14th June 2020

🗞️ Wobble Over, Higher We Go

iTraxx Main

70.8bp, -0.3bp

iTraxx X-Over

403.6bp, +1.2bp

🇩🇪 10 Yr Bund

-0.44%, -2bp

iBoxx Corp IG

B+152.4bp, +1bp

iBoxx Corp HY

B+536bp, unchanged

🇺🇸 10 Yr US T-Bond

0.70%, +4bp

🇬🇧 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″]

Economy in recovery mode…

Every large equity market decline and the headlines have us back in the eye of the storm. Add into it the data for the months past coming in as feared – if not worse (UK GDP, for example), and it’s all over. However, there’s resilience being displayed by investors who appreciate the risks and might be concerned, but invariably need to add risk and look at the declines as an opportunity to do so.

We know that it’s been bad. Of course, April’s monthly drop in UK GDP of 20.4% was devastating and the economy hit rock bottom, but the depth of the shrinkage should not come as a shock. After all,  it was manufactured, driven by deliberate government policy (globally) in the face of the pandemic.

Baby steps since, but the economy will have improved and will continue to do so. The stimulus packages will ensure that we can recover, hopefully quite sprightly, once we are fully free of the shackles of a second wave.

Credit spread markets have come under some pressure through the previous few days in line with the weakness in other risk markets. But trading flows are very light, secondary is very illiquid, clearing prices lack transparency and if equities fall by 2% or more, of course a defensive Street bid will make for broad credit market weakness. Primary shuts, investors take a breather – but we reopen and pile in, as borrowers flood the market satiating any latent demand (and there’s enough of it) for corporate bonds.

So we don’t think much will change. We might have seen the lightest of primary market activity at the back end of last week, but the deal flow will still come in at levels that exceed the usual June monthly average. Much will depend on broad market volatility, but we are hopeful that after last week’s wobble, those volatile conditions recede.

And credit spreads ought to resume their tightening trend. The cash and synthetic indices have gapped wider/higher but there has been little volume behind it to suggest the moves herald something more sinister. We didn’t get that sustained weakening dynamic back in late Feb/early March as we headed into the lockdowns, and we certainly do not anticipate that now.

So, we remain positive for credit and the high/low beta compression trend ought to resume. Most markets are close to getting back to flat for the year and our view remains that we will be in positive territory on a total return measure come year-end.

Swatting aside the bears

After a sprightly start to last week’s final session we faded the gains. Nevertheless, we managed to close in the black on no particular driver being responsible for the moves. That suggests the sell-off was temporary (perhaps an aberration) and seen as a healthy check on the runaway rally which preceded it.

Adding into the poor UK data for April, we also had the worst of prints on Eurozone industrial production for that month, recording a drop of 17.1% versus March (28% year on year). Again, we ought to expect a small improvement through May.

In the US, sentiment is improving (Michigan survey on Friday at 78 for June versus 72.3 in May) and that allied with some ‘bargain hunting’ likely helped boost US markets. Albeit a choppy session, the S&P managed to close 1.3% higher and the Dow almost 2%.

We should have a decent start this week in Europe. The FTSE closed 0.5% higher, the Dax was slightly in the red and the main underperformed across Europe. Rates were close to unchanged.

In credit, the synthetic indices were essentially unchanged with Main at 70.8 (-0.3bp) and X-Over at 403.6bp (+1.2bp). As for cash, there was also little movement as the IG index closed at B+152.4bp (+1bp) and the AT1 iBoxx index was at B+696bp (-1bp, but +100bp for the week). The high yield market was unchanged, with the iBoxx index at B+536bp although that did represent a 45bp widening in the week.

IG non-financial primary drew a blank for the second successive session, but we still got €9bn away in the week with the July total now up at €16.5bn and heading for somewhere close to €35bn – €40bn for the month (above the long term average. It’s been a decent month for the high yield with €5.4bn printed of which €3.3bn got done last week.

If markets hold steady, we should anticipate a busy week which ought to take us through next week as well. The lack of issuance on Thursday and Friday will be this week’s business, with borrowers probably looking to get their funding away before the holiday’s start. We happen to think that the market will be open through July.

As for this week, the data kicks us off on Monday with Chinese industrial production and retail sales for May with markets looking for a decent bounce in both. On Tuesday, its UK employment statistics, the Zew index of economic sentiment and US retail sales for May with markets looking for a bounce after that huge decline in April. That’s followed by industrial and manufacturing data for May as well. Midweek its inflation (UK and Eurozone) and Eurozone car sales. The BoE meets Thursday (more QE?) and we have initial jobless claims in the US before UK retail sales close us out on Friday.

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.