fundamental factors favour such a dynamic. If equities fall out of bed – perhaps because the WHO declares a global public health emergency then, of course, credit will come under pressure. We wouldn’t think that there will be no material selling into it, but illiquid markets will see exaggerated weakness in valuations as investors look for the bid.

For now, the market is chugging along. As already highlighted, primary is still pumping out deals and they’re high yield ones at that – usually the first market to close in extreme market conditions. That suggests investors are taking a cautious but pragmatic view of events at the moment. But also, the corporates offering deals at the moment are fairly solid and can withstand moderate further broad macro/market weakness and disruption.

They are also (usually) rate market insensitive – important given that the ECB was holding its first press conference of the year.

Valuations, too, remain relatively firm with little movement in the last couple of sessions. We suggest holding tight. Few credit market participants will have shifted strategies anyway, or feel overly nervous. It’s too early.

It also helps that the majority of new issues are trading inside reoffer levels while demand for issues remains at high levels.

High yield dominates primary

We started with Samhallsbyggnadsbolaget i Norden AB  – it just rolls off the tongue – the Swedish real estate group better known as SBB. They issued €500m in a perpNC5.25 hybrid priced to yield 2.625% which was 62.5bp inside the initial guidance and that level of tightening was made possible amid interest for the issue up at €2.7bn. Once again, it was highlighting the demand for high yielding assets.

The other high yield deals came with Altice France issuing €500m in a 5NC2 issue priced to yield 2.25% (coupon 2.125%) and €500m in an 8NC3 effort priced to yield 4%. They also issued $1.225bn in an 8NC3 priced to yield 6%. There was Mowi ASA – a Norwegian seafood group, printing €200m in a no-grow 5NC3 green bond priced at Euribor+160bp (books at €700m and -15bp versus IPT).

United Group issued €600m in a 6NC2 to yield 3.125%, €450m in a 6NV1 floater at Euribor+325bp, €625m in an 8NC3 to yield 3.625%  and a €170m PIK at 105.50. Ellaktor added an increased €70m via a tap of its 6.375% Dec 2024 deal, rounding off the session’s deal flow.

Macquarie Group added €500m to the senior financial issuance, as it took 7-year funding at midswaps+77bp, with BFCM adding £600m in a short 6-year at G+97bp.

Markets fearful

Economists will be busy re-assessing their growth forecasts amid bad/very bad coronavirus-related scenario analyses. The fears are that the outbreak of the coronavirus (with its 5-day incubation period suggesting things get worse before they can get better) could be worse than the Sars outbreak previously (2002-2003), and which was mainly confined to the Beijing area.

Of course, it is far too early to tell how much might be lopped off Chinese domestic and global growth rates, but there will be a hit. The city lockdown might seem extreme, but decisive action is designed to help bring the outbreak under control quicker. China already reported its lowest annual growth rate in 2019 for thirty years at 6.1% and will surely report 5%+ now for 2020.

And there will be a global impact. The IMF had recently downgraded its expectations by 0.1% for 2020, to 3.3% which we thought was quite optimistic, anyway. The ECB will have to strike a cautious tone as it enacts only its second strategic review in sixteen years, but rest assured the outbreak is going put some pressure on policy. More ’emergency” easing? Quite possibly it could be forced on the bank.

Anyway, rate markets were on the up. And so the 10-year Bund yield declined to -0.31% (-5bp) and the Treasury in the same maturity to 1.72% (-5bp) with the Gilt at 0.59% (-5bp).

Equities losses saw the FTSE down by 0.85%, the Dax off by 0.94% while the US markets were flat, as at the time of writing.

Credit protection costs rose, but the moves were measured. iTraxx Main was 1.1bp higher at 53.2bp with X-Over 5.8bp up at 218bp.

In cash, the IG market closed the day unchanged with the iBoxx cash index in G closing at B+102bp as did the AT1 sector, the index at B+361bp. Sterling IG credit was also unchanged (G+130bp). The only bit of weakness was in the high yield market which left the iBoxx index here at B+345bp (+6bp), although the high level of recent issuance might have also had an impact here.

Have a good day.

Suki Mann

A 30+ year veteran of the European corporate bond markets and in his role as Credit Strategist, Dr Mann has been ranked number one in the Euromoney Investor Survey eight times in ten years. Previously with Societe Generale and UBS, he now shares views of events in the corporate bond market exclusively here on CreditMarketDaily.com.