16th February 2020

🇨🇳 Hoodwinked

MARKET CLOSE:
iTraxx Main

41.5bp, -0.4bp

iTraxx X-Over

211.7bp, -0.6bp

🇩🇪 10 Yr Bund

-0.40%, -1bp

iBoxx Corp IG

B+101bp, unchanged

iBoxx Corp HY

B+331bp, -2bp

🇺🇸 10 Yr US T-Bond

1.58%, -3bp

🇬🇧 FTSE 100

5563.74, (-5.25%)
🇩🇪 DAX

9815.97, (+1.90%)
🇺🇸 S&P 500

2626.65, (+1.89%)

But undeterred…

The markets are putting up a remarkable fight against a coronavirus-led battering which will derail all of this year’s growth projections. We’re at record highs in the S&P and Nasdaq indices.

IG credit has returned 1.2% year to date, sterling IG 2.4% and the AT1 market 2.9%. Even Eurozone rates have returned 2.4% this year so far! That wasn’t supposed to be the case. Primary credit is functioning well (very well) and there are signs of desperation from investors for new deals, where the lowest rated of borrowers are managing to elicit great demand.

The WHO sent in its staff, and suddenly, the number of coronavirus victims jumped, markedly. What else should we not believe? In reality, few would have believed much coming from the Chinese authorities regarding the coronavirus outbreak.

They have form. Over the decades, for convenience reasons or otherwise, markets have also turned a blind eye on those domestic GDP numbers China has claimed to have achieved.

So we’ve had that big jump in the reported coronavirus victims. Trading the headlines, the equity markets promptly fell. The numbers have been volatile since, but it’s difficult to get a handle on how bad it might still become.

What is a nailed-on certainty is that the disruption to supply chains will persist. Global economic growth will falter through Q2 at least. And we will not make it up thereafter quickly enough to save the numbers for 2020 previously projected.

In fact, recent data from the Eurozone (pre-coronavirus) suggest that forecasts of a recovery this year in the region were far wide of the mark. Last week’s GDP, industrial production, consumption and retail sales data showed a regional economy stagnating and with confidence levels declining.

A more dovish policy tilt will be the net central bank result. In fact, we believe that the central banks will likely act (the EU commission has already acknowledged the risks to growth) and we must be thinking in terms of some sort of action in Q2, by the ECB. Hence the relative resilience of risk markets (more liquidity).

Overall, markets have taken all the imponderables on the chin. We’ve seen records set across a swathe of bourses in Europe and the US and they seem as though they want to go higher despite the various uncertainties. It does not appear that many are thinking that equities might be close to having had their moment in the sun.

There have already been a raft of profit warnings from the luxury goods, industrial, travel, commodity sectors to name but a few – but as long as investors believe its temporary or a one-off phenomenon, then valuations could be sustained.

The Eurozone region is already effectively in stagnation mode (grew by just 0.1% in Q4, 0.9% in 2019) and the reduced activity from the coronavirus could well tip the region into outright recession. Germany stagnated in Q4/2019 while annual growth was only 0.3% in 2019. It isn’t looking too bright for H1/2020.

Rates should, therefore, stay better bid and the potential for central bank action will see yields anchored or go lower from here. The poor growth outlook, fear of the (coronavirus) unknown and possible central bank action should see to that.

And credit? The market has recently become less correlated with equities. Spreads do no longer move in some sort of lock-step action with them. In fact, the corporate bond market itself has been extremely resilient this year and barely exhibited any volatility, when it could easily have come under some significant weakness.


Primary markets hotter than ever

After a disjointed start to the year, several multi-tranche deals from IG non-financial borrowers have redressed some of the concerns investors might have had. They have the cash to burn and we are seeing some massive demand for new deals.

It seems also, the yielder the better – and don’t worry about the ‘risks’. Just last week, Alpha and Piraeus banks received massive orders for their Tier 2 offerings, for example. The corporate bond primary market is red hot.

In IG non-financials, Siemens issued a 4-tranche euro deal, Comcast and LVMH issued 3- and 4-tranche deals, respectively before them, and IBM took 3-tranches. That’s all in February and they also added deals in sterling. So, after just €20bn in January, February’s issuance at the halfway mark is already in excess of €23bn. We must be looking at €40bn before the month is out.

Higher yielding issuance has not been the sole preserve of those greek (and other financial subordinated issuance). There has already been a flurry of corporate hybrid deals this year rated in the high yield category) and issuance in the corporate high yield market is top at €20.6bn. In just 7 weeks, issuance has exceeded levels that usually take them 3-4 months to reach.

We would think that the lack of single name events and the view that underlying yields are staying low – and going lower, is supporting the market. That might change if the current economic slowdown across Europe and Asia leads to something more tangible in terms of a ratcheting default rate. If not, on we go. This is record-breaking pace in issuance.


Markets fighting back against the virus

So far so good for Trump‘s re-election hopes – if all that matters is the level of the stock market (and jobs, consumer spending). The S&P and Nasdaq indices closed at record highs once again in last week’s final session – although the gains in the session were only as much as 0.2%.

The Dow closed 0.1% down. And that was even after US industrial output declined again in January, for the 4th time in five months – although that was blamed on weather and Boeing.

There aren’t quite the same levels of exuberance in European equity markets, probably because the macro slowdown represents a more clear and present danger. The Chinese situation also appears that it will have a more direct impact on the region, than it might on the US. Whatever, the region’s markets closed the week’s final session around flat.

Rates were slightly better bid into the close, leaving the benchmark 10-year Bund yield at -0.40% (-1bp) and the Treasury at 1.58% (-3bp).

In credit, the only borrower in the market was JP Morgan on Friday, as the group issued €1.25bn in an 8NC7 deal priced at midswaps+60bp.

The secondary cash market was never going to be doing much, and it didn’t. Still, it was better bid for choice, leaving the IG iBoxx index at B+101bp. That was a basis point tighter in the week and is 4bp tighter year to date. IG total returns are up at 1.2% year to date. The longer-duration IG sterling market is way ahead, though, returning 2.4% so far this year.

The AT1 market was unchanged, the index at B+336bp, with total returns for the year already up at 2.9% on spreads 60bp tighter. Surprisingly (?), the high yield market was slightly better bid and the index closed 2bp tighter (B+331bp) with total returns here, for the year to date, at 1%.

As for this week, the UK data stream takes in the unemployment and average earnings for December as well as retail sales and inflation numbers for January. In the Euro area, the German ZEW economic sentiment index is followed by flash Eurozone PMIs and inflation data on Friday in a lighter week for meaningful data.

The US will report the Empire and Philly Fed manufacturing numbers as well as flash PMIs and inflation data. All eyes, though, will be on the trajectory that the coronavirus is taking.

Have a good day.

Suki Mann

A 25-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 Credit Market Daily.