27th January 2016

Back to the drawing board

FTSE 100
5,911, +34
9,823, +87
S&P 500
1,904, +27
iTraxx Main
93bp, unch
iTraxx X-Over Index
371bp, -3bp
10 Yr Bund
iBoxx Corp IG
B+179bp, +0.5bp 
iBoxx Corp HY Index
B+610bp, +5bp
10 Yr US T-Bond

Here we go again… It was a dead-cat-bounce after all and we are right to remain circumspect. There was hope, but the two days of recovery at the end of last week failed to convince many that we were back on the up. Well, Chinese stocks again set the early tone for Tuesday’s session, down over 6% on no new discernible news flow. And what followed was all too familiar. Oil dropped back through $30 per barrel, stock markets were a sea of red, government bonds were bid up and yields declined, while the corporate bond market crawled back into its shell. Bund yields at the front end set new record lows of -0.46% and -0.25% for the 2-year and 5-year notes respectively. And then? A fight back, assuming we looked at, say, equities in isolation. But glancing further afield and we could see that any recovery was not based on a fundamental belief that we had hit a bottom and were on the way back. No, it was purely an “oil price”-led recovery. Because oil bounced hard and provided a fillip for equities to come off the earlier lows and initially move tentatively into the black, powering on later as those oil price gains improved. It is not convincing. Anyway, the numbers at the end of the week ought to make total returns for the corporate bond market in January look great in comparison to commodities and equities (though admittedly all three asset classes will be showing negative returns), while we will only be outdone by the classic safe-haven asset of government bonds. The lasting message though is going to be that of a month ravaged by falling stock markets on the back of fears over whether China can contain the pressures heaped on its economy as it undergoes a period of readjustment and, of course, the oil price hitting multi-year lows. Johnson & Johnson, 3M and Procter & Gamble came in with good earnings, but the season hasn’t been great overall, economic data has been on the weaker side with no sign of inflation and growth forecasts revised lower, and the corporate bond market has drawn an effective blank in terms of activity – be it flows, volumes or primary issuance.

But a volatile session ends brightly… Oil was at its lubricating best, with prices rebounding over 2% (they were 6%+ at one stage) and helping the session end in upbeat mode. Brent and WTI closed up at over $31 per barrel. That helped a recovery in European equities, and 1% gains were seen in most indices. Government bonds managed to hold on to earlier gains, with the 10-year Bund yielding 0.44% and, as stated earlier, the 2-year yield anchored at record lows. Italian, Spanish and Portuguese 10-year bond yields all declined by 5-7bp to 1.50%, 1.63% and 2.97%, respectively. On the data front, US consumer sentiment for January showed an unexpected resilience, with ma and pa there unmoved by financial market volatility. The World Bank was the latest of the official bodies downgrading oil forecasts for 2016 (to average $37 a barrel). It downgraded its EM growth forecasts to 4% from 4.6% and warned of the downside risks. Quelle surprise – and welcome to the club.

Credit largely sidelined… It’s been a while, but we saw the first vestiges of bottom fishing in corporate bonds for ‘beaten-up’ names. Some maybe convinced that now is the time to try and pick off a few distressed-like but well rated names. Overall though, the tone was one of caution, with the need to see stability in oil prices – be that at $20, or $30 per barrel, before investors get involved. With month-end approaching, cash positions are cautious (high) in anticipation of outflows or new deals into amore constructive market come February. Has it ever been as binary as that? The Markit iBoxx IG corporate bond index closed a touch wider at 179bp (+25bp YTD) while the HY index gave back some of Monday’s stellar gains to B+610bp (+5bp in the session, or 87bp wider YTD). The iTraxx indices were similarly unimpressed closing essentially unchanged at 92.5bp and 371bp for Main and X-Over, respectively.

The US stock market was closing at around the highs for the session, up by 1.4%.  Apple’s report after the close was mixed, suffice it to say the easy money making days for the group are at an end. If the newsflow is kind overnight, then we can expect a supportive session again 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.