18th February 2020

🗞️ Corporate earnings cull will mar Q1

iTraxx Main

41.8bp, +0.5bp

iTraxx X-Over

214.0bp, +3.2bp

🇩🇪 10 Yr Bund

-0.41%, -2bp

iBoxx Corp IG

B+100.6bp, unchanged

iBoxx Corp HY

B+329bp, unchanged

🇺🇸 10 Yr US T-Bond

1.54%, -5bp

🇬🇧 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″]

Lemmings? Perhaps…

Now we’re talking. It’s time to sit up and take note. Finally, we have a major company, in Apple, warn on Q1 revenues. Of course, they’re suggesting it’s temporary. Let’s see if this hits home.

This warning, though, is the tip of the iceberg, and others will follow quickly. We’re looking at a glut of warnings as companies dependent on the Chinese supply chain and consumption report revenue and profit culls for Q1.

Markets, however, are managing the crisis quite well. That’s because every time there is a blip, looming event risk or potential for a crisis, a central bank turns on the liquidity taps. It does the trick. There’s little point in trading against the rising markets.

Of course, this week the markets have risen on hopes of some sort of stimulus (rate cut?) from the Chinese as they try to keep valuations propped up amid the ravaging of its economy by the coronavirus.

There’s a race to the bottom in terms of stimulus efforts, and we can go on for a while yet given that there is room in US and China policies for it. The ECB will follow in due course as the Eurozone’s finest corporates struggle from weakness in Asian markets (demand and supply line disruptions), but it’s more than questionable as to what any further easing here might have on the real economy.

Anyway, it’s good for investors – invariably long risk assets and content in clipping their returns while the liquidity-enhanced asset bubble continues to inflate. And with it, the art of investing has been lost.

We’re not calling the endpoint, far from it – that’s a mug’s game. The cabinet still has effective medicines in it to keep it all underpinned, and for a good while yet.

For corporate bond investors there is additional support to the market and valuations. The ECB added a shade under €2bn to its CSPP haul last week, taking the total held to €192,556m. There is a serious and unnecessary manipulation of the corporate bond market going on, and it is forcing/pushing investors into lower rates (high yield) securities.

Many of those investors are not versed in the nuances around the risks of those higher yielding bonds – whether they be subordinated debt of Greek banks rated triple-C, or decent high yield companies rated double-B. The one common factor for all is they need bonds, some yield, some performance and their fees.

For instance, the AT1/CoCo market’s index yield (iBoxx) of just 2.77% has dropped 74bp this year already, to around its record low level. The spread on the index has tightened by 60bp to B+336bp. And there is no let-up in the demand for this product which, as a reminder, is designed to fail – without triggering a bank default. Investor confidence in the financial system must be resolute.

As ever, we will will repent at leisure.

Reverse yankee day in primary

The day’s IG non-financial issuance all came from US borrowers with Dow Chemical, Whirlpool and VF Corp adding 6-tranches between them. Obviously, one of them – Dow Chemical – came with three tranches, adding to the trend for multi-tranche deals this year.

Whirlpool issued €500m of a no-grow 8-year at midswaps+75bp which was 30bp inside the initial price talk. VF Corp was next adding €500m in an 8-year maturity green bond at midswaps+50bp (-30bp versus IPT) and €500m in a 12-year at midswaps+70bp which was 25bp inside the initial talk.

Dow Chemical’s three tranches came courtesy of €1bn in a 7-year at midswaps+80bp, €750m of a 12-year at midswaps+115bp and €500m in a 2-year at midswaps+170bp. The deals were priced 30 – 35bp inside the opening guidance across the tranches off combined books of around €10.5bn.

In senior financials, Banca Ifis issued €400m in a long 4-year of senior preferreds at midswaps+215bp (-25bp versus IPT). And after a few sessions of drawing a blank, we had a sovereign deal via Belgium’s long 20-year, for €5bn at midswaps+11bp. Final books here were at €27bn.

Restructure and streamline for the new world order

As well as Apples’ woes, Wal-Mart reported disappointing holiday period sales and HSBC announced cuts of 35,000 in its global workforce as well as a whopping $7.2bn restructuring charge. The bank – and many others will follow – is embarking on readjustment to a new world order where interest rates are going to stay low (forever) and US banks are going dominate (more) the investment banking arena.

The German ZEW economic sentiment index came in at 8.7 versus expectations of 21.5 (26.7 previously) with the current conditions indicator also more negative than forecasts in a sign that confidence/optimism is waning. European car registrations declined in January by 7.4% led by a 13.4% drop in France. No surprises in any of that.

Where there was a surprise (?) was in the UK. Employment rose in the three months to December as 180,000 jobs were added, highlighting the economy’s resilience into the Brexit uncertainty and a stagnating economy (in Q4).

Equities were hit by that Apple news, maybe finally waking up from their blinkered ‘nothing’s going to stop us’ rally. US equities were up to 0.9% lower as at the European close, with the FTSE ending 0.7% in the red, the Dax 0.76% and the €Stoxx50 0.4% lower.

Rates were better bid. Clearly so. The yield on the 10-year Treasury declined to 1.54% (-5bp), the Bund was yielding -0.41% (-2bp) at the close and the 10-year Gilt 0.61% (-3bp).

That busy session in primary left the secondary market treading water, even as equities took that – albeit relatively modest, tumble. That left the IG iBoxx index unchanged at B+100.6bp and the index yield at 0.49% (still +6bp versus the record low). There was little going on in the AT1 market or in the high yield index which both closed completely unchanged.

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.