Archive

Monthly Archives: January 2020

30th January 2020

📉 Reality may be starting to bite

MARKET CLOSE:
iTraxx Main

45.9bp, +1.2bp

iTraxx X-Over

228.2bp, +6.1bp

🇩🇪 10 Yr Bund

-0.41%, -4bp

iBoxx Corp IG

B+105bp, +1bp

iBoxx Corp HY

B+365bp, +5.5bp

🇺🇸 10 Yr US T-Bond

1.55%, -5bp

🇬🇧 FTSE 100

6220.14, (+0.87%)
🇩🇪 DAX

12021.28, (+3.75%)
🇺🇸 S&P 500

3080.82, (+0.49%)

But markets trying to hang in there…

Iran tensions at the beginning of the month, the coronavirus towards the end of January. And plenty of market volatility. We would think that the early part of February will offer more of the same. Markets are having some large down days followed by moderate recovery sessions, all depending on the prevailing virus-related headlines.

There’s considerable pressure, of course, but dare we suggest that markets have had a relatively decent month all things considered? The US indices are still in the black – just, all three having previously set record highs during January. The DAX index though is down by 0.7% and the FTSE is lower by 2.1% – both having a particularly bad day of it during the penultimate session of the opening month of the year.

On the flip side, the bid for safe havens has the Eurozone government total returns (iBoxx index) up by 2.3% in January (to the 30th). Credit hasn’t done too badly out of it, either. Spreads are generally tighter and IG returns are up by 1% for the month. Last year’s stand out AT1 market is already posting +1.4% of total returns although high yield market returns are only at +0.2%.

Sterling credit has outperformed in these early skirmishes, however, up by a huge 2.7% in the month. Nearly all of it has come courtesy of that move in rates.

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29th January 2020

🗞️ Boing, boing

MARKET CLOSE:
iTraxx Main

45.0bp, -1.3bp

iTraxx X-Over

222.0bp, -7.7bp

🇩🇪 10 Yr Bund

-0.38%, unchanged

iBoxx Corp IG

B+104bp, unchanged

iBoxx Corp HY

B+360bp, -3bp

🇺🇸 10 Yr US T-Bond

1.64%, +4bp

🇬🇧 FTSE 100

6220.14, (+0.87%)
🇩🇪 DAX

12021.28, (+3.75%)
🇺🇸 S&P 500

3080.82, (+0.49%)

What crisis…?

We should probably be thinking in terms of setting our sights a little lower for 2020. The coronavirus is here to stay and is likely going to have a material impact on markets. As more international barriers go up in attempts to stymie the spread of the virus, then trade, investment and confidence and other drivers of growth are going to be impacted.

There will, therefore, be a significant hit on Asian regional growth and by extension on global macro.

We would not be surprised if the Q1 economic data over the coming weeks spurs some necessary central bank action, even if most agree that further easing from here is not going to offer much in terms of upside in growth dynamics.

The FOMC will stay pat on Wednesday and we think that the very recent domestic data will be enough to keep the BoE from moving as well in Thursday’s MPC meeting. Things will be different by the end of Q1.

At the moment, we think that the markets are behaving with a very measured tone. Equity markets initially took several big hits, but already look to be moving with smaller moves (up or down).

Rates have reacted as well but likely have found a new level for the foreseeable future. Credit primary has slowed, but we’re printing away nevertheless; The pipeline is rammed in high yield anyway and secondary credit is seeing only moderate levels of weakness.

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27th January 2020

🗞️ Nervous breakdown

MARKET CLOSE:
iTraxx Main

46.3bp, +1.7bp

iTraxx X-Over

229.7bp, +11.2bp

🇩🇪 10 Yr Bund

-0.385%, -5.5bp

iBoxx Corp IG

B+104bp, +2.5bp

iBoxx Corp HY

B+363bp, +16bp

🇺🇸 10 Yr US T-Bond

1.61%, -7bp

🇬🇧 FTSE 100

6220.14, (+0.87%)
🇩🇪 DAX

12021.28, (+3.75%)
🇺🇸 S&P 500

3080.82, (+0.49%)

Uncertainty equals weakness…

The coronavirus is possibly heading for epidemic territory. It will be the event which defines where the markets are heading – until such a time that the authorities have it under control.

