4th February 2016

Good Morning???

FTSE 100
5,837, -85
9,434, -146
S&P 500
1,913, +10
iTraxx Main
104.5bp, +6bp
iTraxx X-Over Index
401bp, +14bp
10 Yr Bund
0.27%, -3bp
iBoxx Corp IG
B+178bp, +2.5bp 
iBoxx Corp HY Index
B+607bp, +12bp
10 Yr US T-Bond
1.88%, +3.5bp

The sun ain’t gonna shine anymore… We don’t think it’s all over, but such is the price action currently ripping through the market, one would be forgiven in thinking that it is. The Japan rate-cut-induced mini rally has all but gone and we’re back to the fundamentals of whether there is enough/any growth to justify even current valuations. And the daily price action is beginning to resemble the difficult days we experienced in January as the markets seem to be caught in a loop, reliving a nightmare every day. While markets react to it, the interest rate, currency devaluation and beggar-thy-neighbour race to the bottom is on. It’s every man for himself. For instance, overnight on Tuesday Japanese stocks fell 3.15% and Kuroda-san was back on the wires threatening to throw all his toys out of the pram, with the promise to cut interest rates further if necessary. Where do we go from here? No one is going to call a bottom but we need data, good data to help turn sentiment in the first place and then we can feed into the confidence generated. That isn’t happening right now as the drip feed of poor new economic newsflow just keeps coming. Eurozone PMIs out on Wednesday painted a sorry picture with weakness in services and manufacturing prices in January. We can expect an appropriate response from the ECB (members) and we dare say the markets will react positively on expectations of stimulus come in March say, but as ever, it will most likely have a short-lived impact. The ADP report out of the US might have been encouraging, but we’ve had s0me poor data prints of late on the manufacturing side and the service sector PMI in Wednesday’s session added to the gloom. The best we can hope for, for the rest of this quarter, is that any weakness sees smaller declines in stocks, that oil’s price decline slows en route to $25 per barrel (say), while corporate bond spread weakness comes about because primary is flourishing. Asking too much?

Oil not the excuse this time… We are not putting the blame for Wednesday’s weakness on oil. Nope. Oil prices were higher throughout the session and ended some 7-8% higher as the dollar came under some pressure. The weakness lay squarely on the poorer data (macro and earnings) and probably the hopelessness around Kuroda’s comments. Equities in Europe were lower and although it feels like the sea of red screens suggests we’re at 2016 lows – we are not. Another day or two of similar price action, and we will be. However, we did reach a land mark in credit. The synthetic indices, correlated to broad risk sentiment and our markets liquid proxy for it, shot through the 100bp Main/400bp X-Over levels having threatened to do so on several occasions already these past five weeks. The upbeat employment report (we could add GM’s record profit numbers for 2015) helped US stocks open better, but the weaker January US non-manufacturing PMIs led a rapid reversal in fortunes. European bank stocks took a battering, while in the bond space, Deutsche’s CoCos – already at distressed levels, dropped further left at between €80-87 depending on the issue. Others dropped too. The DAX closed 1.5% down and now barely 130 points off its January lows. Higher US oil inventories initially saw to it that oil futures declined, but that earlier weakness was trumped by the dollar coming under pressure which helped push oil prices massively higher into the close. We saw $35 for Brent (+7%)! As if to illustrate the disjointed nature of the market, the 2-year bund yield now resides at a yield at -0.50% (record low) and the 5-year at a record low of -0.26%. The tea leaves are telling us something.

Early weakness keeps the shackles on credit markets… We drew another blank in primary but that was to be expected given we opened so defensively. That leaves just EasyJet’s deal on Tuesday as the sole IG corporate offering since mid-January. The pipeline continues to build though, with LyondellBasell indicated their desire to get a deal done soon. Other US borrowers on the road/or scheduled for roadshows are United Technologies, Honeywell and Amgen. Admittedly we haven’t had much by way of issuance, but the €5.5bn printed thus far has two borrowers from the US accounting for 22% of that issuance. Last year saw a record 26% of borrowers from the US issuing in euros. Elsewhere in credit, we didn’t see any panic an there is little paper emerging from “desperate” sellers. Admittedly there is also little by way of buying cares and so we have bit of an impasse and so marking paper wider in a defensive move is more enquiry driven. Into that weakness around the CoCo market, a new target for the market today saw subordinated banks LT2’s of European issuers are getting hammered. The Markit iBoxx IG corporate bond index closed at B+178bp and the HY index at B+607bp (some 12bp wider) – but neither are at the 2016 wides. And finally, iTraxx Main closed at 104.5bp and X-Over 401bp, some 6bp and 14bp wider, respectively, versus the closes the previous session.

After that day, I now need ale. Back with you Friday. 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.