16th September 2015

Rational exuberance to extreme caution

FTSE 100
6,138, +53
10,188, +56
S&P 500
1,978, +25
iTraxx Main
72,5bp, +1bp
iTraxx X-Over Index
333bp, +5bp
10 Yr Bund
iBoxx Corp IG
B+149bp, +1.5bp 
iBoxx Corp HY Index
B+475bp, unch
10 Yr US T-Bond

Rational exuberance comes to an end… Nature abhors a vacuum, and the markets hate uncertainty. Chinese stocks went another 3-4% lower depending on the index, Asian equities followed suit, Europe and US equities are up – but only after US data saved the day, iTraxx index levels are a small up and cash credit spreads weaker for choice. The Fed has the market at its mercy, it would seem, and it all looks rather dramatic. We don’t think it ought to be. We know the Fed will move, if not on Thursday then most likely in October. Most are positioned accordingly, but it looks like the green light is needed before we can get on with it. Our website poll thus far has two-thirds of voters expecting no move this week. In the meantime, the market is acting as if it was caught in the headlights. Thank heavens a 25bp hike isn’t going to directly impact the European corporate bond market. In fact, it should make it relatively more attractive for absolute return funds, for example. Other asset classes might feel some heat as money is shifted from EM, some FX trades are unwound and US stocks perhaps come under pressure. But the spiral of contagion will not blow a hole in the corporate bond market here, just bring some weakness at most. Relax.

Extreme caution all of a sudden in primary… There’s money to put to work, but suddenly the markets have turned all skittish and are demanding more from borrowers. We suggested in yesterday’s comment that new issue premiums were on the up, that deals were failing to catch fire even so and that there has been too much issuance in too short a space of time. Theoretically, increasing those premiums ought to make deals a shoo-in, but that hasn’t been the case (with book sizes/coverage ratios still falling), and so the underperformance on the break is being driven by the current caution. Still, that didn’t stop mid-single-A rated DSM, which lobbed in a huge near-30bp NIP based on the initial price guidance for a 7-year, Eur500m no-grow transaction. The final pricing level, at midswaps+75bp, only saw the premium to fall to 20bp. That’s high for a low-beta industrial, especially taking into account that DSM was the sole non-financial corporate borrower in the market today and got away unopposed. In financials, the pick of the bunch was the AT1/CoCo deal from ABN, offering a final coupon of 5.75% for the Eur1bn-sized issue and where the book was a more glowing Eur3.5bn+.

Red turns to black on mixed US data… The equity markets in Europe languished until US retail spending registered a healthy rise in August, giving a fillip to most who chose to ignore the weaker manufacturing reports. The gains were picked up into the close, with most stock markets up by over 0.75% having been down by that much before. For credit we kind of followed suit, but corporate bond markets are lumbering in nature compared to their equity brethren. In the synthetic space, iTraxx Main was up a little at 72.5bp (+1.5bp) and X-Over at 333bp (+5bp). In cash, another weaker tone saw the iBoxx index close at B+149bp, some 1.5bp wider on the day and mainly on higher beta sectors under some pressure from Street marks rather than better sellers. Underlying yields have jumped higher (10-year Bund +9bp) and returns are going to look poorer.

Eurozone inflation data is out this morning.

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.