6th January 2016

Time of reckoning nears

FTSE 100
6,137, +44
10,310, +27
S&P 500
2,017, +4
iTraxx Main
79bp, -2bp
iTraxx X-Over Index
329bp, -4bp
10 Yr Bund
iBoxx Corp IG
B+156bp, +0.5bp 
iBoxx Corp HY Index
B+531bp, +5.5bp
10 Yr US T-Bond

Beware the long arm of the law… It appears that, in these opening skirmishes of 2016, we’re soon enough going to find out just about how much the global economy has relied upon China as we unwind the contribution she has made to stabilising and sustaining it through the last seven, rather fraught, crisis-ridden years. China’s contribution to boosting global growth has been immense, but as its economy embarks on a multi-year restructuring the ramifications elsewhere – if not domestically – are looking like they’re going to be painful. China aside, we are currently faced with a “wall of worry”. The markets will stabilise once we peek over that wall, but only rally when we surmount it. And as usual, the first gauge of an economy’s health is nearly always the level of stocks. And we are nervous. Equities, that is, are reacting – lower. We’re long used to manipulation by official intervention when crisis beckons – or has hit. The previous, concerted Central Bank interest rate cuts quelling the potential for systemic financial collapse will immediately come to attention. In Tuesday’s session, it was the turn of the Chinese authorities to buy domestic stocks (through state controlled enterprises); but to little avail, their equity markets ended mostly lower anyway. Further headwinds came from the overnight news that the US had filed a lawsuit against Volkswagen ensuring that this story runs through 2016; that the global default rate had picked up (to be expected given the problems in the US energy industry with Russia and Brazil close behind) with Europe in relatively good shape; and, that Eurozone inflation came in lower than expected.

The fightback could be a way off… After a bright start, European stocks retreated and oil prices were dropping again, but the equity falls were not as precipitous as they were in Monday’s session leaving hope that some semblance of calm may be coming our way. Fingers crossed here at least. Anyway, a choppy session ended with equities flattish but oil lower and closing in on multi-year lows again. This was not quite the dead-cat-bounce we had hoped for after Monday’s carnage. Credit markets were quiet as we could expect for such an illiquid asset class, although we had some primary activity giving hope that there will be more to follow later this week. The Brent contract closed at $36.35 (-2.3%) and WTI at $35.9 (-2.4%). The 10-year Bund rallied and yields closed at 0.54% (or some 10bp lower in two sessions) as the 2-year saw a record low yield of -0.38%. The Dow and S&P recorded small ups at their closes.

Primary sees the obligatory auto borrower first out of the blocks… Daimler became the first corporate to print in 2016 with a 3-tranche deal lifting a total of Eur3.25bn. The 3-year floater was for Eur1.25bn while the 5-year fixed (midswaps+65bp) and 8-year fixed issues (midswaps+77bp) were for Eur1bn each. The books for the deals were at Eur7bn and clearly skewed towards the longer tranche. The other deals were in the covered bond market. We remind that our forecast for total IG issuance in 2016 is for around Eur250bn, with each of the last 3-years seeing supply exceeding that figure.

Corporate bonds just a side show… At least the corporate bond market is behaving itself at the moment. No doubt, a little shell-shocked. Still, given the volatility elsewhere, spreads only inched wider. There remains interest to get involved as evidenced by the lower beta Daimler deal which garnered much interest. IG spreads moved just 0.5bp wider and HY around 5bp, as recorded by the Markit iBoxx index. That’s noise really. And with the slightly better move into the close in stocks, we had the Main and X-Over contracts better offered (lower) at 79bp and 329bp, respectively.

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.