31st May 2020

🗞️ Event risk vs market liquidity

iTraxx Main

72.2bp, +3.4bp

iTraxx X-Over

428.9bp, +13.4bp

🇩🇪 10 Yr Bund

-0.45%, -2bp

iBoxx Corp IG

B+176bp, unchanged

iBoxx Corp HY

B+575bp, unchanged

🇺🇸 10 Yr US T-Bond

0.65%, -3bp

🇬🇧 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″]

ECB and US payrolls to dominate…

We might have closed May on a sour note on the back of increased tensions between the US and China, Trump and social media and (albeit expected) weak macro data for Q1/April and May BUT all was/is not lost. On China, the US will be decisive (whether we agree with the actions or not), while the EU’s response will be lighter and represent some kind of a fudge (in comparison). The US administration’s action on social media might lack legal teeth but could find a way to weigh on their equity valuations. However, the economic data can and will only improve from here.

Confidence was broadly rising. If we judge the aforementioned events by previous market reactions, then they will provoke odd ‘down days’ for risk assets. But that’s all. Risk assets are going to be propped up and rise in value, most likely, as a result of the huge and cheap liquidity that policymakers have flooded the market with. It needs a home.

The markets should continue broadly to trade into that narrative. The primary market route in credit seems to be the way forward here. But sentiment will be boosted for as long as deals continue to perform and the subscription rates for deals continue to decline only modestly. Cash is still flowing into credit funds and the news flow around the market – high yield included, is yet to flag much by way of anything but the obvious warning signals.

So May was a decent recovery month overall. Even after the final session wobble, the S&P gained 4.5%, the Dax some 6.7% and the FTSE ended 3% higher. Credit in euro IG returned +0.2%, the AT1 market +3.3% and HY surprised with +2.9% of total returns (all iBoxx) in the month. IG non-financial primary issuance posted a record €57bn of deals (after April’s previous record €56.95bn) and most issues were trading tighter versus reoffer.

For the year to the end of May, the performances of the various markets is quite erratic. The S&P is just 5.8% lower in this period, but the smaller Dow index is 11% lower. In Europe, the Dax had a flying end to the month and outperformed the European bourses in the opening 5-months of the year, but still 12.5% down. The €Stoxx50 has lost 18.6% while the FTSE lags, off by 19%.

In total return terms, IG credit saw a modest recovery to -2.5% for the year to end May, the HY market is off by 7.5% and the AT1 market recorded -7.3% in total returns. The sterling credit outperforms, with total returns of +1.5% in the five months, largely on the back of the Gilt rally. It is now ahead of the Eurozone sovereign market, which is showing returns of +1% in the same period.

Primary cash cow

As a reminder, we ended May with confidence in primary markets sky high. There was little sign of indigestion. In fact, such has been the level of demand, IG non-financial issuance has reached a fresh milestone. After the record issuance seen in April, which smashed the previous record by €8bn – coming in at €56.95bn for that month, May’s deal flow exceeded it. That was against ALL expectations. Even better, over 90% of the deals were trading tighter than re-offer at month-end.

We are already at just about €210bn for the year against that record €318bn for the whole of last year. We will slow, but the next 8-months of activity could see us up at €350bn+ for the full-year, even after taking into account the effects of seasonality on issuance patterns/flows.

The high yield market slowly cranked up the gears in May as well. After only the third blank month in its post-2008 history in March, we saw three deals in April re-open the market (totalling €1.2bn). However, May’s deal flow of €5bn was closer to the long-term average for the month, with total year to end-May issuance now up at €28bn.

For the full-year, much will depend on broad risk asset volatility (namely in equities). However, if risk assets do rise in price (higher equities, tighter spreads) as they did through much of May, then it makes sense for greater levels of HY borrowing and revising year-end targets higher to €60bn seems a reasonable expectation.

The senior market has seen more issuance than we might have anticipated at €11.5bn, especially given that banks have access to very cheap ECB funding. The issuance was broadly spread and all came from European banks, notable after €5bn was printed in April by US-domiciled institutions. For the year to date, we are up at almost €82bn and we shouldn’t be looking at too much getting away over the next few months while the official funding windows are open.

Policymakers’ nerves to be tested

Italy suffered its largest contraction on record in Q1, with GDP down by 5.3% (-4.7% expected). For France, it was the largest contraction since 1968 as her economy shrank by 5.3% in the opening quarter (revised from -5.8%). There’s much for the ECB’s policymakers to chew on too this week, as inflation across the region dropped to just 0.1% in May, taking it to the brink of deflation. The core rate remained unchanged at 0.9%.

European equities closed weaker in last week’s final session, with the FTSE off by 2.3% and the Dax 1.65% lower. US markets were underwater for the most part, but the S&P managed to claw its way into positive territory and higher by 0.5%. The Whit Holiday across parts of Europe will ensure a very limited  and quieter start to this week.

Credit index moved wider in line with equity market weakness (iTraxx Main at 72.2bp, +3.4bp for example), but the cash market managed to hold its nerve and generally closed unchanged.

On the data front though, there’s much to look forward to. Manufacturing PMI’s for May across the Eurozone are out on Monday (Eurozone expected at 39.5) and we also have the US ISM due which is expected to come in at 43. US vehicle sales on Wednesday will stoke some interest. April’s Eurozone retail sales for April are expected to fall by 22.9% when they are published on Thursday.

The ECB meeting and policy decisions (no change expected) comes Thursday, so deals in credit primary will need to be crammed in on Tuesday and Wednesday.

And on Friday, it is non-farm payrolls day with the US expected to have lost a further 8.25 million jobs in May, on top of the 20.5 million lost in April.

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.