Archive

Monthly Archives: May 2018

31st May 2018

Nerves of steel needed

MARKET CLOSE:
iTraxx Main

70.2bp, +0.9bp

iTraxx X-Over

309.2bp, -0.4bp

🇩🇪 10 Yr Bund

0.35%, -2bp

iBoxx Corp IG

B+132.6bp, -2.7bp

iBoxx Corp HY

B+394.8bp, -7bp

🇺🇸 10 Yr US T-Bond

2.83%, -2bp

🇬🇧 FTSE 100

[wp_live_scraper id=”4″], [wp_live_scraper id=”5″]
🇩🇪 DAX

[wp_live_scraper id=”12″], [wp_live_scraper id=”13″]
🇺🇸 S&P 500

[wp_live_scraper id=”15″], [wp_live_scraper id=”16″]

June will make or break our summer…

We closed out May with the markets at a real inflection point. Hopefully, we haven’t passed it (to the downside) as we ponder difficult situations on several fronts all coming at the same time. There is drama and much intrigue in Italy. Inflation in the Eurozone for May was higher and some will hang on to that single data point as evidence that the ECB can safely conclude its QE programme by year-end.

We have a trade war on our hands as the US administration slapped import tariffs on steel after the temporary extension deadline expired on Thursday. Oh yes, it looks like the vote of confidence slated for Friday against the current Spanish government – following several convictions in the ruling party’s aides on the running of a corruption racket – which has a good chance of carrying a ‘no motion’ such that a new government will need to be formed. Or we are set for new Spanish elections. Oh dear.

The only bit of good news so far is that mid-June sees that Trump/Jong-Un summit in Singapore. Here, there is a good chance of this occurring given that the news flow of late around it has been positive although the net result of any meeting is still up in the air. For now, we choose to look on the bright side. The data point for May showing a rise in Eurozone inflation to 1.9% from 1.2% in April seems entirely oil-related.

The bigger picture remains difficult on Eurozone macro – and even more so now given that the trade war could get out of control. The expiry of the temporary reprieve granted to the EU, Canada and others from steel tariffs on exports to the US – where talks have failed – is a real poke in the eye for the markets. Immediately, some of the aggrieved parties – Mexico and the EU – have promised retaliatory action. The markets dropped but then recovered some of their poise and losses.

And then there’s Italy. The markets were looking to see out the closing session of the month exhibiting a much better tone which allowed BTPs to recover some more of their recent weakness (second session in a row). That came amid hopes that a new coalition government could be agreed thereby doing away with the prospect of further elections. The yield on the 10-year BTP fell to as low as 2.72% (around 23bp lower) and well-off that intraday recent peak of 3.40% seen earlier in the week. However, the yield backed up after news of that US import tariff and we closed out at a yield of 2.76% on the 10-year BTP (-19bp).

Continue reading

30th May 2018

Good riddance to May

MARKET CLOSE:
iTraxx Main

69.3bp, -1.9bp

iTraxx X-Over

309.6bp, -7.1bp

🇩🇪 10 Yr Bund

0.37%, +9bp

iBoxx Corp IG

B+135.2bp, +0.7bp

iBoxx Corp HY

B+402bp, -3.5bp

🇺🇸 10 Yr US T-Bond

2.85%, +8bp

🇬🇧 FTSE 100

[wp_live_scraper id=”4″], [wp_live_scraper id=”5″]
🇩🇪 DAX

[wp_live_scraper id=”12″], [wp_live_scraper id=”13″]
🇺🇸 S&P 500

[wp_live_scraper id=”15″], [wp_live_scraper id=”16″]

