6th June 2019

Tulips from Amsterdam

iTraxx Main

66bp, -0.1bp

iTraxx X-Over

290.5bp, +1.5bp

🇩🇪 10 Yr Bund

-0.235%, -1.5bp

iBoxx Corp IG

B+140.4bp, -1bp

iBoxx Corp HY

B+462bp, -2bp

🇺🇸 10 Yr US T-Bond

2.11%, -1bp

🇬🇧 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″]

Go with the flow…

The ECB dominated on Thursday (and eventually disappointed) but the market’s attention hasn’t deviated from events elsewhere. It appears as if the so-called ‘Powell Put’ should see performance safely through to year-end. The key takeaway from Powell’s (and others) comments this week is that the central bank(s) will continue to prop up the markets.

Growth is going to stay subdued, inflation isn’t going higher in isolation, markets are going to be wary of those trade talks and global investment levels will continue to decline.

The macro outlook is fairly bleak with the IMF suggesting a hit to global growth of 0.5% in 2020. Market and policy rates are heading lower, borrowers are satiating investor demand for yield by extending maturities and we’re sucked into ever-increasing long(er) risk positions. If the music doesn’t stop, there’s not much to dislike.

Just look at the deal flow this week. As soon as we got over the trepidation of how Monday might open after a weak close previously, the markets have been cock-a-hoop. All because of the Fed. Equities have moved smartly higher instilling a feel-good factor into the markets. Rates markets, now expecting further policy accommodation, are also entertaining a good bid. The 10-year Bund yield saw an intraday low of -0.23% and looks like it is on the way to -0.30%.

Credit investors feel much confidence or have a touch of desperation about them – either works because they need juice. Knowing that their emboldenment is supported by the Fed and ECB, they will gain much courage to chase the market with a higher beta positioning skew getting them their just returns.

Yields are falling – and borrowers have slipped in to pick them off, with a slew of issuance which has been met with a mad scramble. Arkema saw its €400m hybrid tighten by 62.5bp between initial and final pricing on books 8x subscribed, while Publicis’ triple tranche deal for €2.25bn met with €8bn of demand and 30bp of tightening between final and IPT. The dynamics of both transactions were in excess of the recent averages in terms of demand and tightening.

There’s a touch of ‘tulip-mania’ about the markets but it’s been thus for the past decade.

The drip-feed of policy accommodation at each emerging or possible negative turn has suddenly given the markets renewed hope and reason to rally. Before we head into that non-farm report for May’s US payrolls, the weak ADP private sector jobs print a couple of days ago provided the latest nudge for central bank action – and it will come, especially of the non-farms report follows in the same vein.

Italy: Troubling times

Not that they do not have enough pointers already. The US data has been very mixed and the escalating impact of the trade war (Mexico tariffs, too) will see to it that GDP takes a serious hit. In Europe, growth has long been slowing and the recent factory data points to an imminent recession – in manufacturing, anyway.

Midweek, we had the European Commission report that formal sanctions are likely against Italy for failing to meet agreed budget targets for spending and debt reduction. These are the first steps towards fining Italy with reports suggesting that it could be as much as €3.5bn. Add into the pot the potential for a bigger Brexit clash between the EU-27 and the UK and the disruption that will create, then it seems odds-on that the ECB will be called into action.

Primary window closes ahead of ECB

The ECB meeting almost put a stop to activity in the primary market but, ahead of it this week, we have had a flurry of deals anyway. The only IG non-financial corporate in the market was Eutelsat, printing €600m in a long 8-year at midswaps+215bp (-10bp versus IPT).

That aside, Publicis’ deal will have taken the headlines for being the twentieth 3-tranche or more offering this year from an IG rated non-financial corporate. However, the deal of the week goes to Arkema with its €400m PNC5.25 hybrid which was 8x oversubscribed and final pricing rammed tighter by 62.5bp.

We could expect deals in Friday’s session, but it’s been a good week for primary already. After a relative drought in the previous couple of weeks into the latter half of a torrid May, we had €9.3bn issued in IG non-financials from 14 tranches or 9 individual borrowers.

For the year to date, the IG non-financial deal flow has now risen to €137.2bn, leaving us firmly on target for €250bn for the full-year.

It wasn’t quite a washout for primary in the session. The sterling market entertained deals from BFCM and Barclays. BFCM issued £500m in a 5.5-year senior non-preferred at G+115bp, while Barclays opted for CoCo funding as it took £1bn in a perpNC6 AT1 issue costing 7.125% (-50bp versus IPT).

In the high yield market, Bilfinger issued €250m in a 5-year maturity at 4.625% and Cabot Financial printed €400m in a 5NC1 floating structure at Euribor+637.5bp.

Draghi playing chicken with the market

So we spent the day waiting for the ECB communique and subsequent press conference, watchful for a sign or otherwise of further stimulus to come. In anticipation, equities pushed higher while in trepidation that the risks are massively skewed to the downside, rates retained support. The 10-year Bund yield, for that matter, had set a new intraday record low of -0.24%.

The ECB left everything unchanged and suggested that it expected to keep rates on hold (at -0.4%) through the first half of 2020, representing an extension of 6 months to previous guidance. There were some details on the cost of the TLTRO.

The ECB didn’t play to the gallery – be that the markets or the Eurozone’s governments. There were no dovish signals for the markets nor was there was any word on a ‘bailout’ for highly indebted national governments (cheaper funding through a new QE programme, for example). Basically, for the former the toolkit remained shut, while the latter needs to get its own house in order (restructure or boost the economy with a concerted fiscal stimulus) – none of which is going to happen.

ECB President Draghi: Reason for caution?

Otherwise, his musings were a bit of a mixed bag and we think a disappointment for a market looking for a little more. At a stretch, Draghi was near-term ‘positive’ but medium-term offered reason for caution. Inflation forecasts for 2019 were raised to 1.3% (from 1.2% previously) but downgraded to 1.4% in 2020 (from 1.5%). On growth, Eurozone GDP expectations were raised to 1.2% (from 1.1%) for 2019, but downgraded to 1.4% in 2020 (from 1.6%).

Markets were disappointed and, we think, confused. Equities immediately turned negative and the 10-year Bund yield put on 2bp to yield -0.20%. Into the close, a choppy market saw the Bund yield close 1.5bp lower at -0.235% (day’s range -0.24% – -0.19%) and Eurozone equities ended up to 0.2% lower (Dax).

The FTSE outperformed, moving up 0.6%, and US markets were flat/small up, as at the time of writing. The 10-year benchmark Gilt yield edged lower to 0.83% (-3bp) and is now just 19bp off its record low with the equivalent maturity Treasury yield at 2.11% (-1bp).

In the corporate market, the French state’s meddling in the proposed merger of Fiat Chrysler/Renault saw the Italian American group withdraw its offer. It leaves Renault exposed and highlights the difficulties anyone has in doing business in France given the power of the unions and state interference. The FCA said as much in a quite stinging rebuke. Ouch!

Secondary credit wasn’t doing much, but we again moved tighter for choice. The IG iBoxx cash index tightened a basis point to B+140.4bp (or 4bp this week, 33bp YTD), generally on the slightly better tone we have had. Performance has pushed on, with the IG market (iBoxx) returning 4.2% for the year to date – the highest level so far, of course the rally in the underlying the main driver. 

Higher beta risk also managed to tighten up, the AT1 market better bid albeit amid little happening (apart from the Barclays CoCo) and the high yield market was also a touch better. The HY index closed 2bp tighter at B+462bp amid little interest.

The synthetic indices closed unchanged with iTraxx Main at 65.9bp and Over at 290.6bp (+1.5bp).

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.