2nd September 2018

Isolationist, but US out in front

iTraxx Main

68.4bp, +1.2bp

iTraxx X-Over

298.8bp, +5.1bp

🇩🇪 10 Yr Bund

0.33%, -2bp

iBoxx Corp IG

B+135.8bp, +1.3bp

iBoxx Corp HY


🇺🇸 10 Yr US T-Bond

2.86%, unchanged

🇬🇧 FTSE 100 [wp_live_scraper id=”17″], [wp_live_scraper id=”18″] 🇩🇪 DAX [wp_live_scraper id=”19″], [wp_live_scraper id=”20″] 🇺🇸 S&P 500 [wp_live_scraper id=”21″], [wp_live_scraper id=”22″]

Trump rallies the US equity markets…

We head into the new month having been met with a flurry of issues which ought to offer some food for thought, if not a whole lot of concern. We had data showing slowing industrial production in Japan in July, Trump threatening to pull out of the WTO (again) amid the potential for tariffs on $200bn of Chinese imports this week – while Chinese manufacturing for August rose but exports declined.

The Turkish lira was in volatile form as the central bank enacted measures to help ease its decline and bolster some support for the beleaguered currency and then we had news of weak German retail sales in July.

Equities declined, government bonds were better bid, credit spreads were better offered and primary was closed. Welcome September.

So markets tripped up in the final session of the month after that broadside from President Trump. He’s pulling out all the stops ahead of the November mid-term elections. The worst of it is being felt in Asian and European markets, while the US appears more immune to the potential for a global crisis of sorts. That is first being reflected in the currency markets but also quite clearly in the equity markets.

We endured another weak session on Friday, such that monthly performance sagged some more. The DAX closed 1% lower in the session bringing the monthly performance to a sapping -3.4% and the year to end August returns to -4.3%. Similarly, the FTSE was off 1.1% in the final session, bringing in a -4.1% performance for the month and -3.3% for the year to the end of August. The €Stoxx50 is off -3.8% and -3.4%, respectively.

The US’ more isolationist global policies are doing wonders for its stock market! The S&P has risen by 3% in August and is an excellent 8.5% higher for the year to end of August. The narrower Dow has fared less well, still up by 2.2% in August and 5% higher for the eight months.

European fixed income didn’t do too much in August from a total returns perspective. Performance was close-on zero across most of the different asset classes in a quite unremarkable month. Still, European fixed income has outperformed European equities both in August and for the year to date. IG credit is down 0.3% for the year to end August – as is the high yield market and the euro sovereign market.

The sterling market has underperformed though but has managed to claw back some losses, down 1% in the period to end August, but up 0.6% in August in total returns.

YTD Returns to end of August 2018

Primary flurry depends on macro

A superb August for primary, mainly coming in the final week of the month to leave the month as the best August for IG non-financial ever has left hopes that we can continue with it through September and ultimately into year end. After all, it’s been an absolute shocker of a year for primary in this market. IG non-financial issuance came in at €18bn with €10bn of that in a two-day flurry littered with dual and three-tranche offerings form the likes of Siemens, Total, Unilever, Elia Systems and Michelin.

First mover advantage or not, there was good oversubscription for all the offerings suggesting that the lower levels of issuance in the period January to July might stand a good chance of being corrected.

Much will depend on the news flow and risks of which we likely will receive plenty of – along with a fair dose of volatility. So we could expect the markets to be closed to new deals for periods meaning that when the window does open, we might see a decent flurry of deals to get our teeth into.

For the year so far, €143bn has been issued against €184bn for the same period last year (or -42%). The range for September could be anywhere from €20bn to €40bn, and the upper end of that range will depend on the prevailing news flow and associated event risk.

The high yield market has been quiet in August, given the good form it had been in during the first seven months of the year. We fell short of the €1bn level with three borrowers producing €990m of issuance. August is, of course, usually a very quiet month though for this market while for the year to the end of August the high yield sector has delivered a stunning €48bn of issuance. 👇wpDataTable with provided ID not found!

There is a decent pipeline waiting to spill out deals and we are quite likely going to see a record level of issuance in high yield debt – again, come year-end. Last year’s €75bn is clearly under threat. Again, much will depend on whether event risk remains manageable, but also that equities can get to the end of the year without much of a drop.

All of the senior issuance came in the final week or so of the month, with the €13.6bn of supply leaving it as the best August since 2014. We’re up at €101bn for the year so far. It would appear that €150bn remains a reasonable target for the full-year.

Softer tone to end the month

The moderate weakness in credit spreads at the end of last week reflected the softer tone we had in European equities. The IG iBoxx corporate bond index closed at B+135.8bp (+1.3bp) which took it to 10bp wider in August and some 40bp wider YTD. The HY index was also wider, by 22bp for the August and 120bp YTD. There were a couple of borrowers in the market with Euroclear Bank adding €1bn in a dual-tranche offering and Atrium European Real Estate taking €300m in a 7-year at 3.25%.

The iTraxx indices were also showing weakness, the Main synthetic index up 68.4bp (+1.2bp) and X-Over 5.1bp higher at 289.8bp. That leaves Main 7.5bp wider for the month and X-Over 16bp higher.

The US equity markets closed flattish on Friday and we saw a good bid for government bonds for most of the session, but that faded and the US managed to close unchanged in the 10-year Treasury (yield 2.86%) with the 2s/10s curve steeper at 23bp. There was no agreement between US/Canada on the Trump-imposed Friday NAFTA deadline. The 10-year Bund yield closed at 0.33% (-2bp). And Bitcoin is back up through $7,000.

S&P warned on Argentina’s credit rating, while Fitch changed its outlook on Italy’s triple-B rating to negative from stable. We have the Labour Day break in the US on Monday (the whole market will likely be quiet as a result), and we close out the week with the US non-farm payrolls for August.

Have a good day.

For the latest on corporate bonds from financial news sources, click here.

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.