Archive

Monthly Archives: August 2018

30th August 2018

Trouble ahead?

MARKET CLOSE:
iTraxx Main

67.2bp, +1.5bp

iTraxx X-Over

293.7bp, +5.8bp

🇩🇪 10 Yr Bund

0.35%, -5bp

iBoxx Corp IG

B+134.5bp, +0.5bp

iBoxx Corp HY

B+393.5bp, +7bp

🇺🇸 10 Yr US T-Bond

2.86%, -2bp

🇬🇧 FTSE 100

6007.05, -42.87
🇩🇪 DAX

13116.25, ERROR
🇺🇸 S&P 500

3319.47, -37.54

Maybe, but it’s looking good at the moment…

Credit is delicately poised at this moment. Stable growth dynamics should help to offset fears some might have about reducing their exposures following the ECB’s QE exit. There hasn’t been a rush for the exit in any sense, but there has been a healthy reassessment as to how the market might react once the ECB no longer participates.

Then it comes back down to (as it always has) supply/investor demand/asset allocation and the specific fundamentals of the asset class.

Spread upside will depend on the broader macro environment where any reduction in trade tensions will be most welcomed, an improvement in economic growth will aid credit metrics/fundamentals and confidence gleaned from higher equities will boost a tightening in spreads.

Nevertheless, up until this point in 2018, it hasn’t always gone swimmingly well for the asset class with IG total returns for the year to date at -0.30% and cash index spreads 37.5bp wider. And that is after a lower than expected level of primary activity and an average of €4bn of monthly purchases by the ECB this year. For August, the IG asset class has returned -0.1% on iBoxx index spreads widening by 8bp (Eurozone sovereigns off 0.6%).

The summer holiday period is effectively over, we’re awaiting supply dynamics to improve into that final push into the end of the year. The weakness in spreads is a big surprise, but the total return boost (helped by the rally in the underlying) has helped to offset much of the concerns.

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29th August 2018

Euphoric US markets

MARKET CLOSE:
iTraxx Main

65.7bp, +0.7bp

iTraxx X-Over

287.9bp, +3.4bp

🇩🇪 10 Yr Bund

0.40%, +2bp

iBoxx Corp IG

B+133bp, +0.3bp

iBoxx Corp HY

B+386.5bp, -1bp

🇺🇸 10 Yr US T-Bond

2.88%, unchanged

🇬🇧 FTSE 100

6007.05, -42.87
🇩🇪 DAX

13116.25, ERROR
🇺🇸 S&P 500

3319.47, -37.54

Respite Wednesday…

Deals are back!

There were deals, but we didn’t quite manage to generate the same level of excitement as in the previous session. Just as well, as it might have been too much for some! The takeaway from Tuesday’s corporate bond deluge – €11bn of IG financial and non-financial issuance – was that the market can take such a high level of daily issuance and that borrowers are lined up to pull the trigger as and when required.

So, while we had some primary activity, it was a generally quieter session across the board. There was some excitement around the possibility of Canada agreeing to a freshened-up NAFTA deal but the markets didn’t follow through by going materially higher, in what turned out to be a limited session which saw most treading water as we come close to the end of the month.

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28th August 2018

What a day!

MARKET CLOSE:
iTraxx Main

65.0bp, -0.9bp

iTraxx X-Over

284.5bp, -3bp

🇩🇪 10 Yr Bund

0.38%, +2bp

iBoxx Corp IG

B+132.3bp, +0.3bp

iBoxx Corp HY

B+387bp, -1bp

🇺🇸 10 Yr US T-Bond

2.87%, +2bp

🇬🇧 FTSE 100

6007.05, -42.87
🇩🇪 DAX

13116.25, ERROR
🇺🇸 S&P 500

3319.47, -37.54

Difficult start, happy end…

We are closing in on these final few sessions of the month with the mood a little brighter following a more difficult couple of weeks previously. A likely agreement with a freshening-up of the NAFTA deal (admittedly between the US and Mexico only, so far) has given the markets a boost this week – pushing, in particular, Mexican and US equities higher – the latter deeper into record territory. The S&P and Nasdaq have managed to set record highs while equities have also followed higher in Europe, but are still 1-2% lower for the month.

