Archive

Monthly Archives: June 2018

14th June 2018

The end of an era

MARKET CLOSE:
iTraxx Main

65.5bp, -3.5bp

iTraxx X-Over

291.6bp, -7bp

🇩🇪 10 Yr Bund

0.43%, -5bp

iBoxx Corp IG

B+125.2bp, -1.6bp

iBoxx Corp HY

B+376.6bp, +1bp

🇺🇸 10 Yr US T-Bond

2.94%, -4bp

🇬🇧 FTSE 100

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🇩🇪 DAX

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🇺🇸 S&P 500

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Goldilocks ECB policy…

Well, that was a surprise. They’ve gone and done it. QE is all over at the end of this year and the €30bn monthly asset purchases fall to €15bn per month through the final quarter. However, rates are expected to remain unchanged until after next summer, reflecting a fairly dovish posture. And it was rate policy what won the day. The euro took a tumble. They should continue to reinvest the maturing proceeds (which means around €4bn per month in corporate purchases, if all proceeds reinvested) once QE ends – although Draghi was non-committal.

The door is left open for extending all areas of accommodative policy when looking more closely at the nuances in the language, but the signal regards their ultimate intentions was clear enough. The market was strangely unmoved by it, save for volatility around the euro. The Bund was better bid, equities edged a little higher and a stronger euro versus the dollar turned to weakness on the news. Credit perked up as the pipeline grew some more, the cost to insure credit fell and cash spreads moved tighter.

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13th June 2018

Two more to go

MARKET CLOSE:
iTraxx Main

69.0bp, -3.1bp

iTraxx X-Over

298.6bp, -7.7bp

🇩🇪 10 Yr Bund

0.47%, -2bp

iBoxx Corp IG

B+126.8bp, -0.6bp

iBoxx Corp HY

B+375.5bp, -0.6bp

🇺🇸 10 Yr US T-Bond

3.00%, +5bp

🇬🇧 FTSE 100

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🇩🇪 DAX

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🇺🇸 S&P 500

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Time to move on…

It’s back to business. We’ve had our fill of geo(politics). The FOMC and ECB meetings loomed large in Wednesday’s session, the latter having much to contemplate given the recent weakness in the economic data in the Eurozone – which is looking like we’re not heading for a short, soft patch but could be looking at something more sinister. April’s Eurozone industrial production dropped by 0.9% versus March, against expectations of a 0.5% fall. The FOMC raised rates by 25bp as expected, but the ECB’s press conference on Thursday is going to be all the more interesting.

Our view is that the ECB will leave everything unchanged even if they might be champing at the bit to reduce some of the accommodation. The opening skirmishes of the trade war could lead to something altogether more profound and the central bank will need to make sure its policy reflects a significant worsening in it.

It is quite clear that Trump is flexing the US’ economic muscles and looking for a fight. He will be emboldened by the perceived success of his love-in with Kim Jong-Un. So the deposit rate should stay at -0.4% and QE will remain at €30bn per month for now. We might get more colour on the next step of their tapering move in the 26 July meeting, but a summer of macro-discontent would leave us looking for news come the 13 September gathering.

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12th June 2018

Change should be coming

MARKET CLOSE:
iTraxx Main

72.1bp, +0.9bp

iTraxx X-Over

306.3bp, +5.2bp

🇩🇪 10 Yr Bund

0.49%, unchanged

iBoxx Corp IG

B+127.4bp, -1bp

iBoxx Corp HY

B+376.1bp, -3.5bp

🇺🇸 10 Yr US T-Bond

2.96%, unchanged

🇬🇧 FTSE 100

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🇩🇪 DAX

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🇺🇸 S&P 500

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Time to step out of the comfort zone…

Trump hit it out of the park, or he should have, but we were too light on detail. There’s a long way to go, the North Korean regimes past have got form in reneging on deals. But this could be the start of something new and we should give it all the benefit of any doubt. As such, there was a strangely subdued reaction in the market to the news. Probably because we didn’t get too much detail but we had much other news flow to think about.

We also had the debate and voting on the EU Withdrawal Bill in the UK, with the government having to contend with a ministerial resignation in the process. The liberalists in the establishment are putting up a stern fight on both sides of the Atlantic.

It was worth reflecting also on the decline in vehicle sales for BMW with 10% or more drops in Germany and China in May. And the important ZEW economic sentiment survey in Germany for May fell deeper into the red, to -16.1. It was last at this level back in 2012 at the height of the Eurozone crisis. There’s no crisis (yet) of the same magnitude we had back then. But it seems we’re getting a sustained slowdown in activity with the threat of Italy becoming the latest and most difficult to handle bad boy of EU harmony amid worries that the trade war will spiral out of control.

Confidence appears shot. We’re treading water. Waiting. One of the biggest geopolitical concerns often cited as a risk to global macro/confidence/investment is, for now at least, off the ‘danger monitor’ and the headlines will be more positive around it through the summer months. The aforementioned factors will come to the front of the queue and have a stranglehold on how markets develop and play out through the summer months.

