14th April 2016

Flying colours in mid-month report

FTSE 100
6,363, +121
10,026, +265
S&P 500
2,082, +21
iTraxx Main
74bp, -3bp
iTraxx X-Over Index
315bp, -14bp
10 Yr Bund
0.13%, -4bp
iBoxx Corp IG
B+150bp, unch 
iBoxx Corp HY Index
B+517bp, -7bp
10 Yr US T-Bond
1.76%, -1bp

Clean bill of health…

A mid-month market health check would have us forgiven for thinking we’ve turned the corner. Ignore the IMF/World Bank/ECB cautious outlooks (Tesco’s too!), the fact that oil prices dropped a little in the session and that the latest data flow pointed to France and Spain remaining stuck in deflation. Eurozone industrial production for February was also down by 0.8% (versus -0.7% expected).

We preferred to look on the bright side and the timely boost to economic sentiment as we dispelled fears that global growth might be slowing precipitously on Chinese trade data: with imports down and exports up sharply, they easily beat expectations. Equities rallied hard and we glossed over any of the aforementioned – or other – ills which have niggled us for a while now. Stock markets rising 2% or more felt rather euphoric, while government bonds didn’t sell off as one might have expected. Obviously there is still the ECB to contend with, so save for odd corrections/pullbacks (like we have seen in the Bund this week), it is difficult to see how government bonds could materially sell off any time soon.


Light: Primary for IG non-financial issuance

And it’s a good thing they will not, because breakeven margins are wafer thin. Don’t fight the ECB, so to say. It was a good session, but any upbeat news flow continues to skirt around the issues and perhaps highlights a desperation in investors wanting to – or needing to – look on the bright side. After all, the slippage in oil prices failed to dim sentiment like it did in other sessions. Primary for IG non-financial issuance was light, with just €1bn on the screens through two borrowers (Carrefour and Enexis), while we had a juicier deal in financials with a T2 from BPCE and a less salubrious two-trancher from double-A rated insurer Allianz. The Enexis deal was priced a huge 25bp inside IPT at midswaps+45bp for a 10-year maturity and low double-A/high single-A risk.

What looked cheap at the off suddenly wasn’t. Secondary market corporate spread tightening has stalled of late, with the iBoxx index stuck at around B+150bp. Maybe the high level of issuance hasn’t been repricing the market wider, but it appears to have limited the amount spreads would have tightened otherwise. In that sense, the paltry €1bn in Wednesday’s session offered a welcome break.

Rallying all round


The FTSE 100 rose to a 2016 high

Amazingly, after another 2.5%+ rally and over 250 points added to the index, the DAX is still down around 6.5% YTD. The FTSE has crawled back into the black though, while US stocks have stayed in positive territory – just – for a while longer. That’s a welcome relief all round and breathes (or ought to) greater confidence into and for risk asset valuations. As stated already, eurozone government bonds didn’t sell off in the session. That is understandable while the ECB additional asset purchase programme (+€20bn per month) is up and running, but it also suggests that we are (likely) just a headline away from a reversal of the equity gains of the session, and we still need to maintain a somewhat defensive stance.

Bund yields were lower, with the 10-year at 0.13%, while the risk-on nature of the market fed into bit of a rally for peripheral risk and BTPs/Bonos saw yields drop 8bp to 1.30% /1.46% and a hitherto very volatile Portuguese market saw 10-year yields fall by 21bp to 3.21%. Marginally lower/mixed oil prices failed to weigh on anything – they barely budged anyway, even after the reported heavy rise in weekly US oil inventories. They seem to have found a new resilience or downside resistance at the moment.

But not so exciting for credit

We endured a lacklustre session and we closed out unchanged across the board. Few or no new primary issues makes for a dull session these days. Such now is the lack of liquidity allied with a set in stone buy-and-hold mentality that it is difficult to tighten unless a catalyst provokes it. Higher stocks are no longer doing that unless the credit risk is higher beta in nature. That was demonstrated in the high yield market where the Markit iBoxx index level dropped to 517bp, or -7bp.

Volume and flow levels which comprise important constituent variables of the “turnover” equation point to a most frustrating era for traders and investors alike. Are we really all waiting for the ECB to announce their intentions in some detail before spreads can take that next leg tighter? The synthetic indices closed much better, with Main lower at 74bp (-3bp) and X-Over 14bp lower at 315bp.

That is it for now. Back in the morning.

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.