17th October 2019

Super Saturday up next

iTraxx Main

52.7bp, +0.2bp

iTraxx X-Over

233bp, +0.4bp

🇩🇪 10 Yr Bund

-0.40%, -1bp

iBoxx Corp IG

B+118.7bp, -1bp

iBoxx Corp HY

B+402bp, -2bp

🇺🇸 10 Yr US T-Bond

1.75%, unchanged

🇬🇧 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″]

And we don’t mean the rugby…

Thursday’s session really was all about Brexit. Getting the agreed UK/EU deal over the line is what matters now. It looks like it is ‘this deal, or no deal’, after Juncker ruled out granting a further extension after October 31 – which is a big help for the UK government. It is thought to have wanted such a commitment.

The deal now needs to be ratified in the UK, where Parliament attempts to do so, sitting for only the fourth time on a Saturday in eighty years. It is not a foregone conclusion that they will ratify it, and a second referendum – on the deal – cannot be ruled out totally, as yet. It’s fair to say that while most are relieved that a deal has been agreed – we can argue as to whether it is better than the one agreed by the previous UK government – the markets appear to still be in limbo.

The Gilt market wasn’t so sure and was effectively slightly better bid, after some big moves (higher yields) were seen in previous sessions in anticipation of a deal. Bunds were better bid, too, as German growth and US industrial production data were released (see below), but we would think that both markets will probably sell off again if we see a Brexit deal emerge out the other side of the tunnel – after the weekend. After that, macro news flow will take control again.

Sterling initially rallied but then faded the gains while the FTSE rallied as much 0.9%, before closing unchanged!

Busier primary markets

IG non-financials dealt up a couple of borrowers as Engie and E.ON both issued in dual-tranche formats. Engie issued an increased €900m in an 11-year green bond at midswaps+52bp, while they took 22-year funding for an increased €600m at midswaps+85bp. Combined books were in excess of €4bn and final pricing was 15-23bp inside the opening guidance. E.ON issued €750m in a 3-year midswaps+34bp and €750m in a 7-year at midswaps+55bp, on combined books of almost €3bn. Final pricing was 20-26bp across the tranches.

At €269bn, we’re just a couple of deals away (€2.25bn) for this year being the second-best on record for issuance in the euro-denominated IG non-financial primary market.

IG deals for October 2019 so far

In high yield, we had Hornbach Baumarkt price €250m of a 7-year deal to yield 3.375%, which was 37.5bp inside the initial guidance. Books were up at €750m.

In financials, it was insurer La Mondiale which shone with a €500m PerpNC10 RT1 offering, priced at a juicy 4.375% coupon – which was well inside the initial guidance of 5%, but books were up at a massive €5.4bn. Italian asset management company Anima Holdings issued €300m in a 7-year at midswaps+200bp (-15bp versus IPT) on books of €750m.

Elsewhere CPI Property Group issued €750m in a 7.5-year green bond at midswaps+205bp. Apicil Prevoyance issued €250m in a 10-year Tier 2 yielding 4%.

Cautious markets, but looking at the bright side

A strong performance in its bond trading operation helped Morgan Stanley’s Q3 earnings comfortably beat expectations and rounded off a week of mixed earnings from the US’ largest Wall Street banking groups.

Nestlé: massive $20bn share buybacks/special dividends for the period 2020 – 2022

Away from the banks, Unilever missed after slowdowns in India and China, just as Nestlé announced a massive $20bn share buybacks/special dividends for the period 2020 – 2022. The earnings stream so far in these opening skirmishes of the season have generally been much better than expected.

Elsewhere, the German government revised its growth forecasts for 2020 sharply lower to 1% from 1.5% highlighting the difficulties facing Europe’s largest economy. After dipping 0.1% in Q2, the third quarter data, which is out soon, will likely show a further decline and affirm that the German economy is in recession. US industrial production declined sharply in September, by 0.4% versus August, against expectations of -0.2%.

Nevertheless, it was a choppy albeit risk-on’ish session. Equities were higher across the board and for the most part but faded the gains into the European close. The S&P was above/below the 3,000 mark leaving it around 1% away from a new record high, as at the European close. The DAX ended flat having been up to 0.6% higher earlier in the session.

In rates, that data seemed to dominate into the afternoon session. The 10-year Gilt yield declined to 0.69% (-2bp), the same maturity Bund yield was at -0.40% (-1bp) while Treasuries were unchanged to yield 1.75% (10-year).

The synthetic indices were barely moved with Main up at 52.7bp (+0.2bp) and X-Over at 233bp (+0.4bp) through a drab session.

As for the cash market, IG outperformed, tighter in index by a basis point to B+118.7bp, the tightest level since August. The AT1 and high yield markets were better bid, just.

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.