4th November 2018

Still trading the headlines

iTraxx Main

70.5bp, -1.7bp

iTraxx X-Over

288.1bp, -4.1bp

🇩🇪 10 Yr Bund

0.44%, +4bp

iBoxx Corp IG

B+143.6bp, -1.4bp

iBoxx Corp HY

B+425.7bp, -7bp

🇺🇸 10 Yr US T-Bond

3.22%, +7bp

🇬🇧 FTSE 100 [wp_live_scraper id=”17″], [wp_live_scraper id=”18″] 🇩🇪 DAX [wp_live_scraper id=”19″], [wp_live_scraper id=”20″] 🇺🇸 S&P 500 [wp_live_scraper id=”21″], [wp_live_scraper id=”22″]

Must be time to look ahead to 2019!…

A line in the sand drawn for a new month and a new start?  The chance would be a fine thing! It looked like we were off to a flying start for November, but we failed to maintain the improved tone even after a solid non-farm payroll report.

Equities were seemingly heading for the moon, boosted by hopes that Presidents Trump and Xi would come to some sort of agreement on the tariff situation allowing trade relations to potentially thaw somewhat. That was later dismissed by White House advisor Kudlow and US stocks dropped sharply – and into the red for the final session. A new month, and the same story – we’re trading the headlines.

The upside is that if we could retain some positive momentum – it will save and then bolster performance for the year, for equities anyway. As it stands, the US is still in the black (+1.8%), but Europe needs a much more (a lot more) of a boost to get out of the red, year to date. It’s likely not going to happen. If the bottom doesn’t fall out of the market, in credit we will likely grind moderately tighter, but few are going to rush in whatever happens. For starters, the level of secondary market liquidity is a shocker but when combined with a hesitant investor base, it precludes any material level of activity.

Performance, though, resides slightly in the red and is unlikely (from a total return perspective) going to dip into positive territory for this year. However, that’s not too bad given that -1% to +1% of total returns was the consensus range for this year (for IG credit). Spreads though have had a slightly more difficult time of it, with a steady leaking of them seeing investment grade cash indices around 45bp wider this year (iBoxx IG from B+97bp to B+143bp).

Fickle as markets are, we could see a decent pick-up in primary in November, should the cacophony of macro and geopolitical risks offer some kind of postponement of any of the worst case scenarios – until next year.

Nevertheless, we could really do with a material flurry of deals this month. If only because it will mean some confidence in risk assets is back. €32bn is the average month of November supply of IG non-financials from the 2014-2017 period. For the year to date, we currently sit on just €189bn (-17% versus the same period last year), begging the question as to whether the €250bn+ average annual deal flow in the 2014-2017 period was an abnormal event.

Seems like it might have been. It was a halcyon period for primary – bankers and corporate borrower gorged on the low rate environment and then on the ECB’s QE participation in the manipulation of the market. That’s no loner going to be the case in 2019, so we might just have to get used to lower levels of issuance than those 2014-2017 years. Before that, markets were impacted by the 2007 financial crisis and then the Eurozone crisis, so they might not necessarily give us a clue as to where the ‘real’ annual level of supply might be.

For sure, the capital markets have opened up and disintermediation had run riot across it. We might need the next couple of years to really find our feet and the real, non-manipulated annual primary level. It used to be that €200bn of IG non-financial issuance was a big deal, but we would think that might be the norm (as opposed to €250bn+ seen as an average annual level seen in the 2014-2017 period).

One step at a time

We need to just get through to year-end.

That’s what the October volatility highlights now, with incoming data and the headlines dictating the pace. The risk from he headlines was all too apparent in Friday’s session with hopes a Trump-Xi breakthrough following a tweet from the former were dispelled later and equities moved form being 1% or so higher (in the US) to up to 1% lower. That’s an example of the sort of intra-day swing – occurring too often for anyone’s liking – that has the credit market almost completely sidelined.  No secondary market liquidity, no flow, no volume, no primary, no confidence and much concern on the dire technicals.

In rates, the reaction was a little more textbook. The strong payroll figure, 250k jobs added in October (revised lower the previous month though) versus 193k expectation, with higher wage growth (0.2% month on month or 3.1% year on year – the best in 8 years). Treasuries sold off. the 10-year yield added 7bp and closed at 3.22% while the long bond rose by 8bp to 3.46%. the 10-year Bund yield was dragged higher, up 4bp at 0.44%.

It looks as if the Treasury market is the one to focus on because the US economy has legs in it yet, and these yields are going higher. So equities will retain volatility derived from the headlines while higher US rates will weigh on valuations too. It’s lose-lose. We must be thinking now in terms of whether there US stock market can maintain positive returns this year, the S&P is up by less than 2% after all.

In credit, the session played out with a slightly positive bias, the sell-off int he US coming too late to influence it much. The synthetic indices edged lower with iTraxx Main closing 1.7bp tighter at 70.5bp and X-Over left at 288.1bp (-4.1bp).

It was the same in cash, the market was slightly better bid without anything from a flow perspective to push it, and we ended the week with the iBoxx IG cash index B+143.6bp, 1.4bp lower in the session. The HY index closed 7bp lower at B+425bp. High yield total returns come in at -1% year to date while those for IG are at -0.8%. We will take that for the full year.

There was another postponed deal though – there have been too many for comfort over the past couple of months. This time it was Baa3-rated German auto parts manufacturing group ZF Friedrichshafen, a victim of the current volatility with the price discovery process likely resulting in an increased and prohibitive premium needed to get a deal from this borrower on the screen.

As for this week, we have a slowdown in the US earnings season but still enough S&P500 companies reporting while a few more from Europe will be dishing out their Q3 earnings. Macro takes in services and manufacturing PMIs in the US and the University of Michigan survey.  Tuesday brings the big one though, it’s the US mid-term elections.

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.