We were super bullish on risk assets up until the event-risk emerged. Forget 3,500 on the S&P500 and equities elsewhere being pulled higher in its slip stream. We are now looking at there being a significant impact on global growth. Everything else will follow. After all, China Inc. is essentially closed for business.

So with those equities heading lower and likely going to stay depressed for a while, safe-haven rate markets are bid up. And the bid for them might not be as temporary as one thinks. Any news of the virus’ spread coming under control (that might be weeks/months away) is going to give way to working through what the economic impact might be. The assessment will be bleak.

Growth, investment, international trade, confidence will already have been impacted. Of course, the equity (lower) and rate (higher) dynamic is reacting classically, as expected. But what about the corporate bond market?

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26th January 2020

🦠 Just as credit records beckoned

MARKET CLOSE:
iTraxx Main

44.6bp, -0.1bp

iTraxx X-Over

218.5bp, +0.5bp

🇩🇪 10 Yr Bund

-0.34%, -3bp

iBoxx Corp IG

B+102bp, unchanged

iBoxx Corp HY

B+347bp, +2bp

🇺🇸 10 Yr US T-Bond

1.69%, -5bp

🇬🇧 FTSE 100

6220.14, (+0.87%)
🇩🇪 DAX

12021.28, (+3.75%)
🇺🇸 S&P 500

3080.82, (+0.49%)

It was all nicely lined up, but…

The market reaction as we closed last week’s final session was one of weakness in the US – as each new coronavirus case outside of China elicited a negative reaction. Notwithstanding that reaction, markets will likely still trade on the hope that the virus break-out isn’t the fabled ‘event’ which risks derailing this great multi-year rally.

The next couple of weeks might tell us if we are wrong, or whether the asset price bubble has some more to inflate.

Equities will likely shoulder and exhibit the brunt of the volatility and until very recently have been setting records. The temptation now is that it is time to think of the same for credit markets – and to position for it. In this asset class, investors haven’t thrown caution to the wind, but do still run a limited high-risk strategy in credit. Much is going to depend on the virus emergency.

However, the initial coronavirus impact on credit has been hard to find. Spreads have barely moved and if anything, are still better bid. There are no sellers. Primary markets are still printing away. Demand has remained at elevated levels. Deals are performing. There has been no volatility (even in the synthetic indices).

Why? The technical support coming from the copious levels of early new year inflows (chasing last year’s stellar returns?) – and not enough issuance to satisfy the demand, leaving that cash almost desperate to find a home.

It has left IG spreads just 20bp away from the record lows – AT1 spreads 75bp and high yield just 85bp (all iBoxx index) away, and with the outperforming IG sterling credit market just 12bp away (total returns at +2.8%! YTD).

For the moment in credit, we would think that it is a case of proceeding with caution but perhaps with a bias towards adding risk if (panic) sellers do emerge.

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23rd January 2020

🗞️ Coronavirus’ unknown dimension

MARKET CLOSE:
iTraxx Main

44.7bp, +1.1bp

iTraxx X-Over

218bp, +5.8bp

🇩🇪 10 Yr Bund

-0.31%, -5bp

iBoxx Corp IG

B+102bp, unchanged

iBoxx Corp HY

B+345bp, +6bp

🇺🇸 10 Yr US T-Bond

1.72%, -5bp

🇬🇧 FTSE 100

6220.14, (+0.87%)
🇩🇪 DAX

12021.28, (+3.75%)
🇺🇸 S&P 500

3080.82, (+0.49%)

Anxiety rattles markets…

The rally and recent upbeat tone in the markets has come to a screeching halt due to the increasingly serious nature of the coronavirus’ spread is being felt. Markets are taking fright.

Hopefully it can eventually (and quickly) be contained. However, the unprecedented lockdown of the cities of Wuhan, Huanggang and Ezhou – with more added to that list by the day, and curtailing of other activities/travel and so on across China at this important lunar new year celebratory period, is going to have markets in a defensive mood.

There’s also going to be a big macroeconomic hit, and although the IMF recently downgraded its forecasts for global growth (pre-coronaviras), others are going to follow suit.

Risk markets recoiled on Thursday, after that big drop overnight in Chinese equities (-3.1%). Investors moved swiftly into defensive mode and the level of activity declined. So it was a case of equities in the red, rates sharply better bid and credit stable with primary lighter.

