31st October 2018

Grim reaper’s back in his box

iTraxx Main

74.1bp, -1.9bp

iTraxx X-Over

298bp, -4.5bp

🇩🇪 10 Yr Bund

0.39%, +1.5bp

iBoxx Corp IG

B+145.6bp, unchanged

iBoxx Corp HY

B+435bp, -3bp

🇺🇸 10 Yr US T-Bond

3.15%, +4bp

🇬🇧 FTSE 100 [wp_live_scraper id=”17″], [wp_live_scraper id=”18″] 🇩🇪 DAX [wp_live_scraper id=”19″], [wp_live_scraper id=”20″] 🇺🇸 S&P 500 [wp_live_scraper id=”21″], [wp_live_scraper id=”22″]

Ending with a bounce, but beware!…

A new month, thank goodness. Although we ended October on the front foot, we’re hoping it can’t get any worse through to year-end, can it? Drawing a line in the sand is just what we might need following the grimmest of months for markets as risk pricing came under some serious amounts of pressure, unprecedented in recent years.

IG and HY spreads 10% wider (iBoxx index) but total returns contained at -0.2% and -1%, respectively, during it. The S&P came off record highs seen in late September to register monthly losses in excess of 10% at one point, while also losing 10.5% of annual gains as it dipped into the red for the full year.

And with it, incredible intraday equity volatility (+/- 1.5% not untypical) which made for some extremely nervous participants as the contagion was being felt everywhere. In credit primary, for example, it was just easier (and more sensible) to stay sidelined – which is exactly what borrowers did. Price discovery was a pointless exercise.

Unfortunately, it’s not as simple as turning the page into a fresh month and expecting the markets to offer up an improvement. We are going to need some good news. In the final session, we were greeted by a raft of manufacturing data from Asia highlighting a significant slowdown across the region. That’s not going to auger well generally for global macro over the next few months at least. Still, we did get some respite from the recent volatility and we dare think that markets might see some (tentative) recovery, before facing up to the realities of a deteriorating macro situation – and continued strains on the geopolitical front.

Credit where it is due

Fixed income markets were the clear winners in October, but the devastating volatility and performance in equities relegated that asset class to the bottom of the pile as far as performance for the month was concerned. Well aware of the poor October month’s performance, the yearly one so far has almost turned on its head, too.

Eurozone government bonds (iBoxx index) lost 0.7% in the opening 10 months of the year, representing only a slight deterioration from the -0.5% total return losses in the year to end September. Euro-denominated IG credit markets were down 0.75% in the period to end October, versus 0.7% in the nine months to September (basically unchanged), while the sterling market benefited from slightly lower longer-end Gilt yields to improve performance from a total return loss of -2% in the January – September period, to -1.5% in the first 10 months.

For benchmark investors, IG spreads as measured by the iBoxx index twinned by 15bp in October and are 48bp wider in the 10 month period, coming after the 4bp of tightening in spreads in the index in September. For all the political travails in the UK, the sterling corporate market closed the month with spreads 9bp wider at G+165bp. High yield lost out, too, in spreads terms as we might have expected – and the index widened by 50bp to B+438bp.

However, compared to equities, the fixed income markets have been a beacon of relative stability. Up until the end of September, the Dax reported total returns of -5.1%, but when taking into account October, that figure was -11.4%. The FTSE lost just 2.3% in the nine months to end September, but the 10-month performance to the end of October saw a loss of 7.3%. The €Stoxx50 meanwhile was down almost 9% in the January to October period.

As much as we admired the US markets for the great pace setting trend that they managed to maintain right through to the end of September, the performance for October was as dire. Nine months’ work almost undone in a month. The final couple of sessions of the October nevertheless helped the numbers look a little better amid some good recovery. In the end, the S&P and Dow were up by 9% and 7% in the January to end-September period, respectively, but were only showing gains of +1.6% and +1.7% in the period from January to October, respectively. That’s after losing 7.4% in October for the S&P and just over 5% for the Dow.

Month-end brings much-needed relief

German retail sales rebounded, but by less than expected in September, by just 0.1% versus expectations as high as 0.5%, French CPI was steady at an annual 2.5% in October while the Eurozone’s inflation rate hit 2.2% in October – a 6-year high. The earnings season was extremely mixed again with as many hits as misses, versus expectations. GM got a big boost as it busted expectations for the third quarter (China surprised to the upside unlike for Ford), and it helped prop up the US equity markets overall.

The market was in rally mode, righting some of the wrongs of the past few weeks in a session also used to square up month-end portfolio positions and ready for the new month. German equities spent the day over 1.2% higher before closing 1.6% higher, while the FTSE closed 1.3% in the black. Those monthly returns will look a little better as a result.

It helped that US stocks were on the up, higher by 2% or more at one stage, buoyed by a solid ADP private payrolls report – and generally managed to maintain the momentum in Europe right through to the end of its session. They ended 1.1% higher (S&P500) we think on news that Moody’s had downgraded US industrial giant GE’s rating to Baa1 (lower by 2 notches).

Rates were in retreat, though. The yield on the US Treasury rose to 3.15% (+4bp) for the 10-year, with the equivalent Bund yielding 0.39% (+1bp) and the Gilt left at 1.44% (+5bp) to close the month. News that a Brexit deal should be agreed by November 21 had little impact on UK equities/Gilts as US markets dictated the pace. The 10-year BTP closed to yield 3.44% – unchanged in the month having seen a 5-year high of 3.78% during October.

As for credit, we were also looking to recoup some of the previous spread weakness. In the synthetic space, we had iTraxx Main lower at 74.1bp (-1.9bp) and X-Over back through 300bp, 4.5bp lower at 298bp.

In cash, it was a bit of a struggle and the IG market ended the session unchanged for the fourth day in a row, the iBoxx IG index left at B+145.6bp. The sterling market was the same, unchanged for the day. In high yield, better equities gave traders a bit of confidence to bid up the market a touch, and we closed 3bp tighter for the index, at B+435bp.

Have a good day.

For the latest on corporate bonds from financial news sources, click here.

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.