29th May 2019

Thank havens!

iTraxx Main

71.2bp, +2.2bp

iTraxx X-Over

306.4bp, +8.8bp

🇩🇪 10 Yr Bund

-0.175%, -2bp

iBoxx Corp IG

B+143.25bp, +1bp

iBoxx Corp HY

B+453bp, +5.7bp

🇺🇸 10 Yr US T-Bond

2.23%, -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″]

Pride comes before a fall…

Aagghhh. Sell in May! We suppose that the strategy would have worked. It didn’t feel as though it was a necessary evil, given we had come off the back of a good April for performance – but trade worries have started to concern much more now. Naturally, we’re going to look to June and by extension potentially a difficult month again. In fact, it is likely going to get worse. Time to get a little more defensive for June, perhaps. Equities have taken a bit of a mauling this month with the S&P off by around 6%, the Dax by 4% and the FTSE by 3%. Rate market investors have been the big winners while credit spreads have recorded their first monthly widening this year, weakening by over 20bp in IG (iBoxx index).

Increasingly, we are seeing how China might rise to the challenge. Their range of ammunition is now being aired, albeit ‘softly, softly’ still. At the moment, it is taking in those rare earth metals – of which they are the leading global supplier – and which are needed in a variety of high tech applications, which they might start to withdraw from the global supply chain. Not to get bogged down with the detail, the message is hitting home. One of both sides needs to back down and fast. That US administration-imposed June 1 deadline for higher tariffs is nigh.

It shouldn’t be lost on anyone that Japan’s Softbank hooked up with Nokia and Ericsson as their equipment provider for its 5G infrastructure deployment against Huawei’s offering. Of course, it’s probably just a coincidence that Trump has been in Japan meeting with the country’s new Emperor this week.

The rising fears were evident in the market on Wednesday. Coming off the back of weakness in Asia overnight, European equities were firmly in the red as well to kick-off what will be the last meaningful session for business this week (and month). It’s Ascension Day on Thursday and most European markets will be closed.

Rates were better bid and we are just a ‘headline skirmish’ away from the benchmark 10-year Bund yield breaching its record low yield of -0.20%, residing now at -0.17% (-2bp). Credit has gone off the boil, still relatively firm but primary has faltered of late (didn’t stop ITW’s issue) and investors have pulled their horns in, waiting for calm in risk markets to return.

Those headline skirmishes could come from that trade war if China so chooses to escalate the dispute (and she would be in her rights to do so), but we might need to have a greater think about the day’s unemployment release from Germany. The jobless rate grew for the first time since 2013, now at 5% in May from 4.9% previously as 60,000 were added to the dole queue. This can only get worse. The strains are clear.

Italy’s Lega head Matteo Salvino, fresh on the back of success in the EU elections, didn’t waste any time as he pressed for changes to the EU’s budget and a blanket guarantee on Eurozone government debt! That came as Brussels confirmed they had written to the Italian government seeking an explanation for the country’s deteriorating debt situation, with disciplinary measures likely we think as the Italians are unlikely going to budge.

What does it all mean? In equities, the path of least resistance will be likely to head lower. Rate markets will receive a better bid and we are going to test, for example, that -0.20% record low yield on the Bund yield most likely quite imminently.

Credit squeezes through the gaps but not unharmed with spreads expected to stay under some pressure while the broader markets remain difficult. Primary will quite possibly become a little more subdued – as it has been this week – with borrowers needing to display some nimbleness when windows open – and give up some spread, and new issues not performing while pressure on risk markets remains.

Primary likely closes out May with ITW

It’s been a while, but they’re back. Illinois Tool Works duly completed their 3-tranche offering, swatting aside broader market weakness in the process. They will probably be the last borrower in IG non-financials in the market this month. So the US borrower issued a slightly increased €600m in a 5.5-year maturity deal at midswaps+35bp (-15bp versus IPT), €500m in an 8.5-year transaction at midswaps+48bp (-17bp versus the initial talk) and another €500m in a 12-year midswaps+58bp (-22bp against the IPT).

So, assuming we are done for the month, the total issuance in May from the IG non-financial market takes us over the €30bn line, just. It’s the second best month for deals this year at €30.15bn.

That wasn’t the end of it. In the high yield market, we had Norske Skog in for 3-year senior secured funding of €125m priced at Euribor+600bp.

Take cover!

The markets took cover during the session. Equities were at the forefront of the sell-off, with the Dax off 1.5%, the €Stoxx50 some 1.6% lower and the FTSE 1.2% in the red at the close. The various US equity indices were up to 1% lower, as at the time of writing.

As on Tuesday, the story was with rate markets again, as safe-havens maintained a bid. The demand was not as desperate though, and so the drop in the yield was more measured. In all, it left the Bund yield at -0.17% (-2bp), the 10-year US Treasury at 2.23% (-4bp) and the Gilt yield at 0.90% (-2bp).

The synthetic indices hit some milestones for this current Series 31 contract. iTraxx Main rose to close through 70bp for the first time, at 71.2bp (+2.2bp) while the X-Over index zipped past 300bp, ending the day at 306.4bp (+8.8bp). That was to be expected given the move in equities.

Cash was always going to succumb to the current tone blighting risk assets everywhere else. Flows and volumes were light with ITW’s deal proving to be a useful distraction though. The market was better offered, but the moves were small such that the iBoxx IG index edged just 1bp wider to B+143.25bp.

The high yield market was barely distracted by the Norske Skog deal, though, and took its cue from declining stocks where the correlations are high. The index closed at B+453bp (+5.7bp).

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.