21st October 2016

Not rocking the boat

FTSE 100
7,027, +5
10,701, +56
S&P 500
2,141, -3
iTraxx Main
71bp, unchanged
iTraxx X-Over Index
320bp, -2bp
10 Yr Bund
0%, -2.5bp
iBoxx Corp IG
B+122.5bp, -0.75bp 
iBoxx Corp HY Index
B+415bp, -3.5bp
10 Yr US T-Bond
1.76%, -1bp

Maybe in December…

The mumble from Draghi was fairly dovish in our view. After all, external demand dynamics remain uncertain and volatile – and they will likely do so for an extended period yet. The ECB has little choice but to plug-on in the same expansive way as they currently are. The politicians are not going to  help – which was something Draghi mentioned once again was needed around structural reform to help out the ECB. He does not see an abrupt end to QE – so some form of tapering will come (we assume) – but that tapering wasn’t discussed. The big decisions are coming in December.

Anyway, the ECB left policy all unchanged. That is, the deposit rate left at -0.40%, the marginal lending facility at 0.25% and the asset purchase programme still at €80bn. Draghi kept everything on the table regarding the expansion of the programme beyond March 2017. That will depend on the quality in the sustainability of the economic recovery and potential for inflation to head towards their 2% target. With the baseline scenario for the growth outlook subject to downside risks and underlying inflation, trends were failing to convince (according to Draghi), we believe it is odds-on that the asset purchase programme will have to be extended beyond next March, and may well be increased in its size and/or be more targeted.

Flight cancellation: Deutsche Lufthansa

Taking off: Lufthansa stock

Few dared to raise their head above the parapet prior to the ECB’s big moment. It made for the dullest of sessions. The only noticeable activity – big moves even – were around specific stocks where earnings surprised or disappointed. Keller Group, NCC and Publicis Groupe shares fell by between 6-30% at the open on the back of profit warnings and/or revenue declines.

Lufthansa stock went the other way as the airline group raised full-year guidance. Away from that, we had producer prices in Germany still deflating (surprisingly) by 0.2% in September which represented a larger decline versus August. Out of the blocks, the euro declined and that was attributed to the expectation of dovish comments from the press conference later – but, eurozone government bond prices rose (?). They normally move in sync, in the same direction.

Draghi also commented that net corporate bond issuance had increased markedly (with a specific reference to September’s issuance) and that this was as a direct result of the ECB’s corporate bond QE efforts. Well, we would disagree with the maestro on this point – and he won’t be making that claim for issuance in October with just €12bn issued thus far in the month. And the link between large corporates issuing in the capital markets and SMEs benefiting from banks having more room to lend to them as a result is tenuous at best!

We’re absolutely not convinced.

But markets reassured for the moment

The DAX closed just 42-points of being flat (again) for the year, but this will unlikely come in today’s session given the small overnight drop on Wall Street. Other equity markets also managed decent gains across the board. Relief on tapering and perhaps no change from the ECB on anything saw to it that government bond markets traded higher, which left Bund yields back at 0.00% for the 10-year, while the equivalent Gilt yield just edge lower to 1.07% (-0.5bp). Portuguese risk had a good session, but  gave up gains to close with the yield on the 10-year bond at 3.18% (+1.5bp) and the first daily reverse for a while. That DBRS rating decision looms.


€500m 7 year deal: Aviva

The primary market was FIG and sterling dominated. ‘Dominated’ is probably too strong a word, given the handful of deals overall. Goldman Sachs took €1.25bn in a strange TLAC eligible 8.5NC7.5 structure and Aviva issued €500m in a 7-year deal. In sterling, Western Power did a small tap (£50m) while National Express was looking to issue a 7-year deal. There are plenty of mandates being awarded and we would think that next week will be a fairly busy one to close out the month.

In secondary corporate credit, we got a decent going better with the Markit iBoxx index 0.75bp tighter at B+122.5bp and the lowest level in just over a month. The high yield market was also better bid – again – and the index spread dropped to B+415bp (-3.5bp) and the lowest spread levels since early September too. The iTraxx indices closed a touch better offered (lower) with Main at 71bp and X-Over at 320bp.

The BoE has accumulated £1.56bn of its intended £10bn QE corporate bond lift – and achieved this in 3 weeks, having previously set out that it was looking to achieve the £10bn over 18 months. Small wonder the sterling corporate bond market has seen spreads hold steady in the face of some significant pressure on sterling and Gilts of late.

Anything that comes out, in this small illiquid market, is probably being lifted (if it fits their profile) by the BoE! And at least we know that in this case – unlike the ECB – bonds might be sold back into the market at some point in the future (they did this previously). Having said all that, the market closed unchanged on Thursday!

Have a good weekend, back on Monday.

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.