5th November 2015

Bonfire day – check it out

FTSE 100
6,413, +13
10,845, -106
S&P 500
2,102, -7
iTraxx Main
70.5bp, +0.5bp
iTraxx X-Over Index
292bp, -3bp
10 Yr Bund
iBoxx Corp IG
B+151.8bp, -1bp 
iBoxx Corp HY Index
B+469bp, -7bp
10 Yr US T-Bond

Little to chew on ahead of non-farms… There were a few new issues, secondary offered its usual little titbits and we had VW debt and equity prices under severe pressure again. The excuse for the rather apathetic mood was the non-farm payroll report on Friday, as well as the various comments from Draghi (and Yellen) leaving the market scouring for clues as to whether the European central bank will ease further in December. This game of ‘will they won’t they’ and the markets almost total obsession with it has become rather laborious. Grown men waiting for a sign. It’s going to come, if not in December, then in Q1 or Q2 of 2016, so let’s get on with the business of investing. That’s referring to additional QE from the ECB and a rate hike from the Fed! The euro fell against the dollar (to $1.08), oil futures fell 3% and US Treasury yields rose. Eurozone PMIs were ‘ok’ showing moderate expansion while the slew of corporate earnings continued with results fairly mixed. Shipping line group AP Moeller announced capacity and job cuts and Glencore announced how it was going to lop $5bn off its debt load (to $25bn) by year-end.

VW story threatening to turn into a tragedy… Few will really wish a corporate giant, as important as Volkswagen, to fall from grace as spectacularly as it is. There could be worse to come. The emissions scandal in effect is a form of corruption, but, where the populations health and climate science are concerned, the politicians and the regulatory authorities are going to want a make an example of them. They will extract their pound of flesh and we really have no idea where this will end. First diesel engines and now potentially CO2 emissions being fiddled and taking in petrol engines. Well, it has gone from very bad to very, very bad. The dire situation saw the company’s stock fall almost 10% and its debt prices tumble in Wednesday’s session. At the worst point, the long-end in senior gapped 40bp, its 5-year CDS was up at around 220bp and the VW subordinated hybrids lost up to 4-points. Into the close, some recovery saw default protection 20bp wider at 200bp, seniors left at 30-35bp wider and the hybrids around 2-points lower. The numbers being touted around in terms of fines and the like are at a level that will severely impair the group’s financial flexibility for years to come. We don’t think the scandal threatens the very existence of the company, but a junk bond rating must beckon soon enough. Prices have further to fall, that is. After Wednesday’s close, Moody’s downgraded VW’s debt rating to A3 from A2 and left the outlook as negative. That’s the same as S&P, but they have the rating on review for further downgrade.

Primary lighter than expected… There were many new deals, but only one non-financial corporate in the form of an unexciting low beta issue from Nestle. They printed a Eur500m no grow, long 7-year at midswaps+25bp, taking the monthly run rate up to around the Eur3bn mark. The rest was covereds, a small T2 insurance deal from RLMI and a couple of short-dated senior bank deals. Thursday’s session offers the hope of a final flutter before Friday’s NFP print which usually means no deals on that day. Barclays’ T2 holding company bond also got off the ground (the first of its kind in euros, at midswaps+245bp) and was tighter on the break.

The rest was business as usual… The Dax was in the red while most other bourses recorded gains small gains. Yellen suggesting a rate hike in December was more likely than not put a dampener on stocks into the US close. In Europe, the synthetics – iTraxx indices – were better offered (lower) into those earlier better stocks but ended a touch wider, while cash secondary credit was again a little tighter with VW being the main exception. Secondary markets aren’t very exciting these days given the risk-on complex and low Street inventory levels, so volumes are low and we get a steady grind better that should be with us through to year-end. IG corporates ended 1-2bp better in the day and HY of the same order if not a touch better even. Financials closed unchanged and overall, cash outperformed CDS on the day. Apart from VW, there was little by way of individual stories to get our teeth into. Small mercies. That all left the Markit iBoxx IG index a basis point lower at B+151.8bp and the HY index at B+469bp (-7bp). Yellen’s bullish rhetoric and late weakness in stocks saw to it that iTraxx Main was up a 70.5bp (+0.5bp) and X-Over at 292bp (-3bp).

That seems like a busy day, it wasn’t. Happy Thursday.

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.