Midweek respite – much needed…

In case anyone missed it, a recap: Italy has no government, with a President trying to install a Prime Minister unlikely to succeed in cobbling an interim government together and all the while against an economy enduring a decade-plus long slump. Who can blame anyone for wanting to try something else? One can’t help getting political about it, but getting them to join the Euro-club was a mistake without the necessary flexibility to allow them and other ‘weaker’ nations to play under a looser rules regime – even if only in extremis. We came extremely close in 2012 to the Eurozone falling apart.
We’re on the brink again, and we’re going to see if the Northern European masters have the stomach for another fight, deep enough pockets and the will to do whatever it takes to keep the behemoth together in its current format. While those imponderables play out, the markets have taken their customary stance and decided it’s best to shoot first. And we can go back to Greece and how their own predicament was so shabbily handled for only a few clues as to how the current sense of crisis might evolve. Italy is 10x the size. It presents a whole of host of different issues. Size matters for starters.
Hence the intense sell-off in Italian debt and most other risk assets proportionate to how they might ultimately be impacted by the worst outcome. The worst case sees an Italian exit and all the kerfuffle around redenomination risk. But the potential of a parallel currency (so-called ‘mini-bots’) throws another variable bond investors will need to think about. Mind, an exit will leave us all staring into some kind of abyss which comes in the form of a financial crisis which would likely render the last one as a mere warm-up act.

Continue reading

29th May 2018

Markets vs Politics vs… Democracy

MARKET CLOSE:
iTraxx Main

72bp, +6.8bp

iTraxx X-Over

316.7bp, +18.5bp

🇩🇪 10 Yr Bund

0.26%, -8bp

iBoxx Corp IG

B+134.5bp, +9.5bp

iBoxx Corp HY

B+406bp, +27bp

🇺🇸 10 Yr US T-Bond

2.79%, -15bp

🇬🇧 FTSE 100

[wp_live_scraper id=”4″], [wp_live_scraper id=”5″]
🇩🇪 DAX

[wp_live_scraper id=”12″], [wp_live_scraper id=”13″]
🇺🇸 S&P 500

[wp_live_scraper id=”15″], [wp_live_scraper id=”16″]

It’s a process, don’t blame it on the Brexit…

The establishment won’t give up without a fight. And the market is possibly beginning the long unwinding process – towards an Italian exit from the European Union, and readying itself for the subsequent chaos that will follow. The politics in Italy are now clearly evolving towards creating the most serious confrontation with the EU/Eurozone.

Judging by the unyielding dogmatic, stubborn response and stance by the EU towards the UK on Brexit, the ‘process’ looks like we are heading for some major existential ructions of the behemoth that is the Union.

The Italian Five Star and League parties look as if they’re in no mood to back down and it is unlikely that they will. In fact, their resolve will be hardened as their policies have proved to be the most popular, and deemed necessary in order to pull Italy out of its second decade of economic decline. So another election is nigh and threatens an even bigger majority for populists where a weaker Italian President will have to cede to the populists eventual choice of ministers.

That leaves markets now beginning to think in terms of an exit as being a reality, or at best for the EU to offer some sort of climbdown (highly unlikely) which gives the Italians greater levels of autonomy in steering away from the ‘rules’. We don’t see the latter occurring where fiscal loosening, a failure to clean up the banking system (unaffordable anyway) and repatriation of illegal immigrants are red lines in the most powerful of quarters amongst the European elite. We already witnessed unnecessary disparaging comments from German politicians in the session. A summer of discontent for the markets looms large.

The good news emerging from the potential for US/North Korean talks becoming a reality has been swatted aide. Still, it might boost the US markets and any feel-good factor emerging from it might help stem the weakness in European markets.

Continue reading

28th May 2018

Batten down the hatches – again!