The US 2s/10s yield curve has hit a decade low, flattening to just 19bp at one stage (20bp now) – and was helped along last week by the Fed chairman’s (Powell) comments at the Jackson Hole gathering. His view was that inflation was under control and that there was little sign of overheating in the US economy. There’s still likely going to be two further rate hikes this year by the Fed, though. But the markets right now are hoping that might change and/or are choosing to ignore the extra 50bp to come.

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21st August 2018

Some signs of resilience

MARKET CLOSE:
iTraxx Main

68.2bp, -2.6bp

iTraxx X-Over

293.4bp, -11.4bp

🇩🇪 10 Yr Bund

0.33%, +2bp

iBoxx Corp IG

B+131bp, -0.8bp

iBoxx Corp HY

B+392.8bp, -5bp

🇺🇸 10 Yr US T-Bond

2.84%, +2bp

🇬🇧 FTSE 100

6007.05, -42.87
🇩🇪 DAX

13116.25, ERROR
🇺🇸 S&P 500

3319.47, -37.54

But event risk still looms large…

If it isn’t Turkey potentially unleashing a wretched spiral of contagion infecting and busting emerging markets – and perhaps ultimately the financial system, we now have Italian event-risk back on the menu of problems to contend with. This one continues to be a slow-burning fuse. The fledgling Italian administration is tickling the EU’s (Eurozone’s) tummy with the promise of an €80bn infrastructure spending blitz in defiance – and in breach most possibly – of the fiscal spending rules. The rating agencies are readying those downgrades just as they did previously in the case of Turkey, although nothing here seems imminent (Moody’s waiting until the October budget).

Italian debt was feeling some pressure but whence it was the sovereign previously, now it is the corporate sector – especially in the case of Atlantia (owners of Autostrade, responsible for road/bridge infrastructure maintenance). Atlantia’s 5-year CDS is 180bp wider at 280bp and the cash 27s 100bp wider, representing a price decline of 13 points (now €90) with a small bounce off the lows. Atlantia debt might have found a bottom, but much depends on their license to operate – and whether it is revoked without compensation. We would think that there is little chance of a material recovery until we get some transparency on the situation. 10-year BTP yields are also recovering, now lower at 2.96% (-10bp Tuesday).

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12th August 2018

Fearing the spiral of contagion

MARKET CLOSE:
iTraxx Main

68.0bp, +4.1bp

iTraxx X-Over

303.8bp, +11bp

🇩🇪 10 Yr Bund

0.32%, -6bp

iBoxx Corp IG

B+128bp, +2.4bp

iBoxx Corp HY

B+390bp, +7bp

🇺🇸 10 Yr US T-Bond

2.87%, -7bp

🇬🇧 FTSE 100

6007.05, -42.87
🇩🇪 DAX

13116.25, ERROR
🇺🇸 S&P 500

3319.47, -37.54

It’s Trump’s way, or the highway…

China, Iran, Turkey, Russia and the EU. Trump’s economic war has unleashed a spiral of contagion which is threatening to result in an uncontrollable drop in financial prices. Once an emerging market nation can’t roll over its obligations drawing (over) exposed Western financial institutions into the net, then we have the makings of a financial crisis – which could become systemic. We’ve been here before, famously with the Asian financial crisis as the likes of Indonesia, Thailand and Malaysia succumbed and the contagion quickly took in LatAm and other Asian countries.

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7th August 2018

Trading through a minefield

MARKET CLOSE:
iTraxx Main

63.5bp, -1.5bp

iTraxx X-Over

291.8bp, -4.9bp

🇩🇪 10 Yr Bund

0.41%, +2bp

iBoxx Corp IG

B+125bp, -1bp

iBoxx Corp HY

B+380bp, -3bp

🇺🇸 10 Yr US T-Bond

2.96%, +2bp

🇬🇧 FTSE 100

6007.05, -42.87
🇩🇪 DAX

13116.25, ERROR
🇺🇸 S&P 500

3319.47, -37.54

Trade wars to stifle rally…

Sino-US trade tensions show no sign of letting up – with the former looking to dig in for the long term. We are, in fact, seeing the rhetoric ramped up some with China readying tit-for-tat measures in retaliation of the threatened increase and broadening in tariffs on Chinese goods.

It ought to be putting a cap on the ability for the markets to rally, but it looks as if the markets do want to push higher. The S&P500/Nasdaq are a percentage point or two away from setting new record highs, for example. With that, credit spreads have been edging tighter for the most part while new supply has now stopped dead in its tracks as the holiday mood sets in.

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