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11th June 2018

History in the making

MARKET CLOSE:
iTraxx Main

71.2bp, -3.4bp

iTraxx X-Over

301.6bp, -12.6bp

🇩🇪 10 Yr Bund

0.50%, +5bp

iBoxx Corp IG

B+128.4bp, -0.8bp

iBoxx Corp HY

B+379.5bp, -5bp

🇺🇸 10 Yr US T-Bond

2.96%, +2bp

🇬🇧 FTSE 100

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🇩🇪 DAX

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🇺🇸 S&P 500

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Heavyweight mavericks meet…

If we are ticking boxes for this week, then we’re off to a flyer ✅. The Italian new finance minister went a long way in assuaging any market fears of an Italian ruckus with the EU. And President Trump’s pre-summit tweets are as upbeat as they can be with the North Koreans replying in kind.

There’s a love-in all round. Trudeau isn’t quite the flavour of the month, though, but that spat is not going to necessarily derail the markets. So the opening skirmishes of the week are good, but testing situations are ahead of us with the Fed, ECB, BOJ and more on the Brexit front all to come.

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10th June 2018

Handle with care

MARKET CLOSE:
iTraxx Main

74.6bp, +1.7bp

iTraxx X-Over

313.7bp, +7.6bp

🇩🇪 10 Yr Bund

0.45%, -4bp

iBoxx Corp IG

B+129.2bp, +2.2bp

iBoxx Corp HY

B+384.8bp, +10.7bp

🇺🇸 10 Yr US T-Bond

2.95%, +1bp

🇬🇧 FTSE 100

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🇩🇪 DAX

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🇺🇸 S&P 500

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No more plundering the piggy bank…

After Friday’s performance in the rate markets, the ECB has a job on its hands articulating a measured macro view when it meets later this week. After factory orders disappointed previously, German industrial production dropped by more than expected in April (-1%) versus March suggesting that the Eurozone’s most important engine for growth is spluttering.

It certainly isn’t going to re-energise the region anytime soon. The G7 trade tariff spat will see to that. Trump has ruffled feathers, some would say in a refreshingly politically incorrect way (he will call you out as he sees fit) and is proving to be someone few will want to do business with. Unfortunately, they have to. Where Trump’s concerned, it’s a case of proceed with caution.

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7th June 2018

Week just passes us by

MARKET CLOSE:
iTraxx Main

72.9bp, +3.2bp

iTraxx X-Over

306.1bp, +6bp

🇩🇪 10 Yr Bund

0.49%, +3bp

iBoxx Corp IG

B+127bp, unchanged

iBoxx Corp HY

B+374bp, -1.5bp

🇺🇸 10 Yr US T-Bond

2.91%, -6bp

🇬🇧 FTSE 100

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🇩🇪 DAX

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🇺🇸 S&P 500

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Rate markets setting the agenda now…

The ‘relentless’ rise in Bund yields shows little sign of abating. Well, it feels relentless given that the 10-year yield has jumped by over 20bp in the last week! Even the poor German factory orders for April, where a drop of 2.5% was recorded versus March – and the fourth decline in orders in a row, failed to halt the sell-off in rate markets. Clearly, the market has interpreted comments from ECB board members on Wednesday that the QE bond purchase programme will come to an end by the end of the year. And the market is fretting.

It’s coming just when the growth dynamic across the Eurozone has hit a sustained poorer period with much uncertainty still into a potential summer of discontent on the trade tariff front. Inflation is barely showing signs of a relentless rise and is still well-below official targets. The Italians are an unknown, too, at this moment as the EU/Eurozone is grappling with an existential crisis with recalcitrant countries on several fronts.

It’s clear that the ECB needs to ween the financial system off the support it has much needed and enjoyed over the past decade, but the timing looks a little precarious for expecting an ending to the QE programme while the aforementioned event risk situations could tip the balance towards another crushing downturn and/or financial system panic. Now is the time for extreme vigilance and caution, because the worst could happen.

So, QE or not, we still do not expect the 10-year benchmark Bund yield to hit 1% this year and suspect it finds a level somewhere between 0.4 – 0.7% depending on the prevailing news flow. It was less than a fortnight ago that it was as low as 0.19% intraday as panic set in following the breakdown in talks of a new Italian government. The 5-year Bund yield was as low as -0.40% but is now at -0.12% having been in positive territory during the first quarter on expectations that the Eurozone economy was in rude health. It isn’t.

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6th June 2018

Hawkish sounds from the ECB

MARKET CLOSE:
iTraxx Main

69.7bp, +2.6bp

iTraxx X-Over

300.9bp, +7.5bp

🇩🇪 10 Yr Bund

0.46%, +9bp

iBoxx Corp IG

B+127bp, unchanged

iBoxx Corp HY

B+375.5bp, -1.3bp

🇺🇸 10 Yr US T-Bond

2.97%, +5bp

🇬🇧 FTSE 100

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🇩🇪 DAX

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🇺🇸 S&P 500

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…Raise alarm

We’ve been hoping for a good June. But we keep hitting hurdles which stop us rallying in any sustainable or material way. There’s just a constant drip feed of news which makes us wary and then unwilling to chase the markets higher.