MARKET CLOSE:
iTraxx Main

65.2bp, +2.6bp

iTraxx X-Over

298.6bp, +12.2bp

🇩🇪 10 Yr Bund

0.35%, -6bp

iBoxx Corp IG

B+124bp, +4bp

iBoxx Corp HY

B+371bp, +13bp

🇺🇸 10 Yr US T-Bond

2.93%, unchanged

🇬🇧 FTSE 100

[wp_live_scraper id=”4″], [wp_live_scraper id=”5″]
🇩🇪 DAX

[wp_live_scraper id=”12″], [wp_live_scraper id=”13″]
🇺🇸 S&P 500

[wp_live_scraper id=”15″], [wp_live_scraper id=”16″]

Politics sink markets…

It’s starting to look like a May to forget. Rate market investors have been fortunate enough to come out on top into the re-emergence of macro and geopolitical event risk, after what was a fairly brighter opening week. The supposed economic plan of a new governing coalition being cobbled together in Italy had been a real poke in the eye for risk markets, and Moody’s had already reacted by putting the BAA2 rating on review for downgrade.

However, news that the Italian PM-designate had given up his mandate to form a populist government after the country’s President rejected his nomination for a euro-sceptic economy minister will have stirred some more. The markets didn’t like it one bit. And news of a stop-gap candidate and technocratic cabinet doesn’t solve the problems.

Italian politics in a nutshell: A mess.

Almost 70 governments since the second world war. The President has a disproportionate amount of power, in our view, needing to agree to the coalition’s choice of ministers. Right now, he has decided to reject the coalition’s choice of a euro-sceptic economy minister and has installed his own choice of PM who will lead a technocratic government – until new elections can be arranged (September/October), as parliamentary support and confidence will unlikely be forthcoming.

That means it’s back to the drawing board. Another election either gives a more (likely) decisive victory to the populists, meaning that the President will be close to welding an unconstitutionally disproportionate amount of power and need to yield – should he subsequently maintain his current stance. Or, more disarray and no decisive outcome (much like the current one).

And as if we needed anything else to worry about, we have the potential for an election in Spain as a vote of no confidence in the current government is being called for by opposition parties following a corruption case involving the ruling Popular Party. That vote is slated for Friday.

Either way, Italian debt markets are now going to remain under pressure. We might have got a small bounce at the open on Monday, but it didn’t take long before markets realised that it’s still all an unholy mess. The 10-year BTP yield, using as the standard benchmark, dropped to 2.36% (-9bp) before rising sharp and hard intraday to 2.70% (+25bp) and the equity market in Italy closed 2.1% lower, dragging other European bourses lower too following that brighter open by around 0.6%.

For once, the bad news isn’t quite raining down on us. We could have been adding to those geopolitical woes when looking at the US/North Korean spat. We were up until last Friday! But now we have good news coming as a result of the reversal in Trump’s decision to bail on the proposed meeting with the North Koreans. Unfortunately, the situation is extremely fluid, and we are just a ‘bad hair day’ (read Trump Tweet) away from the whole thing being called off – again. For now, though, it looks surprisingly and refreshingly upbeat on this front.

With Italy and Spain being the chief protagonists in the Eurozone, it takes us back to the crisis days in 2010-2012. Unfortunately, both of these situations look like being slow-burning fuses. Spain, though, does not hold the same existential threats to the Eurozone as might Italy, we would think – the problem there being of a more internal/domestic flavour.

But it is all coming against the backdrop of slowing growth across the Eurozone. Which means from a market perspective, it’s back to being defensive. Look for the lower growth dynamic to persist, investment isn’t going to pick-up, business and consumer confidence will stay under pressure, and the ECB will be compelled not to change anything for the moment.

Continue reading

24th May 2018

Harum-Scarum

MARKET CLOSE:
iTraxx Main

62.6bp, +1bp

iTraxx X-Over

286.4bp, +2.2bp

🇩🇪 10 Yr Bund

0.47%, -3bp

iBoxx Corp IG

B+120.2bp, +1bp

iBoxx Corp HY

B+358.3bp, +2bp

🇺🇸 10 Yr US T-Bond

2.97%, -3bp

🇬🇧 FTSE 100

[wp_live_scraper id=”4″], [wp_live_scraper id=”5″]
🇩🇪 DAX

[wp_live_scraper id=”12″], [wp_live_scraper id=”13″]
🇺🇸 S&P 500

[wp_live_scraper id=”15″], [wp_live_scraper id=”16″]

Hold on tight…

What a week! Good riddance we would hope, but unfortunately, it looks like we’re just at the start of a more difficult period for the markets. The slowdown in the Eurozone’s economy is real and doesn’t show signs of turning around just yet. Equities have just got a little more choppy. The US situation around President Trump is getting noisier by the day – be it China, North Korea or the Mueller investigation. We’re reaching critical moments in all of them, and the time for action from the most unpredictable of any US administration in recent memory beckons (it did on Korea during the session). The markets are understandably nervous.

