4th December 2015

You don’t always get what you want!

FTSE 100
6,275, -146
10,789, -401
S&P 500
2,050, -30
iTraxx Main
69bp, unch
iTraxx X-Over Index
281bp, -5bp
10 Yr Bund
iBoxx Corp IG
B+146.8bp, -1.5bp 
iBoxx Corp HY Index
B+463bp, -10bp
10 Yr US T-Bond

It needed to be epic… It wasn’t. Oh dear. Consensus politics don’t work. In fact, the eurozone doesn’t work. Sticking plaster-like moves in monetary policy and operations to address the severe economic issues besetting the region are not the answer. Churchillian-like leadership is what is required. The tough decisions need to be made. So we are now off to speculating about the next meetings, because the ECB has failed to unleash the bazooka that was sorely needed. Going from -20bp to -30bp on the deposit rate is not going to unleash the wave of lending, or credit growth, in the places where the beleaguered eurozone economy needs them. Banks will take the extra hit. The euro will not weaken as much as it needs to – if at all. Exports will not grow as much as the eurozone needs. Moving on, the size of the current asset purchase wasn’t increased, save for reinvesting maturing proceeds. They expanded the asset purchase to include regional and local government debt securities. And finally, the ECB extended the asset purchase programme until March 2017, or longer if needed. Oh dear again. It really was difficult to get excited by it all. The market didn’t. The sense of bewilderment was palpable. This was poor, very poor. Draghi the magician has run out of tricks, an illusionist with no real magic. Stocks were hammered. The euro rose 2.5c versus the dollar. Government bonds sold off sharply and yields rose. Credit spreads were unchanged but returns have been hit very hard (losing 70bp in a session) as the underlying weakened. The ECB will ease again, there is no doubt about that.

Hammered, down, weaker… Stocks were off by up to 4% at one stage; the euro gained 2.5c versus the dollar, up quickly through $1.08; and Bund yields fell out of bed, hitting the ground with an almighty thud as the 10-year gave up a whopping 20bp! And we thought they could have declined by that amount, as per yesterday’s upbeat note. If ever the markets were disappointed and wanted to illustrate this to the powers that be, well, this was it. Into the close, we had Eurozone stocks off by 3.6% (DAX and CAC). The 2-year Bund yield was up at -0.32bp (+13bp) and we had some severe pain for Italian (10-year BTPs at 1.64bp , +25bp) and Spanish bonds (10-year Bonos at 1.72%, +24bp).

And it all means…? That the excitement of the past few weeks will now be done away with, and we can get back to a steady, not so exciting Yuletide period and look ahead to resetting the performance marker for 2016 come the turn of the year. IG credit might now end up in the red on a total return basis for those benchmarked accounts, for 2015. It could be in the black for those running a more aggressive index beta (significantly greater than 1.0), but we will still need some recovery in government bonds to help out. Other than that, we will limp along, just like the eurozone economy is being dragged along by the ECB – for longer, while the politicians fail to put in place the necessary structural reforms. Few asset classes are likely to really stand out. It also means looking at a very low-return environment in 2016 (again).

Secondary credit market shuts down… Post the ECB, very few bonds exchanged hands. It was as if the market closed. We are now in one of those phases where questions might well be asked as to whether the ‘tourist’ money will even stay in credit. We think it will, because – thankfully – credit isn’t as badly affected as other asset classes. Still, one might rather take a punt in equities than endure another year (?) in a low-returning asset class like credit, despite all the capital preservation attributes associated with it. Credit spreads had never really got ahead of themselves into the ECB meeting, and that might explain why we didn’t really move weaker after. The Markit iBoxx IG corporate bond index actually closed a touch better at 146.8bp, but the index-yield jumped 14bp to 1.72% leaving returns YTD now residing firmly in the red. That is, they lost 70bp in Thursday’s session alone! High yield spreads also tightened 10bp to B+463bp, but the index yield jumped to 4.70% (+6bp). Main was lower at 69bp and X-Over at 281bp.

Have a reflective Friday and a good weekend.

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.