On Wednesday, safe-havens sold off some more after word from influential ECB board members that the Eurozone’s economy was looking in decent shape bolstered the view that QE could be over come year-end. They meet next week. Equity markets wanted to rise, but the rally was checked – not helped also as the EU prepared its US import-tariff response, expecting them to be implemented by the beginning of July.

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5th June 2018

Italy makes or breaks June

MARKET CLOSE:
iTraxx Main

67.1bp, +2.1bp

iTraxx X-Over

293.4bp, +5.6bp

🇩🇪 10 Yr Bund

0.37%, -5bp

iBoxx Corp IG

B+127bp, +0.6bp

iBoxx Corp HY

B+376.8bp, +1.4bp

🇺🇸 10 Yr US T-Bond

2.91%, -2bp

🇬🇧 FTSE 100

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🇩🇪 DAX

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🇺🇸 S&P 500

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And sunnier climes are not impossible…

If the markets don’t fall out of bed this month, then it promises to be a busy period for credit. New issue mandates are being dished out aplenty, we have a good pipeline of borrowers looking to get some pre-summer funding in, and a good month in primary which doesn’t overheat will beget a sustained tightening in spreads.

New deals will likely perform given that they are coming cheaper than they otherwise might following the recent market pullback. Confidence will come off a decent stream of deals in primary as those deals perform on the break (at one stage in May, over 70% of new deals were wider than reoffer). That, more often than not, feeds into a more constructive tone in secondary. June could be good.

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4th June 2018

Self-flagellation, (pardon) Mr President

MARKET CLOSE:
iTraxx Main

65.0bp, -2.4bp

iTraxx X-Over

287.8bp, -7.3bp

🇩🇪 10 Yr Bund

0.41%, +3bp

iBoxx Corp IG

B+126.4bp, -3bp

iBoxx Corp HY

B+375bp, -10bp

🇺🇸 10 Yr US T-Bond

2.92%, +2bp

🇬🇧 FTSE 100

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🇩🇪 DAX

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🇺🇸 S&P 500

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It’s back to work…

A normal day for once. We don’t seem to get to many of them at the moment. There was nothing on the event-risk front to get nervous about. In credit, there were deals to get out our teeth into, although not too testy but a reopening of the primary market nevertheless. Normal? Yes, because for a Monday into the summer months, it’s just about how the session usually pans out. Equities pushed a little higher, credit spreads edged a little tighter again and safe-havens lost a little bit of their lustre as the mood turned a touch more relaxed.

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3rd June 2018

If you can’t beat ’em, join ’em

MARKET CLOSE:
iTraxx Main

67.4bp, -2.8bp

iTraxx X-Over

295.1bp, -14.1bp

🇩🇪 10 Yr Bund

0.39%, +5bp

iBoxx Corp IG

B+129bp, -3.5bp

iBoxx Corp HY

B+384.6bp, -10bp

🇺🇸 10 Yr US T-Bond

2.90%, +8bp

🇬🇧 FTSE 100

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🇩🇪 DAX

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🇺🇸 S&P 500

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False dawn or not, it feels better…

Liquidity. There is too much of it in the world and the cash needs a home. Unless the ‘event risk’ actually materialises, the lesson of the past week is that the pullbacks are buying opportunities. There have been so many occasions over the past couple of years where trouble has loomed, the markets recoiled, but then recovered sharply. And they’ve done – are doing – it again. Only a few days ago the markets were on the way to pricing in financial Armageddon. Not any more!

Italy has a new government, but as yet, we are none-the-wiser as to what/how its policy programme might evolve. Spain has a new PM after the incumbent Rajoy was ousted following a vote of no confidence and replaced by the socialist PSOE party leader Pedro Sanchez, but few are expecting much to be different for the moment there. As for the US import tariff spat, the afflicted parties have thrown their toys out of the pram, but in the words of Wilbur Ross, the US Secretary of Commerce “… the markets will adjust (to any trade sanctions)”.

So, there we have it. It looks like the markets have adjusted already to all the aforementioned event risks, with an attention span measured in days, rather than weeks or months. The expectation must be that the Italians will huff and puff, the recovery in the Italian debt and equity markets will be seen as a sign that the new administration isn’t going to follow through with the worst of the previously touted policies and that Brussels will have won the day again. The Eurozone goes on, in its current format.

As for a global trade war, we might have to see how events evolve, but this is going to be one of those long-term, slow unwinding issues, with some impact on global growth but without knowing exactly how much of an impact any tit-for-tat retaliatory tariffs might have had. Some sort of fraction of a percentage point will be neither here or there. The EU has already fired back, taking some sort of moral high ground but refusing to enter into any further negotiations as bourbon whiskey and Harley-Davidson amongst other items look like becoming a little more expensive in Europe!

Really upsetting the apple cart probably requires some sort of global conflagration. That’s as far away as we might reasonably expect. So, once again, we’ve gone from thinking of June requiring a cautious investing mentality to one which might see a more positive outlook for risk assets. We just keep swatting away all the emerging/potential event risk situations that might lead to a sustainable fall in risk assets.

However, before we get carried away, we would proceed with caution. After all, we are just a headline away – likely emerging from Italy – from another blowout.

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