3rd October 2019

Hmmm, not feeling so lucky

MARKET CLOSE:
iTraxx Main

59.2bp, +1.8bp

iTraxx X-Over

252.3bp, +11.2bp

🇩🇪 10 Yr Bund

-0.58%, -4bp

iBoxx Corp IG

B+125.4bp, +2bp

iBoxx Corp HY

B+422bp, +11bp

🇺🇸 10 Yr US T-Bond

1.54%, -5bp

🇬🇧 FTSE 100 6001.89, (-0.19%) 🇩🇪 DAX 12764.80, (-0.51%) 🇺🇸 S&P 500 3397.16, (+0.34%)

Squeaky bum time again…

We’re in another one of those periods, of which we have had many, where it looks like the financial markets are about to collapse about us. The Eurozone economy is on the brink (again), Trump is facing the proverbial gallows (still), the US/China trade dispute has taken in a transatlantic war (again), Brexit uncertainties are building (still) and there are (still) various geopolitical risks threatening to erupt. The markets, though, are reacting to the slowdown in global manufacturing – and now services – of which this week’s reported US slowdown in both sectors has really set the ball rolling.

It would seem that there’s no complacency in markets as they take a more defensive posture. Trying to offset it all, easier monetary policy kicks in next month in the Eurozone, while there are growing expectations and pressures on the Fed to cut at the end of October meeting.

It is still a race to the bottom. We just stalled in the summer months; The economic data is filtering through again and global macro is in serious slowdown mode. On Thursday, it was services which showed a decline as PMIs recorded a slowdown across the board, but with the composite (services and manufacturing weighted average) recording a contraction in Germany and the slightest of expansions across the Eurozone (at 50.1).

The response is underway, as mentioned. In the Eurozone, the bluntest of tools will continue to be deployed (monetary policy), we’ll get the same in the US although the Fed must address the repo market ructions (stop reducing the size of its balance sheet for starters), the UK will be fiscally profligate in the face of a potential no-deal Brexit while China will continue to loosen policy as well. They’re all pushing on a string some more.

Fortunately, the German markets were closed so it was a quiet session, with just a couple of high yield deals in credit primary but finally a better bid for rates which had eluded us for much of this week. Credit markets were otherwise again treading water, perhaps caught a little in the headlights and in ‘wait and see’ mode.


Uncertainty means volatility

The session was notable for the decline in UK equities by well over 1% before they faded those losses to close 0.6% lower (coming after a decline of over 3% on Wednesday), while those bourses across Europe – where open – were flattish. True to form, it didn’t help that the EU’s Brexit steering committee was hitting back and rejected the UK government’s proposals, setting the stage for a tumultuous run into the end of the month. A no-deal Brexit, if Boris Johnson is true to his word, beckons.

The US equity markets were all over the place, taking another tumble on those escalating impeachment proceedings and were up to 1% lower, also before recovering to trade in the black (+0.6%) on the back of news that a Chinese trade delegation was in the US next week. We think.

Rates were better bid with 10-year Gilt yields back below 0.50%, now at 0.48% (-2bp) and the equivalent maturity Bund yield lower at -0.58% (-4bp) as US Treasuries were yielding 1.54% (-5bp). The closing yields were all off the session lows.

In credit, we didn’t quite draw a blank in primary, with a couple of deals printing in the high yield market. Frontmatec Group issued a slightly increased €175m in a 5NC2 structure at Euribor+575bp and Wind Hellas also increased its offering to €525m for a 5NC2 deal, to yield 4.25%. The combined offering took the year to date HY volume to €49.35bn.

There was a blank elsewhere meaning that, with just Friday to go, we have only had two deals this week in IG non-financials for €1,050m, representing a massive slowdown in the recent run rate.

Credit index moved smartly wider again with X-Over 11.2bp higher at 252.3bp and Main up at 59.2bp (+1.8bp) as protection costs continued to rise in the face of all that macro uncertainty.

In cash, it was quiet but weaker with flows and volumes quite light. Nevertheless, the iBoxx IG index closed up at B+125.4bp (+2bp), the AT1 index widened by 15bp to B+511bp and the HY index was 11bp wider at B+422bp.

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.