16th October 2015

Falling knife… where?

FTSE 100
6,339, +35
10,064, +149
S&P 500
2,024, +30
iTraxx Main
81bp, -0.5bp
iTraxx X-Over Index
339bp, -3bp
10 Yr Bund
iBoxx Corp IG
B+160.6bp, +0.3bp 
iBoxx Corp HY Index
B+510.7bp, -2.5bp
10 Yr US T-Bond

At last, the penny has dropped… We are in danger of taking on a day-trading mentality. The BHP deal across the hybrid complex trades up two points or so and all of a sudden the commodity cycle downturn is over, the desperate bid for risk assets is back with wanton abandon and the global economy has stabilised, with a sustainable growth dynamic in place where rate rises are still likely to be limited and have little impact on risk asset valuations. Don’t you believe it. It’s not like us to advise caution, but we are not getting carried away with the rally or the receptivity to the BHP deal. It helped that deal that equities are up, but if we get a down day or two on the back of some poor data, this deal will get hit and likely quite hard, given that – being the latest large transaction of high-beta ilk – it is liquid. It will be the first to go. Nevertheless, we do like the improvements in tone, and we believe that the general trend is for tighter spreads (higher cash prices). Supply hasn’t been great (Eur5.5bn or so for IG corporates MTD) and investor cash balances are too high for this time of the year. That ought to support spread product, and we remain upbeat for corporate spreads through the final quarter. Oh, and lest we forget, the Fed isn’t going to be raising rates this month; the ECB is in a quandary. Govies will rally or remain firm (the 10-year Bund yield visited 0.52% today); all roads lead to corporate bonds – again.

Difficult macro and poor earnings come at just the right time… More weak data points, a weaker dollar, a stronger euro and a very mixed earnings stream mean that US rates will stay unchanged. So risk assets will rally, and we push out the moment of real pain a while longer. It will come. In the meantime, we feed off the continued loose policy stances, with the ECB now odds-on to announce something in addition to its existing QE programme. The euro’s strengths into German economic weakness amid Asia’s slowdown means further action is required. No word about medium to long-term structural changes – that’s not a vote winner. On the earnings front, Goldman’s missed, Citi beat and after WalMart’s shocking profit forecasts yesterday there was no dead-cat-bounce today in its stock, which had fallen almost 9% in yesterday’s session. US CPI saw the headline at -0.2% MoM and flat YoY and the Philly Fed index was still showing contraction in manufacturing in the region, albeit at a slower pace. Not good.

Frustration at the lack of issuance… After the success of the BHP deal, one would be forgiven for assuming that it would flush out other borrowers. But no. Nothing on the non-financial corporate front (the Deutsche Bahn Eur200m floater tap underwhelmed), although we had just about everything else. Are borrowers suddenly less needy? Have syndicates/bankers lost their nerve? Are we all reading this market wrong? The demand is there. The funding is available. The new issue premium won’t be as great as it was, say, last week or even earlier this week. What’s not to like? We’re unlikely to see much today (Friday) and if we do, it will quite possibly be just a token-like/gesture of a deal.

Equity bounce lifts all boats… European stocks had a good session, with near 1.5% gains across the board. Feed into the equation the poorer or weaker macro data points and so on and implications for US interest rate policy, and we see it is risk on. In a way, the next leg of the rally has been underwritten. Credit overall though seemed more circumspect in today’s session and even the lack of dealer inventory didn’t assure a good old fashioned squeeze. We’re waiting for new paper! The iBoxx IG corporate index edged out to 160.6bp and the HY index finished at B+510.7bp, -2.5bp. For the synthetics, Main was at 81bp and X-Over at 339bp, both only slightly better versus the previous close.

Have a good day – the S&P closed up 30 points (+1.5%) and good weekend. Back Monday.

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.