Archive

Monthly Archives: February 2020

27th February 2020

😷 Bond investors self-isolate

MARKET CLOSE:
iTraxx Main

57.0bp, +6.2bp

iTraxx X-Over

257.4bp, +22.6bp

🇩🇪 10 Yr Bund

-0.55%, -6bp

iBoxx Corp IG

B+115bp, +5bp

iBoxx Corp HY

B+399bp, +22bp

🇺🇸 10 Yr US T-Bond

1.28%, -3bp

🇬🇧 FTSE 100

5563.74, (-5.25%)
🇩🇪 DAX

9815.97, (+1.90%)
🇺🇸 S&P 500

2626.65, (+1.89%)

Markets shell-shocked…

Fear is writ large all over the markets. And the corporate bond market is now under the same pressure as equities, as the global risk asset bubble deflates amid the coronavirus pandemic.

The bid side of the market has pulled right back and the already meagre flows in secondary have dwindled further, with sellers unable a get a decent price for any reasonable exit. That particular trading dynamic is understandably expected.

We suggest taking the current medical advice. That is, it’s time for corporate bond investors to self-isolate and quarantine positions until market volatility subsides. The best one can do here is to add some protection and sit out the market carnage.

IG spreads – iBoxx index – are a massive 15bp wider this week. The hitherto darling of the corporate bond market, in performance terms anyway, has been bullied out of its complacency. The AT1 index has recoiled by 95bp this week and the high yield index some 71bp. And there’s still a session to go. Illiquidity brings out the worst in valuations.

Continue reading

25th February 2020

😨 Pandemic of Fear

MARKET CLOSE:
iTraxx Main

50.3bp, +2.4bp

iTraxx X-Over

243.8bp, +11.3bp

🇩🇪 10 Yr Bund

-0.52%, -4bp

iBoxx Corp IG

B+109bp, +5bp

iBoxx Corp HY

B+363.5bp, +11bp

🇺🇸 10 Yr US T-Bond

1.31%, -6bp

🇬🇧 FTSE 100

5563.74, (-5.25%)
🇩🇪 DAX

9815.97, (+1.90%)
🇺🇸 S&P 500

2626.65, (+1.89%)

Closing off the world…

The high level of price volatility is a pure reflection of the fear and uncertainty plaguing the market. A case of ‘what if?’. After a bright start, the markets slumped and any early attempt to drag themselves off the floor proved short-lived.

And that brighter opening came even after German economic growth for Q4 showed an economy having stagnated, registering 0% for the period – and surely going to record something negative for Q1.

The resistance was futile as the coronavirus-yet-to-be-called-pandemic remained at the forefront of most minds amid growing concern of the increased cases across Europe. The financial markets’ Black Swan event? It’s back in view.

As if to highlight how difficult it has been and what we might look forward to, Hong Kong’s imports dropped by over 16% in January and exports declined by more than 22%. It was an eloquent demonstration of the devastating impact of the virus and how regional trade is being affected by the spread of it. The Chinese data is going to be awful for the month/quarter/half, just as it will be for all of Asia.

With more areas of Italy in lockdown, the Middle East feeling greater strains and the likelihood of further lockdowns across Western Europe, then a domino effect is in play which will see those economic activity numbers (output, productivity, growth) slashed for 2020, let alone the quarter.

Nevertheless, it’s quite clear that the markets want to go higher and any whiff of containment of the virus, they will recover much of the current losses, we believe. And that will be after taking into account the extended period of any hit to economic growth, corporate earnings and the readjustment of the corporate sectors’ investments as they possibly look to re-shore activities after decades encompassing a more globalised approach.

Continue reading

24th February 2020

🦠 COVID-19 Impacts Being Felt

MARKET CLOSE:
iTraxx Main

47.9bp, +4.8bp

iTraxx X-Over

242.5bp, +23bp

🇩🇪 10 Yr Bund

-0.48%, -5bp

iBoxx Corp IG

B+104bp, +4bp

iBoxx Corp HY

B+352bp, +25bp

🇺🇸 10 Yr US T-Bond

1.37%, -10bp

🇬🇧 FTSE 100

5563.74, (-5.25%)
🇩🇪 DAX

9815.97, (+1.90%)
🇺🇸 S&P 500

2626.65, (+1.89%)

Jolted by pandemic risks…

Markets swatted aside Trump’s broad attack on the establishment and the global order. Be it domestic politics, the trade spat with China (and others – Nafta, Europe) or the scuffles with Iran and North Korea, markets were barely riled.

