2nd October 2019

Not the brightest of starts

iTraxx Main

57.4bp, +2.8bp

iTraxx X-Over

241.2bp, +8.2bp

🇩🇪 10 Yr Bund

-0.53%, +2bp

iBoxx Corp IG

B+123.5bp, unchanged

iBoxx Corp HY

B+411bp, +5bp

🇺🇸 10 Yr US T-Bond

1.60%, -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″]

But credit markets weathering it…

It’s been an inglorious start to the new quarter. The health of the economy has grabbed the attention as we start the run-in to year-end. A string of weak data prints, especially around global manufacturing, has seen risk assets coming under some pressure, and global macro is struggling to find a bottom. In fact, it looks like the storm clouds are gathering some more.

Impeachment proceedings are developing apace in the US against Trump, the pro-democracy protests in Hong Kong have taken a turn for the worse, Brexit is reaching another critical moment and all are coming against that backdrop of a weakening global economy.

The central banks are doing their best in fighting against the growing weakness, but are behind the curve (in our view) and not helped by internal dissent, for example, on the appropriate policy response (ECB). There’s little reason for equities to rally (they’re not) and as the earnings season approaches, they likely will struggle to gain much from here.

Rates sold off through September and the early signs were for more of the same into the opening sessions of the new month, but the data flow has put a stop to that. Declining levels of international trade and global economic activity generally leave us bullish rates as weakness pervades the macro space, while the various geopolitical risks add to the concerns and uncertainties.

Corporate bond markets will not go unscathed. Spreads can’t rally in isolation and borrowers will likely need to be more nimble as the window to get a deal on the screen and away will open and shut quickly. Time, nevertheless, will be on their side as rates should be anchored and funding costs are, too, although we think that they will improve (decline) from these levels again.

As those ill-winds lurk, credit primary is still churning out deals albeit amid signs of a slowdown in the issuance run rate after September’s breakneck pace of deal flow. We got deals away on Tuesday in IG with the non-financial volume at €1.05bn and senior bank issuance at €2.5bn. We failed to add any IG non-financial debt to that total on Wednesday, but banks were prominent in the market with even Metro Bank having another go after having pulled its deeply subordinated deal last week.

A record for the full-year, for the IG non financial market is still in sight, with €33bn of issuance needed between now and then.

Metro Bank steals it in primary

Back again – Metro Bank

Brexit fears didn’t put anyone off as investors piled into Ireland’s AIB Group’s CoCo offering. They printed €500m in a PerpNC5 AT1 issue priced to yield 5.25% (-50bp versus initial guidance). Demand for the offering was stunning, with books in excess of €3.5bn. Yield hogs would have been all over this low double-B rated issue. 

The senior offerings came from Swedbank which offered €750m in a 5-year senior non-preferred deal priced at midswaps+70bp and Unicredit which lifted €1.5bn in a 5.5-year senior preferred at midswaps+90bp (-20bp versus IPT).

In the real estate sector, Digital Realty issued €500m in an 8.5-year at midswaps+145bp (-20bp versus IPT) and Nepi Rockcastle also took €500m but in a 7-year at midswaps+235bp.

Sterling corporates kept up the recent good flow of issuance as Northern Powergrid issued £300m in a 40-year at G+140bp.

And then we had Metro Bank’s return, just as news emerged that the institution’s founder would leave by the end of the year. Sentiment around the beleaguered bank was much improved, its stock rising by over 30% in the session and they lifted an increased £350m in a 6NC5 senior non-preferred priced at par to yield a huge 9.5% (books over £550m). More than worth a punt, we would think!

Manufacturing slowdown and WTO ruling pummels equities

Celebration of seventy years of Communist party rule in China has been dogged by ugly scenes of violent clashes between pro-democracy protestors and the authorities. We didn’t quite see the same level in the intensity of the protests on Wednesday, but we must be starting to think of the worst for the former British territory.

It was reported on Tuesday that Eurozone inflation (at 0.9% in September) has slid further away from the central bank’s target level of 2%. The ECB is pushing on a string, it seems.

It is global manufacturing, though, which is really down in the dumps. Eurozone manufacturing was confirmed to be in slump territory as PMIs for the region’s activity came in at 7-year lows. For Germany, the Eurozone’s engine, activity is at the lowest levels since 2007, while Japan’s own gloomy picture was also affirmed on Tuesday. To round off the dire manufacturing data, in the US, activity has also slowed to a 10-year low and September’s print represented a real poke in the eye just as we started Q4. The odds of an October rate cut by the Fed have risen to 75%.

The FTSE was down 3.3% as global equities fell

And so the tone in equity markets remained extremely negative for the second successive session and we saw some big falls in stocks throughout the day. Losses accelerated into the close after news of the WTO ruling approving US moves to slap tariffs on $7.5bn worth of European goods. A transatlantic trade war is the last thing Europe needs right now. The FTSE lost a whopping 3.3%, the Dax fell by 2.8% and US markets were again down, this time by around 2% as at the time of writing.

Curiously, it’s seen as an equity problem, because there has been little action in the government bond market. Benchmark 10-year yields rose in Gilts to 0.49% (+2bp), the Bund was yielding -0.53% (+2bp) with only US Treasuries rallying and were left to yield 1.60% (-5bp), as the time of writing.

In credit, the synthetic indices rose as the cost of protection increased and S32 Main was left at 57.4bp (+2.8bp) and X-Over rose 8.2bp to 241.2bp.

IG cash closed unchanged leaving the iBoxx index at B+123.5bp, there was barely any weakness in the AT1 market with just moderate levels of weakness in the HY market as the index closed at B+411bp (+5bp).

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.