2nd January 2019

Back to work

iTraxx Main

89.4bp, +1.3bp

iTraxx X-Over

362.0bp, +7.6bp

🇩🇪 10 Yr Bund

0.17%, -8bp

iBoxx Corp IG

B+173bp, +0.6bp

iBoxx Corp HY

B+535bp, +11bp

🇺🇸 10 Yr US T-Bond

2.67%, -2bp

🇬🇧 FTSE 100 [wp_live_scraper id=”17″], [wp_live_scraper id=”24″] 🇩🇪 DAX [wp_live_scraper id=”19″], [wp_live_scraper id=”25″] 🇺🇸 S&P 500 [wp_live_scraper id=”21″], [wp_live_scraper id=”26″]

More of the same…

No line in the sand signalling a fresh, brighter period for the markets. We kicked off the new year with all the ills with which we experienced so much volatility from in 2018 still with us. And it doesn’t look pretty for the opening period. China got the ball rolling, reporting that December’s manufacturing activity contracted for the first time in 19 months amid weakness in both external and domestic demand. Equities took a tumble in Asia and Europe followed – initially anyway, rates (safe havens) were massively better bid throughout and credit edged wider in the quietest of sessions. Sound familiar? The move in rate markets is suggestive of material pain to come (macro, geopolitical or whatever the driver) because a 10bp drop in the Bund yield, from an already low 0.24% is a panic adjustment.

2019: Economic signs aren’t good

These opening skirmishes – as a minimum – are going to be a real ‘all hands to the pump’ time for investors. We know already the political issues in the US taking in the Fed’s Powell, the partial government shut down and US-China trade tensions. But it’s the economy which might matter most. It drives everything. Official Chinese growth closer to 6% than 6.5% is going to painful, not least domestically and through EM.

Those Chinese factory numbers overnight – a harbinger of things to come – are going to be a real kick in the teeth for German manufacturing, and by extension, it will also have a material impact on the European markets. The numbers for December and January across the EU are potentially going to be ugly. The signs are though that weakness in activity will reverberate through the first half of this year, signalling the potential for recession in the Eurozone. We will need some greater attention from the ECB. Words won’t cut it.

Keep the powder dry

Euro currency weakness might have helped equities eventually bounce in the opening session of the year after a sharply lower open, but rate markets managed a real, panic-like bid. The 10-year German Bund yield dropped a desperate 10bp to just 0.15% and the lowest level since September 2016, before closing 0.17% (-8bp). The 5-year Bund yield fell by 7bp to -0.34%, to a level last seen in May 2018 albeit briefly.

Gilts were also in vogue, the 10-year now yielding just 1.21% while the equivalent US Treasury was paying 2.67% (-2bp). We have the Commons’ UK Brexit vote to come in under two weeks, while there will be a raft data to contend with giving us a clearer picture if ever we needed one, as to the state of the European economy as we closed 2018. Combined, we are in for a torrid few weeks.

We could bounce if Trump announced an agreement with the Democrats regarding some form of ‘wall funding’. We feel any relief rally would be brief and advise against buying any dip. Borrowers should watch carefully because they could get an opportunistic effort away into any (albeit brief) improvement in sentiment.

The rest just seems like we have lit the blue touch paper, waiting for another burst of possible material weakness and heightened volatility. It’s going to need a defensive stance, for investors to refrain from adding ‘cheap’ paper for the moment and to let some of the situations play out. There will be time and opportunity aplenty this year.

European banks outlook 2019

In his note, our banking sector analyst highlights a brief synopsis for the industry for 2019, and thinks that there is scope for returns in excess of 10%+ returns – but on careful single name selection.

Names that screen well based on his criteria include Lloyds, HSBC, UBS, ING, Nordea and Credit Agricole amongst others. Some which will do fine, but will need a continuous focus from market participants take in Barclays, SANTAN, BNP and ISPSIM, for example. Those which need more scrutiny obviously include DB and UCGIM but also the likes of SG, DANKSE and BBVA.

AT1 is likely to further underperform but will find clearing levels around 8% yield to perp. Defensive names holding up better than higher beta names. LT2 is potentially the best part of capital structure to own (depending on name) due to limited issuance. As for non-preferred/Holdco debt we are likely to see underperformance from current levels. Holdco Senior though is structurally better to own as it benefits from diversified cash flows from operating subsidiaries.

For his full report, click here.

Volatile opening session

European equities played out in very volatile fashion. The Dax was initially spooked by the poor Chinese manufacturing data (off 1.6%) but staged a good recovery to close a little in the black. French stocks stayed lower throughout, by 0.9% while the FTSE closed unchanged and the US market was bouncing around in the black/red. Oil was down and then up (Brent $55.7 per barrel, +2), EM currencies took a hit and Bitcoin was up at $4k to get us started.

In credit, Commerzbank issued a couple of covered bonds, but primary was otherwise closed. We can’t help thinking that a decent session on Thursday (in equities) might just see an IG non-financial borrower or two chance their arm and open the account for this sector. Failing that, we’re moving onto next week as Friday is unlikely going to see a deal.

The indices reflected a cautious mood and iTraxx Main moved 1.3bp higher to 89.4bp while X-Over was 7.6bp higher at 362bp.

There was nothing really doing in cash. The cash IG iBoxx index was a touch wider and left at B+173bp(+0.6bp). Higher beta also edged out, the AT1 index closing at B+720bp (+11bp). While the markets remain so volatile, this is going to be the trend. In high yield, weakness also with the index 11bp wider at B+535bp.

Have a good day.

For information about our bespoke portfolio risk service, 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.