There were enough deals on the screens nevertheless, from high yield/more unusual borrowers. Telecoms duo Altice and United Group were the biggies, but we also had Ellaktor (tap) and Mowi alongside several financial borrowers.

The ECB’s first meeting of the year didn’t throw up any surprises and obviously would have contributed to the lower levels of market activity. Economic risks remain tilted to the downside according to the central bank – but ‘somewhat less pronounced’, although we think they will quite possibly reassess that in due course depending on how events unfold in China.

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21st January 2020

🗞️ Hmmm, markets ready to go again

MARKET CLOSE:
iTraxx Main

43.4bp, +0.4bp

iTraxx X-Over

211.1bp, +2.6bp

🇩🇪 10 Yr Bund

-0.25%, -4bp

iBoxx Corp IG

B+102bp, unchanged

iBoxx Corp HY

B+337.6bp, +4bp

🇺🇸 10 Yr US T-Bond

1.77%, -6bp

🇬🇧 FTSE 100

6220.14, (+0.87%)
🇩🇪 DAX

12021.28, (+3.75%)
🇺🇸 S&P 500

3080.82, (+0.49%)

As coronavirus spread dampens the mood…

The growing concerns around the spread of the new coronaviras which is sweeping through China are being felt in the markets. Should it be eventually be contained and managed as other Sars-like viruses have been, then market recoveries will be swift. Until then, headline risks will keep risk markets in a cautious mood. Equities came under some pressure although we managed to recover much of the losses, rates were seen better bid and secondary credit was unchanged with primary still printing a plethora of predominately financial issuance.

Busy credit primary markets are likely going to be the case through all this week. Once again, we observe that we have not quite seen the high levels of deal flow from plain vanilla non-financial corporates that most investors have been anticipating. Nonetheless, demand for the deals on offer is at very high levels and this is going to be sustained through the first quarter.

Not that we are cheerleaders for institutional IG non-financial corporates, but that pent-up investor demand is good news for borrowers. The market is in excellent shape and receptive. Deals dynamics are unchanged compared to what we saw through most of 2018/9 – and set to stay that way for the foreseeable future if the plain vanilla corporate bond dynamics remained unchanged.

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19th January 2020

🗞️ Starting with a rate cut

MARKET CLOSE:
iTraxx Main

42.6bp, -0.7bp

iTraxx X-Over

207.1bp, -0.6bp

🇩🇪 10 Yr Bund

-0.22%, unchanged

iBoxx Corp IG

B+103.7bp, -1bp

iBoxx Corp HY

B+336bp, -2.5bp

🇺🇸 10 Yr US T-Bond

1.83%, +2bp

🇬🇧 FTSE 100

6220.14, (+0.87%)
🇩🇪 DAX

12021.28, (+3.75%)
🇺🇸 S&P 500

3080.82, (+0.49%)

If you can’t beat ’em, join ’em…

Just two weeks into the New Year and a UK rate cut is just about in the bag. Rallying Gilts and a solid bid for sterling corporate credit has seen the sector outperform – with spreads tighter by 6bp (iBoxx index) and returns already up by 2%. Friday’s horrible and continued decline in retail sales for December (fifth monthly drop in a row) – allied with other weak data during the week, and amid protestations of a cut being needed by various MPC members all suggests an interest rate cut is likely at the next meeting (Jan 30).

There’s little point in hanging around. After all, waiting for a Eurozone or Chinese recovery is not going to bail anyone out.

Although China recorded its slowest annual growth rate in almost 30 years of 6.1% for 2019, it seemed to cheer investors relieved perhaps that the figure at least came in line with expectations. European equities joined the ‘record breaking’ bug. Always in the slip stream of US equity markets, they finally headed into record territory as the bourses across most of Europe set intra-day record highs – save for the FTSE, but that will no doubt come in due course.

