26th January 2016

Give us a clue

FTSE 100
5,877, -23
9,736, -29
S&P 500
1,877, -30
iTraxx Main
93bp, +0.5bp
iTraxx X-Over Index
374bp, +4bp
10 Yr Bund
0.47%, +-xbp
iBoxx Corp IG
B+178.5bp, -2bp 
iBoxx Corp HY Index
B+606bp, -3bp
10 Yr US T-Bond

Directionless and clueless… We’ve just plumbed significant depths in asset prices, bounced back some and now find we are treading water. And that is how we will stay until there is a herd to follow. It has been one direction or t’other since the whole “easing” game started. Admittedly, over the past several years we’ve seen a fairly consistent rise in asset prices, boosted and then underpinned by loose monetary conditions, but its impact appears to be running out of steam. We need new, brave, credible policy to wean us off the previous and current debt-fuelled spending binge, but everyone is content to see the powers that be push on that string. Just to keep it all ticking over. We have Draghi’s brand of QE to keep the eurozone afloat – just like the Fed had before it, to keep the world going asunder – and the oil-producing nations are pumping like there’s no tomorrow in order to keep their economies afloat. There is hope that the Chinese are about to unleash some sort of stimulus to prolong their economic “miracle” (and everyone else’s) while their economy enters a multi-year restructuring phase. The fuse is burning slowly and we all know what’s coming, but as ever we don’t know when. Where’s that herd!!? Monday’s upbeat tone didn’t even see out the morning session. And the oil price sliding was once again the trigger for weaker markets. The news flow generally was dour, with Italian retail spending weaker than expected in November, Kingfisher’s new 5-year plan receiving a resounding thumbs down and the German Ifo sentiment index lower – as we could expect. In corporate bonds, the better open soon reversed but, fortunately for a Monday, the interest to get involved was limited. The primary corporate bond market was closed, threatening now to leave January as one of the worst months for supply ever, outside a holiday period.

Where to now for moribund markets?… We’re looking for a reason to add – or for primary to open – to use up some sidelined monies, but are contrasting that with fresh signs we might need to reduce risk and build cash balances in case outflows materialise. The month-end marks are but four sessions away, after all. Credit will not be the underperformer for the month of January versus most other asset classes. Better to sit tight and hope. Equities continue to gyrate to the tune of the oil price and as it slips back to the $30 per barrel level, so stocks head lower. Brent was down at $30.11 (-6.5%), while WTI was down at $29.74 (-7.6%). The DAX took a tumble, 0.75% lower at one stage, but managed to close just 0.3% off, with other European bourses playing out in similar fashion – although the STOXX 50 closed 0.71% in the red. Government bonds behaved as they should, slightly better bid and yields declining a little, with the 10-year Bund now offering 47bp and the 2-year anchored at its record low level of -0.45%. Offering nothing. The corporate bond market was quiet, but that is to be expected for a Monday anyway. The past two to three years have all been about primary and with little action there, well, the corporate bond market is effectively closed.

And corporate bond spreads… The Markit iBoxx IG corporate bond index closed at B+178.5bp, a little tighter in the session. We’re closely watching those returns into the end of the month, and we see that they improved to -0.16% in the month-to-date from -0.25% to Friday last week. In high yield, we edged better too with the index left at B+606bp. Little left to add here. In the synthetic space, Main closed at 93bp and X-Over at 374bp, both a touch higher in the session. It looks to be a difficult start to the session with the US stocks (-1.6%) and oil prices (-7%) sliding into the close.

Be careful out there. Back Wednesday.

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.