30th January 2019

When the doves fly

iTraxx Main

73.4bp, -1.7bp

iTraxx X-Over

321.1bp, -5.3bp

🇩🇪 10 Yr Bund

0.19%, -1bp

iBoxx Corp IG

B+164.8bp, -1bp

iBoxx Corp HY

B+498bp, +1bp

🇺🇸 10 Yr US T-Bond

2.70%, -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″]

Holding on to gains…

After a difficult final quarter of 2018, we have got just what we needed in January as we corrected some the ills which so blighted 2018’s performance. Brexit might have dominated Tuesday’s session and led to a blank session for markets, but Wednesday was all about gauging the repercussions of the win for Theresa May.  Just like a game of tennis, the ball is back in the EU’s court.

Sterling weakened than recovered. Equities dropped (for other reasons) and were still underwater on Wednesday. Cash credit has been flat amid little activity although we managed some deals in Wednesday’s session. European earnings are emerging and have displayed a bias to weakness (Bosch, Siemens – as industrials are expected to be pressured by Chinese macro slowdown), while Santander’s earnings showed some strength as LatAm/Spain offset weakness in the UK.

So we head into the final session of the month on a less sure footing, much in the same way as we opened the account for the year. Fortunately, the belly of the month was a good one for risk markets, even if safe havens also managed to garner good support. Equities have led the way, but that is in some sense a correction of the poor 2018 performance, while credit and commodity have shot higher and managed to hold on to the gains.

The Dax is around 6% higher, the S&P isn’t far behind and we have euro-denominated IG credit returning 0.6%, the CoCo market 3% (iBoxx index) with high yield market portfolios sitting nicely at 1.8%. It certainly didn’t look too bright for part any of the credit market following the opening week of the month as the hangover from 2018 spilled over into this year. But after that first week, we went into rally mode while primary also opened with a slew of issuance that surprised to the upside.

Rate market investors have also had a decent time of it, with total returns as we close out the month up at 0.8% for it (Eurozone government bonds, iBoxx). Macro has been a worry and will continue to be so. The clouds continue to darken and it just feels like we are going to trudge through an extended period a lower economic growth amid the threat that ‘things can get worse at any time’ hanging over us. That will leave policy makers needing to remain dovish ‘forever’ and will keep rates underpinned.

The remainder of Q1 and Q2  threaten greater ructions. The Brexit debate is ongoing and the jury remains out, the European elections threaten a new order as well as a harbinger of things to come for domestic political agendas, and we no doubt have much more difficulties on the growth front as trade tariff and other events continue to play out.

All roads, in fixed income, therefore lead back to the corporate bond market. It might not be a Goldilocks economy as it feels a little cooler than she might like, but fixed income investors need performance returns. And that should support the bid for corporate bonds as corporates also muddle through the uncertain macro environment. They will pull in their horns and maintain as much as possible defensive balance sheet postures until the mist clears. Could be a while.

Dovish Fed boosts markets

So the results emerging in the early days of the European earnings season are following those in the US in terms of exhibiting a significant level of weakness amid the global growth slowdown, especially being impacted by China. As well as Bosch and Siemens (as mentioned previously), a report from the EC showed that businesses sentiment was at a 2-year low in January, and French consumer spending declined in December. Mind, French GDP for Q4 beat forecasts despite the gilets jaunes protests.

In the US, Boeing reported record revenues in 2018 on strong demand for aircraft and delivered an upbeat picture for 2019. Staying with aircraft, General Dynamics also beat Q4 quarterly expectations. McDonald’s reported a 14th consecutive rise in like for like sales in 2018, while AT&T fell short of analysts expectation in last year’s final quarter. Apple sounded an upbeat note as did AMD while the ADP employment report suggested a continuation of the healthy picture for the labour market.

The Fed came later and was in dovish form with no rate hikes in the near term and the committee cognisant of the economic slowdown. The markets rallied. Of course.

US stocks were neatly in the black for the session gaining as much as 2.5% depending on the index, as at the time of writing. European stocks were mixed with the FTSE the outperformer as it rose by over 1.6%. The Dax was 0.3% lower for the session, recovering from lower levels as the US rallied.

In rates, we had a better bid for European government bond paper, leaving the 10-year Gilt yield at 1.25% (-2bp) and the Bund to yield 0.19% (-1bp). US Treasuries in the 10-year were yielding 2.73% (+2bp).

In credit, we had some deals to look at. Argenta Spaarbank issued €500m in a senior non-preferred deal at midswaps+85bp. We had nothing in euro-denominated IG non-financials again, although National Grid took £250m in a 16-year maturity at G+120bp (-15bp versus IPT). This was followed up with a couple of high yield deals still to price from Smurfit Kappa (€300m) and Autodis (€175m).

The synthetic market was better offered, choosing to ignore the specific weakness in German equities and following other markets. That left iTraxx Main 1.7bp lower at 73.3bp and X-Over at 321.1bp (-5.3bp).

In cash, a quiet session followed but the market was better bid. The iBoxx IG index closed a basis point lower at B+164.8bp but the CoCo market closed completely unchanged. In high yield, the market closed unchanged as well, the index left at B+498bp (+1bp).

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.