25th May 2016

Brexit to bring down the global economy

FTSE 100
6,229, +93
10,057, +215
S&P 500
2,076, +28
iTraxx Main
75bp, -3bp
iTraxx X-Over Index
319bp, -15bp
10 Yr Bund
0.18%, unch
iBoxx Corp IG
B+148.6bp, unch 
iBoxx Corp HY Index
B+500bp, -2bp
10 Yr US T-Bond
1.86%, +3bp

Not quite, but let’s blame the “Leave Campaign” anyway…


Brexit: A convenient scapegoat

Any bad news flow – globally – is now being blamed on fears around Brexit. Yesterday, the poorer outlook around the German business community – as expressed through the ZEW survey, was the latest to blame it on Brexit. Investment, capex, falling markets if there is no other reason to justify any weakness, and politicians losing their credibility (where they had any) are seemingly all affected by the raging debate. We believe that these issues will still be with us whichever way the vote goes.

We just have more colour on how bad the macro situation is. That’s because fundamentals have not changed much and so long as reform stays absent from policy then we will soon realise that Brexit was just a (useful) smoke screen to hide the current ills for a few months.

Primary markets in IG were quiet, adding just €900m in the non-financial sector although we had some deals in the FIG space with a high beta issue from French insurer SCOR. The total for IG supply has now passed the €40bn for the month for only the fourth time in the history of the corporate bond market in Europe. The record for any month is €48.7bn (Jan 09) – when issuers were desperate and paid up to get cash on the balance sheet as the global financial system was thought to be on the brink of collapse. The months of Nov 2014 and Mar 2015 recorded supply of €41.7bn and €41.5bn, respectively. Our “back of the envelope” calculation shows that leaves us just €1.5bn away from passing the Nov/Mar levels; but we think an assault on the record will fail.

A much needed recovery in risk assets

Oil Speculation

Oil: Up again

The Eurogroup were meeting on Greek debt-relief – or not, as the case might be, while Hungary and Turkey cut interest rates. But US new-home sales rocketed in April, providing the fuel for a super session for equities. Mind, almost everything was better bid in yesterday’s session apart from gold. Stocks, government bonds, oil and credit were all beneficiaries. No crediting Brexit here!

There was little newsworthy otherwise to promote such a positive day for stocks, although we may have been oversold and were looking to square up positions into the end of the month. The much better sentiment saw to it that the DAX rose a stunning 2.2% and flew past the 10,000 level. Other European indices rose by a similar amount – if not more. The S&P surged higher by 1.4%! Oil gained on Iraqi production problems, leaving Brent back up at around $49 per barrel.

Safe-haven assets also received some attention, with government bond yields edging a touch lower for choice. US interest rate jitters were put to one side. Bund yields in the 10-year maturity were unchanged at 0.18%, while Gilt yields were unchanged to a touch higher despite polls showing increased support for the “Remain” camp in the upcoming referendum vote. The periphery got a good bid, with BTPs yields lower at 1.42% (-6bp) and Bonos at 1.53% (-4bp) for 10-year debt maturities.

Corporate markets endure a quieter session

Primary deals came from an upsized deal from Air Products for €350m and REN Redes with both deals managing to tighten pricing versus IPTs by a decent enough 12bp. ANZ Bank was the sole senior financials debt borrower while SCOR sold €500m of subordinated notes in 32NC12 format.

Bayer’s offer for Monsanto was rejected and there is no doubt that soon enough they’ll be back with a higher offer – and a several notch-like ratings downgrade with it. Moody’s warned already as they put the group’s A3 rating on review for a cull, citing all the usual comments around execution and financial risks. Secondary activity was fairly limited and spreads closed unchanged although there was a better bid evident for higher beta risk. The high yield market closed out in similar fashion, a touch better bid for choice amid the lowest of volume and flows.

Those better stock markets helped the synthetic indices and the market was much better offered (protection costs lower). iTraxx Main finished at 75bp and X-Over 319bp, some 3bp and 15bp lower respectively in the session. There’s no reason for the market to continue with this better tone today, although the magnitude of the moves should be much more limited, newsflow permitting.

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.