7th January 2016

Alarm bells are a ringing

FTSE 100
6,073, -64
10,214, -96
S&P 500
1,990, -26
iTraxx Main
82bp, +3bp
iTraxx X-Over Index
337bp, +8bp
10 Yr Bund
iBoxx Corp IG
B+157bp, +1bp 
iBoxx Corp HY Index
B+534.5bp, +3bp
10 Yr US T-Bond

“Wall of worry” builds… North Korea just added to a growing ‘snag’ list as the alleged successful detonating of a mini-hydrogen bomb saw to it that we remained on the back foot, adding to this inglorious start to 2016. Oil prices plummeted again, with Brent (-5.8% in the session) well tucked in below $35 per barrel and actually flirting with $33 into the close, hitting new 11-year lows, shrugging off continued Middle East tensions and leaving many bereft of an explanation as to why this should be the case. We would think that classic economic theory is the dominating factor (simple really): too much supply, not enough demand – and leaving any long positions expecting a Middle East tension-enhanced reversal to get hammered. In addition, with the People’s Bank once again weakening its currency (almost a daily occurrence now!), it looks like the global economy will be the “sacrificial lamb” for China’s desire to prop up its own economy. Producer price data from the eurozone saw another drop, while the PMIs were a mixed bag. The eurozone data into the end of 2015 might have been fairly strong, but the next (2016) batch will likely not be. It is a difficult global environment at the moment, but we don’t think we ought to view it all as a perfect storm with us trading ourselves into a major collapse. Anyway, the markets reacted in their customary fashion, with equities taking another material nosedive while the malaise that has blighted the opening session of this New Year trudged on. So as asset prices fell once again in the risk-off environment, the flight-to-quality trade continued. That is, government bonds remained well bid, yields fell further and curves bull-flattened as the longer end outperformed. Credit, well, did nothing, but spreads were marked a little wider as we can’t move in any other direction while all around us are losing their heads. The synthetic indices are the credit market’s barometer for sentiment, and they were wider (better bid) into the generally weaker tone.

How does it look after 3 days?… Not too clever! The DAX is down 529 points this year or 5%, the CAC 157 points/-4% and the S&P 53 points/-2.5%. WTI and Brent are at $33.98 and $34.31 per barrel, respectively. The 10-year Bund yield has dropped 13bp in the same period (to 0.50%), while the 2-year is yielding a record low -0.39%. Credit spreads have moved wider, with Main up at 82bp (+5bp this year) and X-Over at 337bp (+14bp this year). In cash, the moves have been limited and the market has, in a way, behaved itself. The Markit iBoxx IG corporate bond index is up at B+157bp (+2.5bp ytd), while the HY index is up at B+534.5bp (+6bp) in the same short period. IG corporate index yields have fallen owing to the drop in yields of the underlying. That is scant consolation, but it has left returns for corporate bonds in positive territory and it would seem that the underlying will be the main driver of whether corporate bonds manage positive returns in 2016.

A difficult session, with more angst likely to come… Non-farm payrolls are due on Friday and after the strong ADP report on Wednesday, we all know what is coming then. That could add more fuel to the rate fire, with global markets reeling some more if it looks even more likely that the Fed will hike again soon. Four hikes was the extreme hawkish case for 2016, and two rate increases the other end of it. We have plumped for two and would expect the Fed to pay attention to the global macro environment before firing off rate increases too aggressively. In the end, while stocks were well down in the red, oil dropped and other risk assets came under fire, credit spreads just edged wider. The Markit iBoxx index for IG corporates was up just a basis point, the HY index just 3bp.

Into the close, US stocks have came off their session lows having taken a leg lower earlier, the S&P and Dow eventually down by 1.3% and 1.5%, respectively. That means a cautious start to proceedings as we kick off for business today.

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.