21st October 2018

In need of a boost

iTraxx Main

73.9bp, -1.1bp

iTraxx X-Over

295.2bp, -1.2bp

🇩🇪 10 Yr Bund

0.44%, +2bp

iBoxx Corp IG

B+137.1bp, +2.1bp

iBoxx Corp HY

B+417.2bp, +8bp

🇺🇸 10 Yr US T-Bond

3.20%, +2bp

🇬🇧 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″]

What bright side?…

There’s little to be cheerful about for the week ahead. And that comes off the back of a bad news day last Friday. Chinese growth is slowing with third quarter GDP coming in at 6.5% – and the lowest level for a decade. There will be ramifications everywhere especially as the impact of the US tariffs is still to be felt. We had several European companies warn on profits with Michelin, Bouygues, Daimler and HeidelbergCement in the thick of it, but slowing tyre demand in China will impact the German auto sector. There was the European Commission’s rebuke of the Italian budget having markets on the defensive fearing a wider political crisis, before an intervention later from Moscovici (EU commissioner) calmed the frayed nerves.

The yield on the 10-year BTP reacted accordingly, extremely volatile as it rose to a 5-year high of 3.78% before closing at 3.57% (-2bp) all in the same session. And we still have the situation around the missing – now confirmed dead, journalist Jamal Khashoggi, which is fast moving with repercussions possible for the Saudi regime.

Altogether it means that we’re extremely unlikely going to see any confidence return to the markets in the short term. It’s been a terrible October for equities, and in Europe especially. European rates have had a slightly better time of it given their safe-haven status but yields are only flat in the month although they threatened to go materially higher. The outlier has been the US where inflation concerns and a hawkish Fed deem it necessary that yields rise there, and Italy where 10-year BTP yields have recovered to being 15bp higher this month on those budget concerns.

That lack of confidence also means that credit primary is likely going to continue to splutter where most likely we’re going to be hoping for opportunistic funding from solid, well-known, blue chip, IG rated corporates to help keep the market alive. They’re going to need to be outside their earnings blackout period though. There won’t be many by the looks of it!

So far as primary has been concerned, it’s a little like the secondary market at the moment. All but closed. We’re seeing just snippets of activity. We closed last week’s final session with primary drawing yet another blank and so just €7bn issued this month from the IG non-financial sector, which compares very unfavourably with the €18bn issued in October in 2017.

The €183bn issued so far this year will likely turn out to be no more than €210bn for the full-year – and that’s if the market is less volatile if concerns on some the aforementioned issues recede and new ones do not emerge. It will be the lowest level of deal flow in IG non-financials in the Eurozone crisis erupted in 2011 that year saw just €106bn of IG non-financial issuance). But the markets roared back in 2012 (€217bn) rising every year since to a record €271bn supply in 2016.

We had yet another blight on the primary financial landscape as Banco de Credito Social Cooperativo pulled a T2 deal – the latest institution to do so. It’s not lost on us that the recent several postponed deals are mostly from lesser-known financial institutions, which are looking to raise sub-benchmark sized funds, almost as a first dip of the toe in the market. Given the weakness in stocks and Italian government bonds which has also seen some contagion into peripheral markets just recently, for the Spanish name above we’re not at all surprised they have decided to postpone the transaction. The yield on the 10-year Bono, for example, is 22bp higher this month, at 1.75%.

Credit gives up some, but still out in front

We had US equities shooting higher at the open, then endured a choppy session where the 1%+ gains were faded to leave the indices generally flat for the day. All the aforementioned concerns were given as the drivers for the ability of the indices to hold onto to the higher gains.

As for rates, Italian sovereign debt played out to the headlines while most other markets were slightly better offered. That left the 10-year Bund yield close the week at 0.44% (+2bp) and the Gilt at 1.58% (+3bp), with the 10-year Treasury at 3.20% (+2bp).

After the close, Moody’s downgraded Italy’s sovereign debt rating to Baa3/stable in a largely anticipated action. S&P have them at BBB/stable but we expect that to change lower soon, while Fitch recently changed the outlook to negative on its BBB rating assessment.

In credit, iTraxx Main edged 1.1bp lower to 73.9bp and X-Over was 1.2bp lower at 295.2bp. Cash credit underperformed, most likely playing catch up generally amid outperformance in previous sessions – against all other markets. Still, absent a financial systemic crisis, the asset class is displaying some relatively solid defensive characteristics albeit even if activity has ground to a halt.

The iBoxx IG index was therefore 2.1bp wider on Friday, the index left at B+137.7bp or 7bp higher for this month so far. Within that, the CoCo market continued to feel a little hot under the collar, with the index moving 10bp wider on the day, and now some 57bp wider in the month and sitting on total returns of -1.5% for October so far. That’s not bad going given the weakness in bank stocks in some of the periphery.

Sterling credit edged just 1.1bp wider leave the index at G+160bp, representing a widening of just 4bp this month.

As for this week, the ECB monetary policy committee gives its rate decision on Thursday and the market will be expecting little to change. Amid the emerging risks on macro and geopolitics, we could probably expect a slightly more of a dovish tone and for the moment, they will continue to look to end the QE purchases at the end of the year.

US GDP is due in the week’s final session while the earnings season picks up a gear with over 150 S&P500 companies delivering their results including the likes of Amazon, Alphabet, Ford, McDonald’s and United Tech.

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.