16th October 2018

Black clouds dissipate

iTraxx Main

72.5bp, -1.7bp

iTraxx X-Over

289.4bp, -4.5bp

🇩🇪 10 Yr Bund

0.49%, -2bp

iBoxx Corp IG

B+134.6bp, +0.5bp

iBoxx Corp HY

B+404.7bp, +0.6bp

🇺🇸 10 Yr US T-Bond

3.16%, 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″]

Difficult to look on the bright side though…

Jamal Kashoggi

It is difficult to get excited about the markets at the moment – even after the big rally on Tuesday. There is just too much going on. Wherever we look, there is a problem lurking – or a fresh one developing. The latest is around the Saudi government’s involvement in the whereabouts of the missing (presumed dead) journalist Jamal Kashoggi and the reaction (or sanctions) which might be coming their way. The Italian budget has duly been presented to the European Commission and a deficit of 2.4% has been projected for 2019 (versus 1.8% in 2018). It’s not going to wash well; let’s see what the EC officially comes back with.

And then we had that report by S&P regarding the up to $6trn of loans raised by local government bodies (off balance sheet) with some defaults now occurring which ultimately might have serious ramifications for the Chinese (and global financial system).

So there are few reasons to be cheerful. We haven’t touched on the latest shuffling in the UK government and EU on the Brexit situation as ‘squeaky-bum time’ approaches. Nor the terrible ZEW economic sentiment survey which reported a reading of -24.7 (lowest since 2012) for October, as the dark clouds gather on the country’s export sector as expectations of the China/US trade war start to bite harder.

The markets are treading water while some of these situations play out. The loose money has been shaken and we’re probably not going to see any further near-term big falls (of 2% or more) in equities unless an actual event provokes it. So stocks are possibly and more generally likely going to see that +/-1% daily range while we see some stability in safe-havens as government bonds trade in narrow ranges for precisely the same reasons.

Nevertheless, to show that it isn’t all that bad, Turkey was back in the market with a dollar benchmark offering – the first since April. Clearly, the sovereign was boosted on hopes of recovering relations with the US and increasing confidence from investors following the release of the US pastor who had been held captive, as well as some subsequent warmer words from Trump.

Credit, though, looks like it is less caught up in it all. We are a little more upbeat for the asset class and believe that the primary window is open for those borrowers looking potentially for funding. Notwithstanding the earnings season blackout period, investors will be receptive to deals, and while Tuesday only threw up a Commerzbank senior offering, the rest of this week ought to see corporate deals more forthcoming.

Credit market volatility limited

Credit spreads have gone wider, but they have not gapped. Equities have taken the brunt of the markets’ ire following the rate-induced sell-off last week, and continues to be the front line this week as they lack any direction. There has been some safe-haven buying and yields which had threatened to go the moon (in the US anyway), seem to have fallen back a little as a result.

But credit spreads have only edged wider, while the recovery in the underlying (government bonds) has propped up returns. The Markit iBoxx IG cash index is just 3.5bp wider this month. There hasn’t been much issuance in this period (less than €7bn of IG non-financial debt, just €1.8bn of senior bank issuance and €2.1bn of HY debt), but there have also been reduced levels of secondary market activity/flow.

The high yield market looks like it has moved more – the index 18bp higher – but there is a greater correlation between equities and high yield debt. Still, an 18bp move to B+404bp represents a relatively good performance. For some more context, HY total returns year to date are at -0.5% and for IG, at -0.7%. The DAX is lower by around 10%.

It appears as though the credit market crawls back under its protective rock amidst any volatility and weakness elsewhere.

A rally, at last

Walmart: Profit warning

The US earnings season continued with good results from Morgan Stanley and Goldman, the latter disappointed on fixed income earnings, though. And Walmart issued a profit warning as it continued to grapple with the costs associated with the acquisition of Flipkart. The data on US industrial production was encouraging as output rose a better than expected 0.3% month on month in September.

Still, European equities had a better day of it, higher by up to 1.4% and the US markets were also in much better shape, in the black from the opening bell and up by 1.9%, at the time of writing. A stronger sterling on solid domestic wage growth data saw to it that the FTSE index underperformed, barely in positive territory for most of the session, but up eventually 0.4% at the close.

Hints from Juncker that the EC would reject Italy’s budget proposals were completely ignored, with BTPs better bid and the yield on the 10-year lower at 3.47% (-8bp). Bund yields edged lower to 0.49% in the 10-year (-2bp) and Treasuries were unchanged – the 10-year yielding 3.16%.

The confidence garnered from better stocks saw protection costs fall, leaving iTraxx Main at 72.5bp (-1.7bp) and X-Over at 289.4bp (-4.5bp). Cash was a touch better offered, for choice, the iBoxx index left at B+134.6bp (+0.5bp) while the high yield secondary market was also effectively unchanged, the index left at B+404.7bp (+0.6bp). The only deal on offer in the corporate world was the Commerzbank senior non-preferred green bond, which issued €500m at midswaps+95bp.

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.