Continue reading

23rd May 2018

Bad hair day

MARKET CLOSE:
iTraxx Main

61.6bp, +2.1bp

iTraxx X-Over

286.4bp, +7.1bp

🇩🇪 10 Yr Bund

0.51%, -5bp

iBoxx Corp IG

B+119.2bp, +5bp

iBoxx Corp HY

B+356bp, +14bp

🇺🇸 10 Yr US T-Bond

3.02%, -4bp

🇬🇧 FTSE 100

[wp_live_scraper id=”4″], [wp_live_scraper id=”5″]
🇩🇪 DAX

[wp_live_scraper id=”12″], [wp_live_scraper id=”13″]
🇺🇸 S&P 500

[wp_live_scraper id=”15″], [wp_live_scraper id=”16″]

Credit throws in the towel…

The corporate bond market has just about everything going for it from both a fundamental credit perspective (low defaults, Goldilocks economy, low rates, spreads not at record tights, low levels of transformational M&A and so on) and a technical one. The latter has investors sitting on plenty of cash amid the most unexpected low levels of new deals.

There’s a bit of M&A in the air but nothing transformational or systemic that we need to be worried about it. Re-leveraging is not a problem, while the ability for the corporate sector to service its ongoing obligations remains intact at the best levels ever – even as average credit quality across the corporate IG sector (for example) has dropped from AA (1980s/1990s) to triple-B.

Continue reading

22nd May 2018

Pausing for breath

MARKET CLOSE:
iTraxx Main

59.5bp, -0.3bp

iTraxx X-Over

279.3bp, -1.8bp

🇩🇪 10 Yr Bund

0.56%, +4bp

iBoxx Corp IG

B+114.3bp,+1bp

iBoxx Corp HY

B+342.3bp, -1.4bp

🇺🇸 10 Yr US T-Bond

3.07%, unchanged

🇬🇧 FTSE 100

[wp_live_scraper id=”4″], [wp_live_scraper id=”5″]
🇩🇪 DAX

[wp_live_scraper id=”12″], [wp_live_scraper id=”13″]
🇺🇸 S&P 500

[wp_live_scraper id=”15″], [wp_live_scraper id=”16″]

Respite session…

Finally, some good news! First off, the Chinese announced a reduction in auto import tariffs to 15% from 25%, with some speculation that they will need/have to cut them further. We await news on other sectors/products having import tariffs reduced. And then we had some bottom fishing around Italian debt markets which was inevitable given the massive sell-off that had seen 10-year BTP yields jump by over 60bp in just this month. Buying in now – as tempting as it might be – might be a little premature.

Even the UK’s public sector net borrowing was the lowest in 10 years.Embracing the news we would have hoped for a big boost to risk markets. That slight bit of improved news flow comes after a week or so of more difficult headlines/events after all. The primary market credit reopened as well, after a couple of sessions of low/no activity but there was only a more balanced feel to the mood in the markets.
Continue reading

21st May 2018

Lessons learned in credit

MARKET CLOSE:
iTraxx Main

59.8bp, +1.7bp

iTraxx X-Over

277bp, +4bp

🇩🇪 10 Yr Bund

0.53%, -5bp

iBoxx Corp IG

B+113.3bp, +2.5bp

iBoxx Corp HY

B+343.8bp, +8bp

🇺🇸 10 Yr US T-Bond

3.07%, unchanged

🇬🇧 FTSE 100

[wp_live_scraper id=”4″], [wp_live_scraper id=”5″]
🇩🇪 DAX

[wp_live_scraper id=”12″], [wp_live_scraper id=”13″]
🇺🇸 S&P 500

[wp_live_scraper id=”15″], [wp_live_scraper id=”16″]

