15th May 2019

Here we go again!

iTraxx Main

66.4bp, +0.7bp

iTraxx X-Over

282.3bp, -1bp

🇩🇪 10 Yr Bund

-0.11%, -4bp

iBoxx Corp IG

B+136.6bp, +1bp

iBoxx Corp HY

B+444bp, +2bp

🇺🇸 10 Yr US T-Bond

2.38%, -4bp

🇬🇧 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″]

Afraid? Seems so – or maybe not…

Now THAT was completely unexpected! It was dire into the opening part of the US session, and then the markets rejoiced. The great man incredibly blinked as Trump delayed auto tariffs for up to 6 months. The markets will now think it might be a harbinger of things to come and he could cede to something similar with Chinese tariffs. Until then, rates were better bid even amid some German GDP numbers which suggested that the economy in Q1 had grown by 0.4% on the previous quarter, and although that was in line with expectations it shows an annual growth of just 0.7% versus 2% for the same period a year ago.

Nevertheless, those numbers were brushed aside as that level of growth gives little to cheer about given the state of global macro is a massive concern for Germany. Investors instead focused on the weaker Chinese industrial production (5.4%/previous 8.5%) and retail sales numbers (7.2%/previous 8.7%), both for April. The news that the US was evacuating diplomatic staff from Iraq ramped up tensions in the Gulf region and was much more of an immediate concern.

The 10-year Bund yield had slowly – and without too much brouhaha – crept back to -0.07% from 0.04% over the past two weeks, but declined to as low as -0.12% in the session (-5bp), thereby dropping 16bp this month. The record low closing yield on this benchmark is -0.19% (and -0.20% intraday).

European equities opened lower and stayed that way – until the US rallied just after its open and rallied some more after that auto tariff delay. Asian stocks were in the black overnight, we think on Chinese stimulus hopes. Credit was met with a whole gamut of corporate borrowers pulling the trigger on funding, seeking to plug into the still solid investor receptivity to deals, the low funding costs available and a market clearly still open.

So, credit investors got their fill and there is little sign of indigestion; It seems more a case of desperation to get paper on board before the market potentially shuts. For how long that window remains open is the question. It could potentially slam shut at any time, reflecting the uncertainty surrounding those US/Sino trade talks and the impact thereafter if no-deal is reached.

Now, though, those gulf tensions add another ingredient to a growing pot of geopolitical tensions. Growth is not going to break out of its current malaise, and the risk even from here must be to the downside. Draghi must be sharpening his pencil and the European Central Bank must be readying to act.

In credit, though, few appear concerned that secondary might be under some pressure as equity volatility takes its toll through a hitherto fantastic period in 2019 for spread markets. That primary deals might not break tighter when free to trade is also a reduced concern at the moment. We are still receptive to new deals to help absorb the cash held in portfolios.

Heavy primary as macro/geopolitical fears mount

They were not backward in coming forward. ‘Needs must’, as the clouds darken on the macro environment while geopolitical tensions across the globe remain elevated.  Meanwhile,  Trump spreads himself rather thinly on many fronts.

IG non-financial corporate borrowers finally pulled the trigger and we were met with a slew of deals. Philips, Emerson Electric (again), Rentokil and Enel were most welcomed while KKR’s inaugural deal found much favour added to by a couple of real estate groups also borrowing.

Rentokil kicked us off with €500m raised in a 7-year maturity deal priced 22bp inside the opening guidance at midswaps+78bp. Order books were at around €1.8bn. Next up was Philips’ green bond, for €750m at midswaps+42bp as it also took 7-year funding. A relatively rare deal for the high triple-B rated borrower, demand for the deal exceeded €2.6bn and final pricing was 23bp inside the opening guidance.

Emerson Electric returned, having previously taken €1bn in a dual-tranche deal in January. This time the mid-single A rated US borrower took €500m in a 5-year at midswaps+42bp with final pricing also 23bp inside the opening guidance (books not disclosed). Enel closed us out with a 61NC6 €300m hybrid issue priced to yield 3.875%, which was 37.5bp inside the opening price talk, on books up at around €1bn.

The day’s activity garnered €2.05bn in IG non-finance issuance and took the total for the month to €15bn, with still a couple of weeks worth of business to get done.

In the REIT space, NEPI Rocastle issued €500m in a 4-year yielding 3.125% while S Immo offered up an increased €150m in a 7-year yielding 1.875%. Senior financials was represented by Erste Group’s €500m, 7-year senior non-preferred deal costing them midswaps+80bp. Finally, that KKR deal got done for midswaps+125bp for €650m with order books at €2.5bn allowing 25bp to be lopped off the initial guidance.

Rollercoaster ride

ABN Amro‘s Q1 profits fell by 20%, Kingfisher also missed but maintained 2019 profit goals and Renault issued a profits warning. Tui’s losses widened in the first half of its reporting year. It wasn’t great a great day for Europe Inc.

In the US, retail sales for April recorded a 0.2% decline versus expectations of a rise of 0.2%, although March’s numbers were revised sharply higher (+1.7%). Industrial production declined by 0.5% against expectations of it being unchanged. Not so good here, either.

US equities whipsawed and European equities moved smartly into the black, led by those US auto trade developments as the S&P made up some ground. Up to 1% lower for much of the day, the Dax ended 0.9% higher (!), the FTSE was up 0.8% while the S&P was 0.7% higher, as at the time of writing.

While the 10-year Bund yield was attacking recent lows it closed to yield -0.11% (-4bp), the equivalent maturity Gilt was down at a yield of 1.07% (-3bp). The US Treasury was yielding 2.39% (-3bp), at the European close.

The late recovery in equity helped to engender some confidence and a better tone in the synthetic iTraxx market, but only enough for them to close out pretty much unchanged in the session. X-Over was a basis point lower at 282.3bp and Main 0.7bp higher at 66.4bp.

Secondary cash was a little wider, leaving the iBoxx IG index at B+136.6bp (+1bp) and the high yield index B+444bp (+2bp).

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.