5th April 2018

Putting up stern resistance

iTraxx Main

57.7bp, -2.8bp

iTraxx X-Over

283.8bp, -6.3bp

10 Yr Bund

0.52%, +2bp

iBoxx Corp IG

B+107.5bp, -1bp

iBoxx Corp HY

B+333bp, -4.5bp

10 Yr US T-Bond

2.82%, +3bp

FTSE 100 [wp_live_scraper id=”4″], [wp_live_scraper id=”5″] DAX [wp_live_scraper id=”12″], [wp_live_scraper id=”13″] S&P 500 [wp_live_scraper id=”15″], [wp_live_scraper id=”16″]

Punching back…

We’ve had the sort of week which ultimately leads to the severest of corrections…lower. For US equities to trade through the sort of daily – and intraday – swings like it has, we have to think in terms of it ending badly (before we can exhibit a decent recovery). The markets are still finding their feet as they assess the likely outcome from the trade skirmishes. Each headline elicits a reaction, be it hopes of talks (we go higher) or the publication of a new list somewhere (we go lower), or a ‘Trump tweet’ about the issue (where we usually go lower).

Overall, we ought to be in a good space. Macro has come off the boil in Q1 but growth is still chugging along at a steady clip. We would think that policy will reflect the uncertainties in the system and adjust accordingly, certainly in the Eurozone from a more cautious ECB. While the US should only raise rates a couple of more times this year, although policy here is a little more unpredictable on strong jobs growth and the potential for higher levels of wage inflation. Nevertheless, we are still in a global Goldilocks economic trajectory – and it is our friend.

It’s the unknowns which rankle though. We would think that the trade issue is going to stay with us for an extended period and has already become the vital and pivotal variable in the investment process. There is no brushing this one aside and using the argument that copious levels of financial markets liquidity will ride roughshod over it. That might have worked with the North Korea/US spat, the various elections we’ve had over the past couple of years (Trump, Italian, German), the Brexit referendum and so on, but where the global growth outlook is potentially compromised, we need to tread carefully. It’s the economy…

The data in the session saw the composite PMI for the Eurozone come in at a lower than expected 55.2, and although the economy is still exhibiting a decent level of activity, it has come off the boil in both the service and manufacturing sectors during the first quarter. There’s nothing to worry about in that slowdown given that the pace in Q4 was at elevated levels, but the trade war event risk is a real danger and might just have an impact through the second quarter (on confidence, investment and orders).

Not that anyone was thinking that, as the last session of the week to get some proper business done (ahead of Friday’s non-farm report), saw a bounce of ‘dead cat’ proportions in equities boosted by the massive intraday recovery in US stocks in the previous session.

Primary still delivering

Volkswagen featured with €2.25bn of combined deals

There was only the one IG non-financial borrower in the markets, namely Volkswagen, but we are seeing deals every day so far in these early days of the new month. VW came with a 3-part offering for a combined €2.25bn.

They went for €1bn in a 1.5-year floater at Euribor+20bp (-15bp versus IPT), added €500m in a 3-year fixed offering at midswaps+37bp (-13bp versus IPT) and took €750m in 5-year funding at midswaps+60bp (-15bp).

So deals for each of the three opening sessions of April totalling €4.65bn and, at this run rate, we’re going to be looking at something north of €30bn for the month, perhaps closer to €40bn. That would go some ways to correcting the lower level of issuance seen in the opening quarter of just €55bn. Much will depend though on how the broader markets play out, as we are surely going to see periods where the window for issuance closes into any event risk related volatility.

Monthly IG Issuance

Other deals took in a €500m transaction from UBI Banca in a 5-year senior non-preferred format, priced at midswaps+140bp. And then Aussie property group Scentre lifted €500m in a 10-year at midswaps+80bp, with the group lopping 10bp off the initial talk, having garnered a book of €1.2bn.

Re-racking the risk pack

A super session for risk asset saw German equities rise by almost 3% – they were under fire the most in the recent sell-off. The FTSE rose by well over 2% and US stocks were adding circa 1% or more. Apparently, all because of trade talk optimism. We’re still in the red in the US, but now by less than 1% – having been off by around 4% at one stage yesterday (year to date) – and up by close on 7% a few weeks ago.

That meant the demand for safe-havens was reduced, and we saw yields rise as government bonds gave a little of their recent gains back. US Treasuries saw 10-year yields up at 2.82% (+3bp) while the equivalent maturity Bund yield rose to 0.52% (+2bp) and the 10-year Gilt yield moved up to 1.42% (+4bp).

As for synthetic credit indices, there was clear relief and longs were being reduced into the equity rally. iTraxx Main declined to 57.7bp (-2.8bp) while the X-Over index dropped 6.3bp to 283.8bp.

In the cash market, VW kept the interest going and the rally in equities was always going to have the Street tighten up offers into any emerging bid interest. So we obviously (?!) went tighter. That meant the Markit iBoxx IG cash index ended a basis point lower at B+107.5bp, the higher beta CoCo market was a little better while the HY index ended 4.5bp lower at B+333bp. Modest moves – but the first reversal (tightening) in spreads for a week.

Non-farm payrolls are up next.

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.