24th May 2018

Harum-Scarum

MARKET CLOSE:
iTraxx Main

62.6bp, +1bp

iTraxx X-Over

286.4bp, +2.2bp

🇩🇪 10 Yr Bund

0.47%, -3bp

iBoxx Corp IG

B+120.2bp, +1bp

iBoxx Corp HY

B+358.3bp, +2bp

🇺🇸 10 Yr US T-Bond

2.97%, -3bp

🇬🇧 FTSE 100 [wp_live_scraper id=”4″], [wp_live_scraper id=”5″] 🇩🇪 DAX [wp_live_scraper id=”12″], [wp_live_scraper id=”13″] 🇺🇸 S&P 500 [wp_live_scraper id=”15″], [wp_live_scraper id=”16″]

Hold on tight…

What a week! Good riddance we would hope, but unfortunately, it looks like we’re just at the start of a more difficult period for the markets. The slowdown in the Eurozone’s economy is real and doesn’t show signs of turning around just yet. Equities have just got a little more choppy. The US situation around President Trump is getting noisier by the day – be it China, North Korea or the Mueller investigation. We’re reaching critical moments in all of them, and the time for action from the most unpredictable of any US administration in recent memory beckons (it did on Korea during the session). The markets are understandably nervous.

In credit, we’ve had two deals pulled – from borrowers who should have delivered bog-standard, smooth transactions. Instead, they’ve unleashed an air of uncertainty into the asset class as investors baulked at the pricing (even after supposed 40bp new issue premiums). Bankers have misread the mood of the market – and likely need a fresh look at the new deal pricing regime. Secondary spreads have gapped wider as whole sectors have been repriced following the so-called ‘cheap’ new deals – which largely haven’t performed anyway, with nervous investors subsequently selling (or trying to) into an ultra-defensive Street bid. Current levels are not enough to lure ‘bargain’ hunters, yet.

And Italy finally has a new Prime Minister. That show is about to begin. The ECB has sent out a timely reminder that indebted countries need to contend with bond flight risk should economic growth stall and/or there is a loosening in their fiscal situation. If the new Italian regime duly goes ahead with its intentions to open the fiscal sluice gates, then we have the makings of a major financial systemic crisis ahead of us.

So some pain is being felt in credit. The banking sector is under increasing pressure, as it will always be should a sovereign crisis erupt. Investors are sidelined and hoarding levels of cash which risk busting their own fund liquidity limits. The market can (and we think will) snap back, but we’re not yet at maximum pain levels. There’s plenty of liquidity in all markets to chase everything higher, but the trigger point could be a while away. Until then, hold tight.


North Korea talks off

The session though was dominated by Italian politics and frayed nerves about what happens next, but then we had the big news that Trump had called off the 12th June Singapore summit with his North Korean counterpart. Too bad. The more caustic rhetoric of late put a dampener on a potential meeting ever happening, and it was as if one or both of the parties were angling for a fight, so to say. The repercussions of any blame game might be felt now in the US/China trade talks as the Chinese would likely have been influencing voice in the back channels.

The markets reacted as we might have expected. Risk off but no panic. Rattled. US stocks tumbled by up to 0.6% (at the time of writing), the DAX was off by over 0.9% and the FTSE by 0.9%. Italian stocks didn’t necessarily underperform, lower by 0.7%. The safe-haven bid was in play, Gilt yields in 10-years down at 1.40% (-4bp), the Bund yield dropping to 0.47% (-3bp!) and the 10-year US Treasury back below 3% at 2.97% (-3bp). Heavy stuff. BTPs played out in a wide range between 2.30% – 2.41%, closing just a basis point lower in the session at 2.40%.

We’re back to the future so far as expectations are concerned. All the economic and geopolitical risk cards are back on the table. Chinese trade talks, North Korea/US risks, Iran and we can add Italy to the list as the chief tormentors of the markets.


Primary closes

After a fairly torturous period for the corporate bond market, it came as no surprise that we saw no deals in Thursday’s session. We are unlikely to see anything on Friday or Monday either ahead of the long weekend (UK Bank Holiday Monday).

That means that there are effectively three days in which to get some primary business done. A few days break from now until next Tuesday will come in useful and offer the markets a chance to regroup and reconsider. It won’t change the fact that IG non-financial issuance at just €95bn might well fail to get to the €100bn mark by the end of May. That’s not happened since before 2012, while the January – May period in 2017 delivered €128bn of deals.

The IG corporate sector has too much cash, punch drunk on years of cheap funding, and maybe just doesn’t need more at this time. Too much balance sheet cash can be a burden and represents some reinvestment risk. The economy (in Europe anyway) looks like it is slowing down, and few will be increasing capex and investment at this time, we would think.

Even by its own recent standards, the high yield market has been quiet, as well. The deal pipeline is full, but actually, the number of borrowers coming to market has been more sparse of late, with just €4bn of issuance this month. Only Chemours has printed this week (€450m) and only Kraton Polymers dealt last week (€290m).

A fairly predictable session ensued in secondary, in line with what we have been used to this week. The weakness was more limited though and the iBoxx IG cash index was left at B+120.2bp (+1bp) while the high yield market also edged wider, that index closing at B+358.3bp (+2bp).

No extra marks for guessing that protection costs increased in the session too. However, it was a more measured response as against what we have seen of late, leaving Main up a basis point at 62.6bp and X-Over at 286.4bp (+2.2bp).

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.