4th September 2015

That was the week that was…

FTSE 100
6,194, +111
10,318, +270
S&P 500
1,951, +2
iTraxx Main
71bp, -3bp
iTraxx X-Over Index
330bp, -8bp
10 Yr Bund
iBoxx Corp IG
B+-142bp, +1.5bp
iBoxx Corp HY Index
B+463bp, +3bp
10 Yr US T-Bond

Thank heavens for the upcoming non-farms report… Because it brought the opening week of the post holiday period to a much needed albeit premature end. Friday will be a non-event, with moribund markets – as few will want to do much ahead of the US payrolls report later and will be pondering their moves for next week. There will be much to reflect on with those payrolls and it could be a nervy week to follow depending on the number. Market participants in all asset classes will be sidelined today, so expect a quiet session after a fairly edgy start to this opening week of September. The Fed actually has its work cut out whatever the figure, needing to look at the global situation as it reflects on the right course of action to take on domestic rate policy. My view is that there should be no rate move. Markets are global, and that huge interconnection now between them means that it will matter, possibly, what they do. If they raise rates at the next meeting in mid-September, the language of the subsequent communique will determine the level of market volatility, the reaction of the different asset classes, fund returns and which is going to be the best asset class to be in. If the language is soothing, any rate adjustment higher will be greeted with a potential rally, treated as a damp squib and we’ll have a good run into year-end. The threat of more hikes in subsequent meetings will likely offer us more volatility and the need for a more defensive attitude through to the end of the year. Simple, really.

Accor giveth with right hand, taketh away with the left… We were not disappointed from today’s new issue activity with Suez (A3), Accor (BBB-), Honda (A1/A+), Heineken (Baa1/BBB+), Scania (A-) and Kerry Group (Baa2/BBB+) providing the fill for us today. The demand was ‘very good’, with books 4-5x oversubscribed in most of the deals. Heineken raised Eur500m in a no-grow 6-year at midswaps+70bp, Suez raised the same in a 10-year transaction at midswaps+80bp while American Honda plumped for a dual tranche 3.5-year floater and a 7-year fixed at midswaps+75bp. Scania’s was a short-dated floater, and sub-benchmark to start with, but they managed to raise Eur500m. Kerry’s deal (Irish foods group) was an inaugural, brave 10-year at midswaps+137bp for Eur750mn. Accor gave with one hand and took away with the other. They paid up for a tender of the 17s and 19s (around 30-35bp) while offering a concession for the new 8-year starting at 40bp. They settled at midswaps+155bp for Eur500mn (25bp premium). Initial premiums went out in the range of 17bp (Heineken) to 40bp (for Accor). They ended in the range of 7-20bp. More on this on Monday.

Monetary policy focus on more stimulus in Eurozone… No action from the ECB – but that is not news. The news was the potential for further accommodation (on growth and inflation concerns) and Draghi’s dovish stance which gave equities an additional  boost. There were hopes also that the Fed will be kind to the markets later this month. Basically everything we need to keep equities supported, corporate spreads tighter and a broad risk-on environment! It’s like the good old days. European equities gained by 2-3%, oil futures edged up a little, govvies were better bid and credit stable’ish amid still relatively only moderate secondary flows as primary markets dominated. Recent deals are performing well and this is seeing some confidence return to our market.

The US stock market rally faded after the close in Europe, so expect little to happen today as a follow through. As for the Thursday’s session, the iTraxx indices saw Main better offered, down at 71bp (-3bp) and X-Over at around 330bp (-8bp). Cash moves were more limited in a fairly unspectacular session and left in a narrow trading range, leaving the IG iBoxx index at B+141.5bp (+1.5bp) and the HY component at B+463bp (+3bp). The bund rally on a dovish ECB saw index yields lower and the first week’s marks of September seeing returns for corporate bonds on the up. Small mercies.

And finally, thank you… The iBoxx IG index is up at B+141.5bp and our straw poll asking our website readers where it would end at the end of the month from a starting level of B+138bp (end August) had them vote for a bullish stance. 55% expected spreads to be closer to B+130bp versus 45% who thought nearer B+150bp. After Draghi yesterday, the ball is in the Fed’s court. A thank you to all those who took time to vote.

Have a good weekend…

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.