20th November 2019

Tariffs and impeachment weigh on market

iTraxx Main

50.1bp, +0.7bp

iTraxx X-Over

235.4bp, +2.4bp

🇩🇪 10 Yr Bund

-0.35%, -1.5bp

iBoxx Corp IG

B+117bp, +2bp

iBoxx Corp HY

B+403bp, +2.5bp

🇺🇸 10 Yr US T-Bond

1.74%, -4bp

🇬🇧 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″]

Optimism ebbs and flows…

The murky trade outlook put the kybosh on the markets midweek. The sentiment wasn’t helped by the very weak producer price inflation numbers in Germany for October. Equities lurched lower at the open in Europe and rates were having as good a day they’ve had in several weeks. There’s no panic, yet, but markets appear to be highly strung and extremely sensitive to any trade-related news flow (or lack of it).

Credit spreads edged wider again amid limited levels of secondary market activity, but it appears that the heavy primary activity is weighing on IG spreads. During the session, we had those multi-tranche deals on the screens from EssilorLuxoticca and Fresenius. That meant the €300bn level of annual issuance was exceeded (now €304bn YTD) for the first time for IG non-financial issuance in the euro-denominated corporate bond market.

Anyone hopeful on macro these past few weeks will have been seen to be unreasonably optimistic, we think. Anything which beats expectations is seen as a sign of some sort of green shoots of a recovery, but we keep getting enough poor data prints to suggest a need for less optimism. And oil prices are on a declining trajectory reflecting lacklustre global growth dynamics. At a stretch, we can’t even point to weak recovery dynamics.

The US/China trade issue looks to have a binary outcome but we must err on the side of caution, especially after the US passed a second bill aimed at supporting the HK protesters. That is destined to raise the temperature between the two countries.

With all that, it seems like Trump’s threat to raise tariffs on Chinese goods if no deal is forthcoming was the principal driver for the weakness in the day. However, there was word that Trump wants greater concessions before he considers rolling back on existing tariffs and cancelling the Dec 15 tariffs (due on over $150bn of goods). Suddenly, the optimism of a deal from a couple of weeks ago has turned on its head.

Primary milestones… Yawn

Admittedly, we have fleshed out the ‘record issuance ‘ theme for what seems like an age now. But we are achieving incredible milestones and ones that we never thought were possible – for this year, anyway. Remember, the forecasts for IG non-financial issuance for 2019 from just about everyone was for a decline versus 2018 – and we had pitched volumes for the year at €200bn – €220bn.

Fresenius Medical issued an increased €1.75bn in a 3-tranche deal. The 4-year €650m tranche priced at midswaps+55bp (25bp inside IPT), they took €600m in a 7-year maturity at midswaps+85bp (-25bp versus IPT) and €500m in a 10-year at midswaps+120bp which was 10bp inside the initial talk. Books were up at a combined €4.5bn

The big one, though, came from EssilorLuxottica. The French Italian company issued an increased combined €5bn in a 4-tranche effort. €1bn was issued in a 3.5-year maturity to yield -0.02%, followed by €1.5bn in a 5.5-year priced at midswaps+45bp (-20bp versus IPT) and €1.5bn in an 8-year at midswaps+55bp which was -20bp versus the opening talk. The final €1bn came in a 12-year maturity priced at midswaps+70bp and that was 20bp inside the opening talk. Combined books came in at over €13bn.

In the session, we had €6.75bn issued, for November so far we are up at €26bn (€27bn last November) and for the year to date a nice round €304bn has been printed in the IG non-financial sector. US borrowers account for a record 30.3% of the total YTD.

Notably, French insurance group CNP issued €750m in a long 30NC10 Tier 2 green-bond which was priced at midswaps+200bp, and was 20bp inside the opening guidance with books up at €2.2bn. The other deal in the session, came from Italian shopping mall REIT Immobiliare Grande Distribuzione which took €400m off a near €1bn book at midswaps+250bp.

Trade jitters, of course

After spending most of the day up to 1% lower, equities in Europe managed to claw back some of the losses leaving the FTSE to eventually close 0.84% in the red and the Dax around 0.5% lower. US markets were in the red at the start but the relatively modest declines aided that modest European recovery. At the time of writing, losses increased in US equities, bourses down by up to 0.8%.

In rates, we managed to give back some of the earlier gains, but the market was nevertheless better bid through the session. Having dropped to 0.70%, the 10-year benchmark Gilt yield closed the session at 0.72% (-1.5bp) while the Bund in the same maturity was yielding 0.35% at the close (-1.5bp). In the US, the Treasury was yielding 1.74% (-4bp), as at the time of writing.

Of course, the cost to protect credit was always going to end a little more expensive given that drop in stocks and general risk-off tone. The moves were modest, though, and iTraxx Main closed 0.7bp higher at 50.1bp while X-Over closed at 235.5bp (+2.4bp).

In the cash market, as already highlighted, we edged wider again in IG with the iBoxx index left at B+117bp (+2bp) – and that’s the widest level in a month. We had a modest reversal in the AT1 market with the index up at B+468bp (+5bp) and a similar level of limited weakness in the high yield market, the index left at B+403bp (+2.5bp).

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.