21st November 2018

Feet up for Thanksgiving

iTraxx Main

77.7bp, -2.9bp

iTraxx X-Over

320.5bp, -10.8bp

🇩🇪 10 Yr Bund

0.38%, +2bp

iBoxx Corp IG

B+163.6bp, -1.3bp

iBoxx Corp HY

B+482.4bp, -9bp

🇺🇸 10 Yr US T-Bond

3.07%, +2bp

🇬🇧 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″]

More of the same would be nice…

Wednesday’s recovery in markets will kid no one. With so little expected to happen on Thursday and Friday, this was about cleaning up for the week. It was obviously being viewed with some suspicion, as not even Stryker Corp dare test the water. The news flow was mixed, with the US back on the warpath as the US-China ceasefire of the past few weeks abruptly ended. Talk about WTO ‘eviction’ amid unreasonable behaviour is setting us up for a hit to global growth next year as tariffs come on line. And then there was Italy, sanctioned by the European Commission’s Excessive Deficit Procedure over it’s 2019 budget. The Italians were standing firm.

The EC is intent on heaping more misery on Italy, suggesting (effectively) more austerity! That lack of flexibility in the Maastricht rules sets us up for a difficult period ahead. Italy yields or is fined (we’re not sure how a net contributor to the EU budget can be forced to pay). BTPs had rallied before the expected announcement, and surprisingly managed to hold on the gains as the session wore on – and as the news sunk in.

Primary drew another blank, the fourth in a row now devoid of an IG or HY rated non-financial deal although there is some talk of Borealis pulling the trigger on Thursday (?) on a sub-benchmark sized 7-year transaction. Takeda’s €7.5bn multi-tranche was the last IG deal, while International Design Group’s dual-tranche €720m funding was the last HY deal (back on Nov 9). Only the ING Group has printed in the senior markets this month. Slim pickings indeed. We are stuck at €21bn for IG non-financial deals this month, just €1.52bn in high yield and €6bn of senior financial issuance.

The better tone rippling through equities was helped by weaker than expected US data (durable goods and consumer sentiment) as it might be seen to check the extent of rate hikes next year. So all being told, we had a decent recovery in stocks although it felt anything like convincing. The markets even saw the EC/Italy standoff with a positive tilt as it preferred to look on the bright side and expect that Italy will surrender some of the budgetary decisions and fall in line with the EC’s demands. BTPs held on to their gains in the session (10-year yields lower at 3.48%, -15bp).

Bounce-back Wednesday

So the markets go into the big US Thanksgiving break on the back of a positive tone. Whether it lasts will depend on what the Black Friday sales period looks like with data emerging on Friday and over the weekend likely shaping what the opening sessions of next week will look like.

We are inclined to view the sustainability of session’s gains with some suspicion (hoping to be proved wrong, of course) given the news flow is now definitely pointing to a slow down in growth next year bedding in across the board. For example, John Deere, always a good indicator of global activity (maker of farm machinery and heavy equipment), suggested a slowdown in sales growth for 2019.

US equities moved up to 0.8% or more higher, the Dax recovered a useful 1.6% and the FTSE gained 1.5%. Italian equities joined in, up 1.4%. In duration, Gilt yields rose a basis point in the 10-year to 1.39%, the US Treasury yield rose 2bp to 3.07% and Bunds closed to yield 0.38% (+2bp) as the market’s relief rally dulled the lure of safe-havens. It’s worth noting at this point that most forecasts made at the beginning of the year had 10-year Treasury yields closing out 3.0% – 3.25% and Bunds at 0.75% – 1.0%. The former will play out, the latter most definitely will not.

In credit, the UK’s Co-op Group (sterling) and Norwegian retailer Ekornes postponed transactions resulting in that blank in primary. There was though a sharp recovery from the excessive widening seen in the previous session in protection leaving Main lower at 77.7bp (-2.9bp) and X-Over at 320.5bp (-10.8bp).

As for cash, the rout also came to an end. Any better bid that emerges though might elicit some selling into it, from nervous holders of corporate bonds preferring to reduce some risk while they can at a more reasonable level. Hence any recovery might be laboured.

We had just a moderate recovery in cash markets. The AT1 sector was marked a touch better amid hardly any activity. It left the Markit iBoxx IG cash index at B+163.6bp (-1.3bp), while the high yield index was 9bp tighter at B+482.4bp. These were small moves and would have been barely noticed.

Unless market moving events occur and warrant comment, we will be back next week.

Have a good day.

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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.