30th January 2020

📉 Reality may be starting to bite

MARKET CLOSE:
iTraxx Main

45.9bp, +1.2bp

iTraxx X-Over

228.2bp, +6.1bp

🇩🇪 10 Yr Bund

-0.41%, -4bp

iBoxx Corp IG

B+105bp, +1bp

iBoxx Corp HY

B+365bp, +5.5bp

🇺🇸 10 Yr US T-Bond

1.55%, -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 markets trying to hang in there…

Iran tensions at the beginning of the month, the coronavirus towards the end of January. And plenty of market volatility. We would think that the early part of February will offer more of the same. Markets are having some large down days followed by moderate recovery sessions, all depending on the prevailing virus-related headlines.

There’s considerable pressure, of course, but dare we suggest that markets have had a relatively decent month all things considered? The US indices are still in the black – just, all three having previously set record highs during January. The DAX index though is down by 0.7% and the FTSE is lower by 2.1% – both having a particularly bad day of it during the penultimate session of the opening month of the year.

On the flip side, the bid for safe havens has the Eurozone government total returns (iBoxx index) up by 2.3% in January (to the 30th). Credit hasn’t done too badly out of it, either. Spreads are generally tighter and IG returns are up by 1% for the month. Last year’s stand out AT1 market is already posting +1.4% of total returns although high yield market returns are only at +0.2%.

Sterling credit has outperformed in these early skirmishes, however, up by a huge 2.7% in the month. Nearly all of it has come courtesy of that move in rates.

The coronavirus is the known unknown, but the markets are probably still trading on the hope that the authorities can get a better grasp of the scale of the problem and hopefully the ability to control it very soon – however unlikely that might be.

In addition, there is probably an element of ‘don’t be too concerned, the central banks will act to smooth to over any cracks if need be‘. The Fed might have been on hold on Wednesday, but there were dovish undertones as to future policy intentions.

All being told, we think that the coronavirus impact will be relatively short-lived but there is going to be a severe hit on global macro. There was already a non-trivial probability of some action from the ECB given that the Eurozone region is already under increasing pressure with recent data (especially from Germany) suggesting little expectation of a meaningful recovery anytime soon.

However, we would think that the ECB will refrain from any further policy action for as long as possible, especially until they get a better handle on how a coronavirus-related hit on Eurozone growth will play out. Again, it might come sooner rather than later.

The Bank of England faces a not-too-dissimilar dilemma although the recent data has been more upbeat. Here, though, it’s not just how the coronavirus might impact the economy (via reduced international trade flows, for example), but how investment and confidence might be impacted by Brexit now that the UK will finally leave the EU (January 31).

The MPC left rates on hold in January, but the odds for a cut next time have risen sharply.


Something for everyone in primary

The primary market offered up mixed bag with deals across most different sectors of the credit market. The high yield market – rather surprisingly even the volatility oil equities, has been in fine form! The €12.9bn issued makes this January the third best month for deals in the euro-denominated high yield market history.

Banco Santander was back, this time with a senior non-preferred issue for €1.25bn priced at midswaps+75bp (-20bp versus IPT).

Away from financials, the hitherto dearth of issuance in the IG non-financial issuance reversed course, with a couple of deals from Finland’s Elenia and Spanish group Abertis.

Elenia issued €500m in a senior secured 7-year at midswaps+60bp which was 20bp inside the opening talk, with books up at €1.9bn. As for Abertis, they issued an increased €600m in an 8-year at midswaps+148bp. Books came in at just €1.2bn and final pricing was 17bp inside the opening chat.

The rest was in high yield. Austrian construction group Porr AG went for hybrid funding, with a PerpNC5 structure priced to yield 5.375% for €150m. We had Norway’s travel and shipping group Hurtigruten offer €300m in a 5NC2 deal priced to yield around 3.375%.

Stada (Nidda Healthcare) followed up with a €350m tap of its 3.5% 2024 issue. Frigoglass is due to price €260m of a 5NC2 deal at around the 7% area on Friday.


Markets infected

US GDP for the fourth quarter came in at a steady 2.1% (2.3% for the full-year), in line with expectations, while core PCE inflation fell to 1.3% in Q4 against the 1.7% expected – both according to first estimates. There was a mixed bag on the earnings front – Facebook, Shell, UPS and Southwest Airlines all missed, while Tesla and Eli Lily, for example, beat expectations. The spread of the coronavirus though was dominated the broader market direction.

Sterling strengthened after the MPC held steady in rates but cut growth forecasts, so the FTSE took another leg lower. The index was down by 1.3% in the penultimate session of the month. The Dax declined by 1.4% and US stocks were in choppy form, down by around 0.5%, as at the time of writing.

Gilts gave little back too, and the yield on the 10-year benchmark rose to 0.54% (+2bp). The market was better bid elsewhere and the 10-year Treasury yield fell to 1.55% (-5bp), while the Bund was yielding -0.41% (-4bp) in the same maturity at the close.

The cost to insure credit rose. iTraxx Main moved 1.2bp higher to 45.9bp and X-Over rose by 6.1bp 22.2bp. These are all modest moves given the weakness in equities.

The cash market continues to act in very measured tones. IG spreads edged just a basis point wider, the iBoxx index up at B+105bp – and that’s just 2bp wider this month.

In high yield, the index was up at B+365bp (+5.5bp) and the AT1 cash index at B+376bp (+6bp).

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.