28th April 2019

Zzzz… it must be month-end

iTraxx Main

58.8bp, -1.2bp

iTraxx X-Over

250.7bp, -4.2bp

🇩🇪 10 Yr Bund

-0.01%, unchanged

iBoxx Corp IG

B+124.7bp, -0.1bp

iBoxx Corp HY

B+402.5bp, +2.5bp

🇺🇸 10 Yr US T-Bond

2.50%, -3bp

🇬🇧 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″]

But it’s been good…

The record close in the S&P index might be the immediate talking point, but we’re having a bit of a reflective albeit snoozy end to the month, with barely little really happening otherwise over the past week. And it doesn’t appear anything will change over the next one – even after that big beat in Q1 US GDP, which itself was boosted by temporary factors and which appeared to mask several underlying concerns.

There are excuses aplenty also coming from the earnings season and the blackout period associated with it. It’s also month-end and investors will be cleaning up positions and checking performance levels for April and the year to date. On the latter, they will be cock-a-hoop in all cases because rates, credit and equities have had a fantastic time of it. All these markets and others (oil too despite the 3%+ fall on Friday) have exceeded most analysts’ expectations in performance terms.

As we enter the final two sessions of the month, euro rates (iBoxx index) have given investors 2.2% of total returns performance. That would be excellent for any given year, let alone these opening four months of 2019. The same goes for the euro-denominated IG market where total returns year-to-date sit at an impressive 3.9%. And just as supply levels start to wane in IG non-financials, we’re due a continued squeeze and performance upside through May.

It goes on. In the high yield market, although we have seen some very moderate levels of spread weakness in the past week, returns still come in at 6.7% year-to-date. We have had the busiest week for high yield sales this year (Netflix to TelePizza issuing €2.9bn) and that might have weighed on spreads, but equities have been mixed, too, and would have added to the slightly negative sentiment in secondary. To get some perspective, spreads in the HY iBoxx index are 40bp tighter this month.

So those fixed income numbers are excellent. Equities markets have done even better. The Dax for the year-to-date is 16.5% higher. The FTSE has gained almost 10.5%. In the US, the S&P is also almost 17% higher in the same period and closed on Friday at a record high following a good rally late on into the close. It’s difficult to tell whether this will serve to boost markets this week given the Fed meets, earnings ramp up some more and payrolls are due.

Nevertheless, as we doubtlessly look ahead to May, there is little on macro/geopolitics to suggest that we ought to change course. Macro remains difficult and that big beat in US GDP for Q1, where the economy expanded by 3.2% QoQ (versus expectations of 2.0%) – generally failed to impress. There might have been much reassurance gained from the numbers but they were boosted by inventory build-ups, local government spending and trade. This is all expected to unwind in Q2/3.

Core PCE came in at 1.3% – in line with consensus, but down from 1.8% in the previous month. Treasuries rallied while equities initially failed to gain any boost from the data and only later were in the mood to reach that record high in the S&P.

Primary still dealing, but only in HY

The high yield market has been in the ascendancy of late. Friday’s deals took in Eircom’s €750m 7NC3 offering priced to yield 3.5% and also saw a loan offering taking the total proceeds to €1.15bn. TelePizza followed up with €335m also in a 7NC3 structure offering a yield of 6.25% (-25bp versus IPT). In the sterling high yield market, William Hill priced £350m in a 7-year unsecured transaction giving 4.75%.

As suggested earlier, that was €2.9bn issued last week in high yield and €20bn for the year so far (against €61bn last year).

However, in the IG non-financial market, we have had just €2.6bn of deals in the last two weeks fr0m Sika Capital, Auchan and last week’s sole offering from Logicor. That’s a relative drought and was unexpected even with Easter and the earnings season in the mix to disrupt the supply dynamics.

S&P500 and that record close

As well as that GDP data, we had Trump demanding Opec bring down oil prices and that was enough to see Brent and Crude prices drop by almost 4%. And then Intel warned on the chip market outlook which led to Intel and other chip stocks take a significant tumble. ADM and American Airlines also produced weaker Q1 earnings/outlooks. The S&P index nevertheless managed to close at its record high of 2939.9, after that late surge into the closing bell.

Before all that, equities in Europe moved only 0.25% or so higher, the FTSE was flat. European rates did little, the 10-year Bund yield unchanged and yielding -0.01% while the Gilt closed to yield 1.15% (-2bp) in the same maturity. The US Treasury yield dropped to 2.50% (-3bp) in the 10-year.

In credit, the iTraxx indices managed to close lower (better offered) with Main at 58.8bp (-1.2bp) and X-Over 4.2bp lower at 250.7bp through a rather uneventful session.

Big names coming up in earnings season

The cash market was subdued and managed to close unchanged with the IG iBox cash index left at B+124.7bp (-0.1bp). Secondary high yield also took a backseat but to the primary offerings in the session, and closed with little ado, the benchmark iBoxx index at B+402.5bp (+2.5bp).

As for this week, as we suggested earlier, the FOMC hooks up on Tuesday for its 2-day meeting and is expected to leave everything unchanged. Non-farm payrolls close us out on Friday (180k/3.8% unemployment rate, expectations). In between, we have earnings from the likes of Alphabet (Google), Apple, BP, GM, VW, Fiat Chrysler, ADM, GE, Mondelez, Pfizer, HSBC and the like. A big week.

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.