11th July 2018

Trump-inspired trade tensions hit markets

iTraxx Main

67.8bp, +1.2bp

iTraxx X-Over

304.3bp, -4.1bp

🇩🇪 10 Yr Bund

0.30%, -2bp

iBoxx Corp IG

B+132.2bp, +0.5bp

iBoxx Corp HY

B+394bp, +2bp

🇺🇸 10 Yr US T-Bond

2.85%, -2bp

🇬🇧 FTSE 100 [wp_live_scraper id=”4″], [wp_live_scraper id=”5″] 🇩🇪 DAX [wp_live_scraper id=”12″], [wp_live_scraper id=”13″] 🇺🇸 S&P 500 [wp_live_scraper id=”15″], [wp_live_scraper id=”16″]

Don’t bet on it…

Trump hadn’t even left US shores and was already throwing punches in several directions ahead of his first engagement in Europe, with NATO. They landed. The one which hurt the market most was the $200bn of additional Chinese imports that the US administration will seek tariffs on – with the Chinese promising to respond. But the President had harsh words on NATO spending and the reliance of Germany on the Russian gas pipeline to the country, before suggesting how his meeting Putin might be easier than with Theresa May – and finished with some warm words for the UK’s (now) former Foreign Secretary Boris Johnson.

The markets reacted. Stocks took a leg lower in the session losing over 1% while rates managed a better bid to reverse the weakness seen in the previous session. The US 2s/10s was back below 30bp and as low as 26.5bp during the session.

We are, however, into the home straight heading into the market close down for the summer, save for the usual deals we will get in the SSA space through the late July/August period. Others might pop up in the plain vanilla corporate sector in both IG and HY, but it’s going to be a very drab period for the new issue market. Secondary is going to be as predictable we would think, as it will trade in line with equities/sentiment.

If a summer of discontent is ahead of us, we go wider into volatile and weaker equities. Although a more standard, event-risk free 6 weeks will leave us most probably better bid for choice and we will have some positive momentum as we return for the last leg of activity starting September.

What’s for sure is that we have spent the last six months or so most likely having reset the bar for the market after spending much of the previous four or so years lowering it into some kind of frenzy and excitement that the corporate bond market was the place to be. Investors wheeled out all sorts of excuses to promote the bond market and justify the tightening in spreads to record lows – which included the ECB’s QE, all manner of fundamentals and technicals and the need to buy into a fixed income asset class which yielded a little more than government bonds. The inflows came.

All those positives still hold but, for some reason, investors are not buying it anymore. Probably because the prevailing view is that the cycle for this investment phase might have run its course. That halcyon period for credit is likely over, and we’re going to have to accept less spread performance and lower returns for this year and most likely next.

Primary winding down

Just a couple of non-financial corporate borrowers chanced their arm in the session, and both were high yield borrowers. The rest was predominantly SSA issuance with Aroundtown Property heading for the sterling market (£400m). Six borrowers this month have so far issued €3.05bn in IG non-financials and unless someone crops up with some kind of dual-tranche benchmark offering, the best we’re looking at for July might be something well below the €10bn mark.

So, the high yield deals took in K+S AG which issued a massively increased €600m in a 6-year deal at 3.25% (25bp inside the guidance) and then we saw the return of Greek telecom group OTE which issued €350m in a 4-year offering priced to yield 2.45% (-30bp versus IPT). The order book for the OTE deal was over €1.5bn and over €1.1bn for K+S offering. There was also a tap of €125m from Fedrigoni of its November 2024 issue priced at €97 (Euribor+412.5bp). So €1.15bn in the session took us to €1.6bn for the month so far in high yield issuance.

There was nothing from senior financials, but we have had a relatively decent month so far with €7bn of deals.

Trump on the offensive

The stepping up of the offensive against China on trade, taking in a whole gamut of products from the usual industrial heavyweights like metals and auto parts to more banal items covering smaller consumer products. We’re basically just about at the point where there is no going back – certainly Trump is not going to back away (for domestic political reasons if nothing else) while the Chinese have little choice but to enact tit-for-tat measures as far as possible.

And then there was the NATO meeting with the President berating those countries not paying their 2% share of GDP into NATO’s coffers. The President saved some of his ire for Germany – leaving Merkel necessarily coming back at him as she defended German independence. It is rarely politically correct from Trump but he is getting results with other NATO nations already beginning to ramp up their contributions.

The trade war, though, was the big driver for risk assets in the session. Banks stocks took a particular hit, leaving the DAX off by 1.5%, the FTSE by 1.3% and most other European bourses by 1% or more. As for the US, at the time of writing, stocks were up to 0.7% or so lower.

In the government bond markets, we were better bid for the most part but faded into the close. The 10-year Gilt yield rose off the lows to close unchanged at 1.30%, we had the 10-year Bund yield at 0.31% (-1bp) while the yield on the 10-year US Treasury at 2.85% (-1bp) following some higher than expected US producer prices, up 0.3% month on month in June and 3.4% year on year.

As for credit, the tightening trend of the past few session came to an end. Protection costs rose with iTraxx Main up at 67.8bp (+1.2bp) and X-Over 4.2bp higher at 304.3bp.

In cash, with little to focus on in primary, secondary felt the heat coming from those geopolitical situations. The cash market was marked wider as a result, but by just 0.5bp to B+132.2bp for the IG iBoxx cash index and 2bp for the HY index to B+394bp.

Have a good day.

For the latest on corporate bonds from financial news sources, click here.

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.