2nd March 2020

🗞️ The market expects!

iTraxx Main

68.1bp, +4bp

iTraxx X-Over

308.9bp, +6.4bp

🇩🇪 10 Yr Bund

-0.63%, -3bp

iBoxx Corp IG

B+129bp, +3bp

iBoxx Corp HY

B+438bp, +0.7bp

🇺🇸 10 Yr US T-Bond

1.08%, -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″]

Central banks to kitchen sink it…

We had the obligatory dead-cat-bounce but it came courtesy of an extremely volatile session. This is no time to get involved in terms of attempting to find that bottom. This Covid-19 story is still evolving. Wait. The economic consequences are already significant and potentially could be off the scale.

It is so tempting to think that the market reaction is overdone. It probably is in the short term. But we are not looking at a V-shaped recovery either. More like a crooked ‘U’ with a more slow decline where relief rallies are met with more selling – before we emerge with some kind of a turning point.

As for now, as the coronavirus outbreak in China started to take hold and gain in prominence, the 10-year benchmark Bund – just moderately better bid – saw the yield on it begin its descent lower to -0.35% (from around -0.20%). Back then, we suggested -0.70% was the likely next big stop.

Now it’s going to be more like -1.0% amid a coronavirus-pandemic and concerted central bank action in the only way they know/and can.

We can also add to that sub-0.9% on the US 10-year Treasury, and a new record low through 0.34% on the Gilt. At 1.08% (Treasury), 0.41% (Gilt) and -0.63% (Bund) we are actually not really sticking our necks out with any of those calls.

Especially so, now that the OECD is thinking in terms of possible global growth of 1.5% this year, which leaves the IMF well behind any reasonable curve at 3.2% on their previous updated scenario – but they will soon come into line.

So while we try and get a handle on it all, the macro data for February is beginning to capture the impact of the virus’ impact on European and US industrial activity. The raft of manufacturing PMIs for February published in the session was quite revealing. Spain’s came in at 50.2, Italy 48.7, France 49.8 and Germany 48.0 with the Eurozone just about in line with consensus at 49.2. Pretty much all better than expected but activity contracting – and it will be by a greater margin when we get March’s data!

The UK saw some modest expansion in manufacturing as the post-Brexit boost took the indicator to 51.7, and in the US, the ISM manufacturing PMI showed the smallest of expansions at 50.1 (consensus 50.5).

It was a very choppy session. European equities fought back after opening sharply higher, collapsing – and then recovering. That’s a function of fear and expectations of a rate cut.

The FTSE managed to rise by 1.2% after registering gains of 2%+ at an optimistic open and the Dax closed flat after being sharply lower for most of the day, as other markets ended in the black, finally!

The US markets were up/down/flat – and then ripping higher to well over 2%, as at the time of writing. The markets must be anticipating a Fed interest rate cut, and probably of the order of 50bp.

As highlighted, rates  already resumed much better bid before succumbing to the better equity performance and yields edged off their session lows. Credit spreads took another lunge wider. iTraxx Main was up at 68bp (+4bp) and X-Over was 6bp wider at 308.9bp.

Credit primary was closed with not a single bond deal registered in euro/sterling in any market (corporate/SSA/covered). If markets open better on Tuesday, we fully expect some primary activity, somewhere.

Credit cash was only moderately on the defensive. But last week’s €711m of corporate bond QE from the ECB latest weekly haul would have been offered no consolation to the market. Their total now stands at €194,854m and for sure, it’s going to be considerably higher before they even get close to contemplate slowing down. They’re in it for the very long term whether they want to be or not.

Anyway, the IG iBoxx cash index moved ‘just’ 3bp wider and was marked at B+129bp which was 26bp wider this year. It was a similar picture elsewhere, with the AT1 market just 9bp wider leaving this index at B+489bp – and the high yield index at B+438bp (+0.7bp), the outperforming market! Sterling IG credit was also essentially closed unchanged.

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.