28th January 2016

Mid-cycle crisis

FTSE 100
5,990, +78
9,881, +58
S&P 500
1,883, -21
iTraxx Main
92bp, -1bp
iTraxx X-Over Index
366bp, -5bp
10 Yr Bund
iBoxx Corp IG
B+179.2bp, +0.7bp 
iBoxx Corp HY Index
B+603bp, -7bp
10 Yr US T-Bond

Get oil right, you get the market right… Another day of much indecision following on from a fractured session overnight in Asia. It feels as if we are at an inflection point, except that we are not. We’re just hanging on to every cent of movement in the oil price – fixated by it almost, and becoming experts on the oil industry which takes in Middle East politics, global demand, the rig count and default situation, barrels being pumped or due to come on line, inventory levels and so on. It’s the latest fad and the intraday price volatility impacts sentiment in all asset classes, dictating the direction of the markets for which the herd can then follow. The rest matters seemingly only at the margins now given that we are not due any major data points outside the earnings season for a couple of weeks yet. But the rest ought to matter. For instance, heavy machinery manufacturer Caterpillar, a global economic industrial activity bell-weather company, reported a weak sales outlook ahead of its results on Thursday, while Boeing also fell well short of investor expectations. While their shares – and those of others, may have come under some pressure, the broader market managed to do very little as it waited for the Fed. The weaker outlooks matter because they are a sign of how difficult the broader economic outlook is and the corporate decision making that will come out of that will impact future strategies taking in capex, investment, M&A activity and the like. Bleak? Seems like it.

Midweek, middle of the road, sitting on the fence, waiting… There wasn’t much to write home about on Wednesday. As stated, the Fed meeting put paid to that, leaving us in a state of flux. Stocks played out in a range between +/-0.75% but ended on the plus side with most European bourses up by between 0.3-0.6%. Oil was volatile. It still ended being a decent session, some 3.5% higher at $32.9 per barrel. But not before it saw close on $33.50 per barrel for Brent, helped by noise that the Russians would hold talks with OPEC on the potential for coordinated output cuts. Could this mean that the race to the bottom might be reaching a conclusion? Prices had dropped through $29 earlier in the day. Such volatility has been playing havoc with nerves and sentiment. For government bonds, they stayed well bid with the 2-year Bund firmly set at a yield of -0.46% and the 10-year a touch lower, yielding 44bp. Italy managed to get some sort of deal together regarding the treatment of non-performing loans which have been weighing on its banking sector. That helped sentiment some, but also, the 10-year BTP yield dropped to 1.50% with Spain’s equivalent Bono at 1.61% (-2.5bp).

Credit subdued, primary kaput… We edged a touch wider for choice in corporate bonds, the Markit iBoxx IG index closing at B+179.2bp (+0.7bp) and we are around 17bp wider year-to-date while we held much hope that we could tighten by 15bp for the year. From here, that looks almost impossible! In HY, we were 7bp tighter at B+603bp, or 65bp wider YTD and we can add to that after today’s session which is likely going to be a weaker one. In the synthetic space,  iTraxx Main and X-Over closed slightly better offered (lower) on the back of the better European close at 92bp and 366bp, respectively, but will comfortably reverse those gains today. The all-important primary market drew a blank. And it is getting worrying for the participants on all sides of the corporate bond market. With no primary, there is very little going on because secondary liquidity doesn’t really offer an acceptable route to trade anymore. It’s taken as a given by us all that we have little or no activity in the holiday month of August and into year-end (December) – and we position for that in many ways. But January? Well, this is a first and must be weighing on desk budgets for the year already. After all, much of the annual P&L is garnered through January and the first quarter – but not this time. If little materialises in these final two sessions of January (and that is likely going to be the case), then we would have to conclude that it’s about the worst month for the primary corporate bond market that we can remember. Mondelez’s issue two weeks ago was the last IG non-financial benchmark deal, and that in a January with just a couple of sessions to go that hasn’t even seen Eur5bn printed.

Don’t read too much into it… The Fed left it all unchanged and referenced global issues, market volatility etc., as having a bearing on their thinking and decision making. The markets reacted as we should expect – or did it? US and global growth is most likely slowing and there is hardly any inflation anywhere. Refinancing event risk is on the up especially in Asia and the US high yield market and broad financial stability is beginning to feel the ructions of it all. No rate hike – and unlikely one in our view, this side of the summer. So, a dovish outlook and equities fell (earnings will stay under pressure), Treasuries got bit of a bid behind them (escalating event risk and likely no hike) and oil edged off its highs. On the other hand, some argue that the Fed left the door open for a hike in March and so equities fell – but the front-end of the Treasury market outperformed – going against that thinking. The Dow closed 1.4% lower, the S&P -1.1% and the 10-year Treasury yield under 2.00% again. In other news, Repsol joined the growing list of oil and commodity groups announcing deep spending cuts and write-downs, while the Office of Financial Research warned of growing corporate defaults being a big risk to US financial stability in 2016 in its annual report. Quelle.

We will open weaker, sit tight because there is little else one can do. Try and 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.