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16th January 2020

🗞️ 2020’s credit outlook brightening

MARKET CLOSE:
iTraxx Main

43.3bp, -0.3bp

iTraxx X-Over

207.8bp, -1.7bp

🇩🇪 10 Yr Bund

-0.22%, -1.5bp

iBoxx Corp IG

B+104.8bp, -0.7bp

iBoxx Corp HY

B+338.6bp, -2bp

🇺🇸 10 Yr US T-Bond

1.81%, +2.5bp

🇬🇧 FTSE 100

6220.14, (+0.87%)
🇩🇪 DAX

12021.28, (+3.75%)
🇺🇸 S&P 500

3080.82, (+0.49%)

Financials and high beta credit hold the aces…

Given the solid start to the banking sector’s Q4 reporting season, it does appear that we are potentially set up for the financial sector to lead the rally in stocks and credit in 2020. That’s certainly how investors in credit are looking at it, with financials and high beta credit likely to deliver most of the performance this year. What’s to stop the juggernaut?

The ECB is active in the market, investors have high cash balances. Trump is being impeached and the markets have barely reacted while the previous Middle East tensions have also been shrugged off. Brexit is now old news. US stocks are hitting record highs almost daily, now up through 3,300 for the S&P.

So it is difficult not to be positive on credit and this dynamic seems like it will persist. How much of an ask is it, really, to think that we can revisit record lows in AT1 index spreads/yields? They were seen in January 2018, with the iBoxx index spread at B+287bp and the yield at 2.81%, which compares with B+376bp and 3.29%, respectively, now. We’re less than 100bp in spread and 50bp in yield away, so it is eminently likely we get there in this bid-only sector.

While we’re at it, what about iTraxx Main at 37bp and X-Over at 180bp at some stage? Anything more than that in X-Over and we will be looking at some serious compression between the two versus current metrics.

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15th January 2020

🗞️ Shades of 2019

MARKET CLOSE:
iTraxx Main

43.6bp, unchanged

iTraxx X-Over

209.5bp, -0.4bp

🇩🇪 10 Yr Bund

-0.21%, -3bp

iBoxx Corp IG

B+105.5bp, +0.4bp

iBoxx Corp HY

B+340bp, +2bp

🇺🇸 10 Yr US T-Bond

1.80%, -2bp

🇬🇧 FTSE 100

6220.14, (+0.87%)
🇩🇪 DAX

12021.28, (+3.75%)
🇺🇸 S&P 500

3080.82, (+0.49%)

It’s almost laughable…

We’re into the second week of the new year and the barriers to a risk asset rally are being dismantled. US equities are in the ascendancy and, at this rate, the S&P500 index will be up at 3500 by quarter’s end. There are only around 200 points to go!

Even rate markets are playing ball with the day’s UK and US inflation/Eurozone industrial data showing enough (or not) to warrant a significant rates rally. Shades of 2019.

Admittedly, on the event risk side, we are in ‘relief-trade’ mode. The thawing in trade tensions between the US and China is the current driver of the rally – just as the phase one trade agreement was signed. Just a few days previous it was relief that the US and Iran had backed away from a more devastating confrontation. Macro is ticking over and all we need is a decent earnings season to see out a good quarter for markets. It would be some feat coming off the back of the 25%+ gains in stocks last year and 10%+ gains in higher beta credit sectors.

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12th January 2020

Kitchen sinking it

MARKET CLOSE:
iTraxx Main

43.1bp, +0.2bp

iTraxx X-Over

204.9bp, +1.1bp

🇩🇪 10 Yr Bund

-0.24%, -1bp

iBoxx Corp IG

B+105.4bp, unchanged

iBoxx Corp HY

B+344bp, -3bp

🇺🇸 10 Yr US T-Bond

1.81%, -4bp

🇬🇧 FTSE 100

6220.14, (+0.87%)
🇩🇪 DAX

12021.28, (+3.75%)
🇺🇸 S&P 500

3080.82, (+0.49%)

Easing in tensions boosts markets…

Borrowers are throwing the kitchen sink at it. There’s like a big black hole absorbing anything and everything that comes its way. There doesn’t appear to any repricing risk in the near term as the early year exuberance from borrowers and investors alike satisfy both sides of the equation.

This is a classic new year dynamic playing out to perfection. IG non-financial issuance can hit €40bn and senior deal volume can exceed €30bn – currently at €11.25bn and €16.5bn, respectively, without any repricing moves. Of course, it helps that equities are setting record highs more often than not in the US, and that we are in a de-escalation period following that US/Iran trouble while also waiting for that ‘phase 1’ deal between the US/China to be signed.

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