Italy presents no catastrophe for credit…

We’ve lost count, but the 68th (?) government since the second world war – Does it really matter?  We have been here, just in a different guise. Most would think that there are far more important things going on in the world – North Korea, Turkey, Argentina, Russia to name a few. Small wonder corporate bond investors have refused to panic. Of course spreads in cash and CDS are wider but they are outperforming the weakening BTP market/sovereign CDS levels. And much of the corporate spread has come off the back of a defensive Street stance. There are sellers of corporate risk – but relatively few – as investors learn the lessons of the past, having long memories when convenient to do so. 

Continue reading

20th May 2018

Italy to the fore

MARKET CLOSE:
iTraxx Main

58.1bp, +1.6bp

iTraxx X-Over

277bp, +4.3bp

🇩🇪 10 Yr Bund

0.57%, -7bp

iBoxx Corp IG

B+110.75bp, +2bp

iBoxx Corp HY

B+335bp, +9bp

🇺🇸 10 Yr US T-Bond

3.06%, -5bp

🇬🇧 FTSE 100

[wp_live_scraper id=”4″], [wp_live_scraper id=”5″]
🇩🇪 DAX

[wp_live_scraper id=”12″], [wp_live_scraper id=”13″]
🇺🇸 S&P 500

[wp_live_scraper id=”15″], [wp_live_scraper id=”16″]

They just got it wrong…

Investors often have a gripe about syndicate desks tightening pricing too much and then dishing our poor allocations. The reality is, the method (game) of pricing and then building a materially oversubscribed book gives comfort to investors through knowing there is safety in the numbers. All the more reason to look at last week’s pulling of the Bertelsmann deal following the syndicate desk going out with ‘final terms’. We don’t buy for one moment the reason for not proceeding being about waiting for more ‘stable market conditions’.

Continue reading

17th May 2018

Worry wall

MARKET CLOSE:
iTraxx Main

56.5bp, +0.1bp

iTraxx X-Over

272.7bp, -2.3bp

🇩🇪 10 Yr Bund

0.64%, +2bp

iBoxx Corp IG

B+108.5bp, +0.5bp

iBoxx Corp HY

B+326.7bp, -1bp

🇺🇸 10 Yr US T-Bond

3.11%, +1bp

🇬🇧 FTSE 100

[wp_live_scraper id=”4″], [wp_live_scraper id=”5″]
🇩🇪 DAX

[wp_live_scraper id=”12″], [wp_live_scraper id=”13″]
🇺🇸 S&P 500

[wp_live_scraper id=”15″], [wp_live_scraper id=”16″]

Wall of worry rises…

Market rates have shot higher – especially in the US – on the back of expectations of improving macro and tightening job markets feeling a necessary rise in inflation, and allowing the Fed to try and bring policy as close to normal as it can. We’re being dragged higher in the Eurozone even as growth splutters and inflation remains anchored at very low levels.

The differential in rates between the US and Eurozone is increasing. Credit spreads are not tightening even as the ECB lifts what seems to be any semblance of secondary market liquidity (and back up to circa €1bn a week as judged by the last several weeks) and against a primary market which, until this week, flattered to deceive.

As for primary, we’ve had the poorest opening five months for many a year. We’ve trotted out reasons why that might be the case in many previous notes from bloated liquid balance sheets, to reinvestment risk to geopolitical and macro event risk. Either way, the weakening IG non-financial supply dynamic has been a difficult one to assess. Even equities have staged a good recovery and we are not far from record highs (less than 3%) in most markets, even if we have recovered of late all too unconvincingly.

Continue reading