- by Suki Mann
|10 Yr Bund
|iBoxx Corp IG
|iBoxx Corp HY
|10 Yr US T-Bond
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Don’t panic, Mr Mainwaring!
The European corporate debt markets were effectively closed on Thursday. No holiday. No crisis. And it was anything but the ‘Super Thursday’ as it was described as in some quarters. The reason was the UK election, the ECB meeting and to a lesser extent James Comey’s testimony to the Senate Intelligence Committee.
The latter will see a market reaction on Friday and next week – if at all – given the preamble was offering nothing new. According to the early exit polls, the UK election result looks like giving Theresa May/Conservatives an increased majority but not quite the knock-out blow we were expecting when she originally went to the polls. There will be a sigh of relief given the sterling battle put up by Labour, in particular. And so we were left with the ECB to wait for on a day when nothing otherwise happened.
No supply in euro debt markets, anywhere. But also little by way of turnover and flows to warrant any moves in spread markets. There are too many days like these at the moment as we remain in a period where there have just been too many situations where event risk looms large. It kicked off with Brexit, the US elections, the brouhaha around the French elections, every FOMC meeting in the last year (hike or no hike), most ECB meetings and now, it’s the UK General Election. Then we’re back to US politics/Comey and next week’s FOMC.
That’s a mouthful of potentially hairy situations, but the associated event risk with the ones passed has seen little negative market reaction. Actually, save a day or two where we’ve gone down in stocks, wider in spreads and rallied hard in government bonds – markets are risk-on across the board.
Equities are up 7-10% YTD, rate markets have returned -0.6% (and it could/ought to be worse) in the same period, while HY credit is closing in on 4% returns. The global economy is little disjointed but we have the first vestiges of a sustainable recovery emerging in Europe, the US might be flattering to deceive while EM is hanging on to the US’ coat tails.
So it is a case of ‘steady as she goes’ which means staying long risk; and we think the summer months might be kind to the markets. There’s little reason for them to not be.
ECB sees flicker of light
The deposit rate was left unchanged at -0.40%. They removed the reference to lowering rates if needed, instead suggesting that rates would remain at their current level for an extended period of time, and well past the horizon for net asset purchases. The first signs thus emerged that the ECB is starting the long road back to normalising rates amid signs that they believe that the Eurozone economy is on a surer footing.
With growth risks now ‘broadly balanced’ and no longer ’tilted to the downside’ the ECB can sound a little more hawkish. However, the central bank did lower their medium-term inflation forecasts to, for example, 1.3% in 2018 from a previous forecast of 1.6%. Growth forecasts for each of 2017, ’18 and ’19 were lifted by 10bp.
However, with the spectre of deflation behind us the ECB will still not be shifting rates anytime soon, given that inflation is still too low for comfort. It seems that there is enough slack in the system for them to keep a very accommodative policy stance to help boost and the bolster inflation in the region towards the 2% medium-term target range. We also think that the asset purchase programme will continue well into 2018, although whether it’s still €60bn per month remains to be seen.
All said, the news gave a bid to rate markets and the 10-year Bund yield declined to 0.25% (-1bp) before closing unchanged at 0.26%, while OATs dropped to 0.65% (-3bp). The periphery was outperforming leaving Spanish Bonos to yield 1.47% (-8bp) and Italian BTPs 2.16% (-11bp). For Italy, the likelihood of early elections was diminished after the failure of parties to reach an agreement. Gilt yields went the other way, likely on election nerves, with the 10-year up at 1.04% (+4bp).
No home run from Comey
Well, we have a Goldilocks-like described economy in the US, we now have one in the Eurozone too. It looks like she is everywhere. The Eurozone is blowing neither too hot or too cold. Signs of inflation are subdued. There is not going to be a rate hike for at least another 18 months by all accounts, too. It doesn’t get much better. The synthetic iTraxx indices reacted, and Main dropped to 60bp (-2.6bp) with X-Over at a new multi-year low of 245.2bp (-3.4bp).
Equities in the US were visiting new record intra-day highs although they didn’t manage to hold on to them – even if Comey’s Senate Intelligence Committee testimony didn’t necessarily prove conclusive in any way, in terms of damning President Trump (any more than he might already be). It might still come, but what’s clear is that this story is a slow burner rather than anything immediate – in the path to impeachment. US Treasuries edged lower a little, leaving the 10-year yield at 2.19% (+1bp).
In the cash market, we had a deal from Superior Industries in the high yield market, adding €250m to the month’s issuance. That apart, we endured a very limited session and one where spreads closed unchanged with the Markit iBoxx index at B+119.2bp.
As for high yield, we closed at B+317.4bp and the equalling record low level, while the HY index yield dropped to 2.89% (-1bp) – also a record low.
Have a good day and weekend. Back on Monday.
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