24th February 2020

🦠 COVID-19 Impacts Being Felt

iTraxx Main

47.9bp, +4.8bp

iTraxx X-Over

242.5bp, +23bp

🇩🇪 10 Yr Bund

-0.48%, -5bp

iBoxx Corp IG

B+104bp, +4bp

iBoxx Corp HY

B+352bp, +25bp

🇺🇸 10 Yr US T-Bond

1.37%, -10bp

🇬🇧 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″]

Jolted by pandemic risks…

Markets swatted aside Trump’s broad attack on the establishment and the global order. Be it domestic politics, the trade spat with China (and others – Nafta, Europe) or the scuffles with Iran and North Korea, markets were barely riled.

We can add in the Eurozone’s multi-year woes, Brexit and a whole host of geopolitical skirmishes which might have let more of the air out of the asset bubble.

They were all seen as short term issues which, if need be, could be resolved with central banks having some ammunition left to soothe over the cracks.

Not so in Monday’s session.

A huge dash for safety which saw us back to flat or lower year to date for equities after falls extended to well over 4% in some markets during the session. Safe haven rates (10-year maturity) were bid only, and pushed yield levels not seen since Q3 2019 in Germany (-0.48%) or June 2016 in the US (1.37%). Gold was through the roof.

Credit primary and secondary were effectively closed, although ING sneaked out that AT1 issue postponed from last week following that abrupt departure of its CEO. It was the bank’s ‘fortune favours the brave’ moment. The offering was the day’s sole activity and was notable for the reduced order book and deal size and higher coupon, against last week’s interest.

Investor interest in the deal was cut by over 65% versus last week’s indications, the coupon was 25bp higher at 4.875% and the size reduced by $250m to $750m. All totally understandable.

Markets have finally woken up to the potential for a coronavirus pandemic. They care about something now, and it’s COVID-19.

The realities will hit home. Q1 macro is going to be a disaster for China and for much of Asia. It is going to be difficult for the Eurozone, too, and emergency central bank measures to help stem the hardship must be on the table. The UK will be somewhere behind the Eurozone, while the US will likely manage to evade much of the weakness – for now.

The longer-term ramifications are there for all to see and processes will already be set in motion. Re-shoring will be a feature. Complacency around globalisation and the dependency on smooth supply chains functionality are going to see a radical restructuring.

The corporate sector’s earnings/revenue chill could prove longer lasting as new strategies are put in place to address and mitigate the aforementioned and other issues should they arise again in the future.

Most sectors will be unable to avoid the consequences (travel, tourism, luxury goods, energy, industrials) and will be re-rated accordingly.

Alas, in credit, corporate fundamentals will come under pressure. Especially if the COVID19-related slowdown is protracted (runs into H2). There’s a high probability that this might be the case. Of course, the IMF and other supranational forecasting bodies will suggest otherwise (and point to a V-shaped like recovery). They have little choice but to proffer that view.

We’ve weathered and will continue to push back on much of the downside threatening rating transmission risks. And could probably do so for the next quarter or two. Any longer than that and credit will come under pressure.

Just as well there are lock-in clauses across many of the passive funds which have grown immensely over the past few years.

Carnage ripples through risk markets

Fear stalked the markets. The story was the equity market although the rally in rates came a close second. The German Ifo business climate index came in at 96 (95.3 expectations, 96 in January), but that data point seemed woefully behind the curve.

The Dax dropped 4% and the FTSE by 3.3% and while off their session lows, both were comfortably back into negative territory for the year to date. The various US equity markets were off by around 3% as at the European close. The Dow dropping by over 1,000 points at one stage will take many of the headlines. The Vix shot higher, too, up at 23% (+6).

In rates, the better bid for government bonds saw the 10-year US yield drop to 1.37% (-10bp) as the 30-year yield saw a new record low of 1.82% (-9bp), both as at the time of writing. The 10-year Bund yield was back at -0.48% (-5bp), while in the UK, the Gilt was yielding 0.54% (-5bp) at the close. Gold was up at $1675 per ounce (adding $25 in the session).

In the credit world, the ECB added a shade under €1,587m to its CSPP haul last week, taking the total held to €194,143m. Whilst a serious and unnecessary manipulation of the corporate bond market, forcing/pushing investors into lower rates (high yield) securities, for once their €1.5bn+ run rate of weekly additions will be seen as helpful given the pressure spreads might see if the current turmoil persists.

In credit index, buyers of protection pushed the iTraxx indices sharply higher with Main up 4.8bp at the close to 47.9bp and X-Over added 23bp to move to 242.5bp.

As for the cash world, the Street pulled in its horns and investors were left with little choice to try and sit it out. The defensive market made for weakness across the board. So, the iBoxx IG cash index moved 4bp wider to reflect this, now at B+104bp – but still -1bp year to date.

The weakness we might get in macro will filter through into the banking system which in many cases is already troubled with high levels of non-performing loans. That and other credit issues, allied with those weaker equity markets saw a 33bp widening in the CoCo spread index, which recalled to B+380bp.

Alas, the high yield market was crushed, in a sense. The HY index moved 25bp wider to B+352bp in one of the largest moves in recent memory!

Tuesday? Coronavirus, watch those headlines.

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.