13th May 2019

Never surrender

iTraxx Main

68.3bp, +2.4bp

iTraxx X-Over

290.2bp, +10bp

🇩🇪 10 Yr Bund

-0.07%%, -2bp

iBoxx Corp IG

B+134.7bp, +3bp

iBoxx Corp HY

B+439.4bp, +8bp

🇺🇸 10 Yr US T-Bond

2.40%, -5bp

🇬🇧 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″]

Time to be afraid…

That’s better! We can at least explain the market moves in the week’s opening session. The weakness across all risk asset classes was down to concerns about the lack of a trade deal and the implications and ramifications for growth if one isn’t eventually reached. Global growth coming in at over 3% for 2019 is at the mercy of an agreement.

Trump might have been playing the tough guy, but the Chinese hit back vowing to ‘never surrender to foreign pressure’. It’s going to get more interesting now following initially a fairly stern and clear (official) riposte from the Chinese through official news media which elicited a measured market response. But then came the expected retaliatory tariffs of between 10% – 25% on $60bn worth of goods, leading to a mini-rout in risk assets.

Emerging market equities and currencies took it on the chin with the former seeing them all lose over 1% and the latter all 1% or more weaker versus the US dollar. European equities followed suit but declines (and the more measured declines earlier in the session) turned into a bit of a rout. Credit was better offered amid barely any flow in secondary, while primary only threw up a single plain vanilla deal which came in the senior financial sector.

Initially, the trade deal uncertainty weighed on activity and sentiment in more measured form, especially as the weekend passed without any fresh updates via a Trump tweet or otherwise. However, as the US markets opened, the markets were reacting to China’s response (as above) and Trump’s subsequent tweets about China being ‘hurt very badly’ should they pursue a trade war. Oh dear!

Thus the day’s market weaknesses finally reflected the uncertainty in the air around those trade negotiations. After all, we were wrong-footed on it in Friday’s session as the markets all ended up higher. Lest we forget, we could see an almighty rally if something concrete emerges and dispels many of the fears investors might hold. That’s unlikely at the moment though, don’t hold your breath.

Still, we’re at the halfway stage pretty much for the month. Equity markets have displayed higher levels of volatility than in the opening third of the year and it has taken its toll. The Dax is lower by 4%, the FTSE has given up around 3.6% and the S&P (as at the time of writing) is also around 4% in the red for the month.

Credit spreads have displayed some weakness too, as we might expect with IG spread (iBoxx index) around 10bp wider and the high yield index over 30bp weaker this month. Nevertheless, the rally in the underlying as the bid for safety has taken hold, resulting in, for example, a 10bp drop in the 10-year Bund yield since the beginning of May has served to stem much weakness in total returns.

IG credit has lost only 0.15% this month and the high yield market just 0.85% in those total return terms. We would suggest that spread weakness has been limited, so far. We know there is still solid demand for risk – mainly through primary – and few are prepared to offload paper on signs of weakness in risk assets. Market recovery won’t be kind to those who have reduced credit risk.

One can bet, though, that official policy everywhere will remain dovish; We have barely seen any single name event risk and the good old Goldilocks economic environment (as it is now) remains the corporate bond investors’ best friend. Credit investors are holding their nerve. Best to sit back and wait.

Safety first when the chips are down

The markets were riled by the trade dispute. It’s as simple as that. Nothing else mattered. We barely peeked at the UK political situation, for example, with talks between the two main parties likely coming to a close this week without a deal being reached between them.

The general view hitherto was that global macro ought not fall off a cliff, although arguing the case for that might seem a little out of the money at the moment – because global macro is the investors’ chief concern with both sides digging in.

Winner: Bitcoin has seen huge gains in the last month of well over 50%

Investors took position and the barricades went up, so to say. US equities lost 2.5%, or 3%+ on the Nasdaq (as at the time of writing). The Dax’s losses accelerated into the afternoon to 1.5% and the FTSE to 0.5% as a sea of red was splashed over all risk assets. We will be down again on Tuesday. The only one to hold up was Bitcoin, nestled now nicely above $7k a coin – and heading for $8k.

Duration though was in the ascendancy. The 10-year US benchmark yield dropping to 2.40% (-5bp), the equivalent maturity Bund to -0.07% (-2bp) and the Gilt to 1.10% (-4bp).

And so, to credit. NAB was the only IG corporate borrower in the session, as it took €1.25bn in a dual tranche transaction in 5-year and 12-year maturities. In high yield, Verisure was to price a €200m tap of its 3.5% 2023 issue.

Obviously, credit protection costs were rising, as investors sought to hedge out some risk. So iTraxx Main rose by 2.4bp to 68.3bp and X-Over closed out at 290.2bp (+10bp).

In cash, a quiet session had the Street in defensive mode. As measured by the iBoxx cash indices, IG spreads were 3bp wider at B+134.7bp although the high yield index ‘only’ widened by 8bp to B+439.4bp. That will see more weakness on Tuesday but it will be a reflection of weakness in equities more than anything else.

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.