5th May 2020

✈️ Flying blind

iTraxx Main

84.8bp, -2bp

iTraxx X-Over

508bp, -13bp

🇩🇪 10 Yr Bund

-0.58%, -2bp

iBoxx Corp IG

B+195bp, +1bp

iBoxx Corp HY

B+669bp, +3bp

🇺🇸 10 Yr US T-Bond

0.66%, +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″]

Markets looking past the gloom…

Monday was catch-up day following the May Day holiday across much of Europe. Tuesday was more like it. We are back to looking past the poor earnings and economic data expectations for Q1/Q2 and trying to position for some kind of recovery through June onwards. As those lockdowns ease.

Recriminations. Revenge. Accountability. Answers. Geopolitics are threatening to take centre stage nonetheless. We need to keep our eye on the ball because the US (and now we include Western nations)-China Covid-19 spat is a lurking threat to markets. This one could have a deeper impact than the US-Sino trade tariff ructions did.

The headline risks alone should temper some of the irrational exuberance in asset prices.

In credit, the spread recovery has hit a brick wall. Spreads gapped wider late March, snapped tighter mid-April and threatened to continue a tightening which would have wrong-footed anyone who thought this crisis would be short-lived. No such luck. The earnings streams are flowing through. Large corporates are restructuring into smaller entities, and smaller corporates are going to go to the wall – in many cases.

We are flying blind in a sense. There is a lack of clarity about it all, but the clouds are lifting. The easing in the lockdowns is going to engender some kind of macro upswing but, if it’s too laboured, it’s going to come too late. Pick your credits carefully.

In high yield, it is therefore understandable that we’ve barely had a deal to contend with since the pandemic lockdown started. Just four of them. There will be a reluctance to take much down unless the information ratio is good, the borrower fits and/or the price irresistible (Netflix, Verisure, Merlin).

We had Stada (aka Nidda Healthcare) due to price a deeply discounted €200m non-fungible tap of its Sept 2024 issue (coupon 3.5%) in the session.

Primary back in the saddle

Credit primary was open again, furnishing investors with deals and eliciting interest at the usual high levels that we have now come to expect. Luxury goods group Kering took €600m in a 3-year at midswaps+65bp and another €600m at midswaps+105bp in an 8-year maturity priced 50-55bp inside the initial guidance. Combined books were up at €11.2bn.

Staying in France, Suez issued €750m in a 15-year at midswaps+125bp but, being a different beast, it only attracted €1.6bn of interest and final pricing was just 20bp inside the initial chatter.

The other IG non-financial borrower was Shell. The group issued €2bn split equally between 4-year and 12.5-year maturities – priced at midswaps+95bp and midswaps+135bp, respectively. Both were 25bp inside the initial guidance and combined books were just shy of €6bn.

In senior financials, Danske Bank opened up the month’s issuance with €1bn in a 5-year senior preferred at midswaps+103bp (-22bp versus IPT) and OP Corporate Bank also lifted €1bn in a 5.25-year senior preferred at midswaps+85bp (-20bp versus IPT). French real estate group Klepierre  €600m in a 9-year at midswaps+230bp (-40bp versus IPT).

Vaccine hopes and easing lockdowns boost markets

The economic data throughout the day hammered home all the points pertaining to the slump in activity. In the UK services PMI for April came in at a record low of just 13.4, for example. We had j0b losses being announced galore with airline losses particularly prevalent. Eurozone PPI for March missed expectations of -1.3% month-on-month, coming in at -1.5%.

To add to the data gloom, the US services sector declined for the first time in over a decade with the April ISM at 41.8 (but better than expectations). Hopes, though, were raised on news that Pfizer had started clinical trials on a possible vaccine for the coronavirus.

We had the ruling of the German constitutional court in Karlsruhe that the public sector buying programme was legal, but questioned its ‘proportionality’ with respect to monetary policy objectives. The ruling set a 3-month window for the ECB to respond with a review to justify the programme. It has no immediate bearing on the PSPP, but will serve as a big shot across the bows to any further ECB action beyond the current programmes. A deeper Eurozone malaise beckons.

For now, it’s a bit of a fudge, we think, and the market was a little jittery on the news. They came off the session highs before settling lower – and then resuming its rally once the news had been absorbed. The 10-year Bund yield edged lower to -0.58% (-2bp), the BTP moved higher to 1.88% (+12bp), while the Gilt yield declined to 0.20% (-3bp) after the drop in services activity and expectations of a 7%+ decline in growth in Q2. Not too far to go here in order to get back to that record low of 12bp (March 2020).

There was no stopping equities, though. The FTSE was up 1.7%, the Dax up by 2.5% and US markets were 1.6% or more higher, as at the time of Europe’s close. Brent was back up at $30 per barrel as WTI moved to trade off a $23-handle.

Of course, credit index was better offered as the risk-on mood saw to it that the cost of credit protection declined. So iTraxx Main edged to 84.8bp (-2bp) and X-Over protection dropped 13bp to 508bp.

In cash, the moves were moderate and wider in IG with the index edging to B+195bp (+1bp). Brick wall? Yes. The AT1 index was effectively unchanged at B+881bp and the high yield market likewise barely moved and the index left at B+669bp.

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.