We can add in the Eurozone’s multi-year woes, Brexit and a whole host of geopolitical skirmishes which might have let more of the air out of the asset bubble.

They were all seen as short term issues which, if need be, could be resolved with central banks having some ammunition left to soothe over the cracks.

Not so in Monday’s session.

A huge dash for safety which saw us back to flat or lower year to date for equities after falls extended to well over 4% in some markets during the session. Safe haven rates (10-year maturity) were bid only, and pushed yield levels not seen since Q3 2019 in Germany (-0.48%) or June 2016 in the US (1.37%). Gold was through the roof.

Continue reading

23rd February 2020

🔻 Market being shaken out of its complacency

MARKET CLOSE:
iTraxx Main

43.0bp, +0.8bp

iTraxx X-Over

219.6bp, +5.1bp

🇩🇪 10 Yr Bund

-0.44%, unchanged

iBoxx Corp IG

B+100.4bp, unchanged

iBoxx Corp HY

B+328bp, +2bp

🇺🇸 10 Yr US T-Bond

1.47%, -5bp

🇬🇧 FTSE 100

5563.74, (-5.25%)
🇩🇪 DAX

9815.97, (+1.90%)
🇺🇸 S&P 500

2626.65, (+1.89%)

Nervous breakdown…

The coronavirus is taking a greater grip outside of China now, and the economic impact is being felt are widely. More and more, it appears that macro won’t catch up with the loss of activity we are going to experience in Q1 and very likely in Q2.

The Chinese are now briefing that the economic impact (export/imports) will be severe in January and February. The IMF, over the weekend, shaved 0.1% off its 2020 global growth forecast to 3.2% and 0.4% off Chinese growth to 5.6%.

Markets ended last week on the defensive but continue to trade on hopes that the authorities can get it under control quickly and/or that central bank action is nigh which will save the day (sustain asset prices) for a little longer. It was a big preliminary PMI data release day on Friday. The picture was bleak.

In the US, manufacturing’s expansion slowed with the PMI for February up at 50.8, missing the 51.5 expectation but the big blow came in services where activity contracted (PMI at 49.4 versus estimates pitched up at 53!). The last contraction was in March 2016.

Continue reading

19th February 2020

🗞️ A midweek flutter

MARKET CLOSE:
iTraxx Main

41.5bp, -0.5bp

iTraxx X-Over

211.4bp, -2.6bp

🇩🇪 10 Yr Bund

-0.42%, -1bp

iBoxx Corp IG

B+100bp, unchanged

iBoxx Corp HY

B+337bp, -2bp

🇺🇸 10 Yr US T-Bond

1.57%, +1bp

🇬🇧 FTSE 100

5563.74, (-5.25%)
🇩🇪 DAX

9815.97, (+1.90%)
🇺🇸 S&P 500

2626.65, (+1.89%)

Credit, where it’s due…

The reported number of daily coronavirus cases/deaths slowed – and the markets rallied. The corporate earnings/revenues and macro economic data to come are going to paint a bleak picture for Q1, but that is for another day.

As things stand, the market reaction is going to be very limited (to the downside) because they are going to be furnished with oodles of cheaper liquidity.

In fact, all markets have traded on that expectation and the coronavirus has failed to dent the enthusiasm for risk assets. The anticipation of more and even cheaper liquidity has retained a level of buoyancy in risk markets beyond anyone’s expectations. That’s probably the salutary lesson of the post financial crisis 10-years.

Ten days left to month-end and the credit market has performed much better than expected. IG non-financial primary has sparked into life this month with this threatening to be the best February month of issuance since 2015 (issuance at €28.8bn month to date versus €40bn in 2015). Spreads have tightened by 5.5bp this month into it.

Demand in primary is at record highs as new year cash, new cash and redemptions all look for that higher yielding ‘safe-haven’ fixed income asset. The rally in the underlying has pushed total returns (iBoxx) to 1.25% for the year so far.

We think the high yield market is the one which has surprised, though. Issuance year to date is up at a stunning €20.6bn amid a splurge in issuance which saw €13bn issued in January and €7bn this month so far. The pipeline is looking fairly good too. That’s the story.

Continue reading

18th February 2020

🗞️ Corporate earnings cull will mar Q1

Lemmings? Perhaps… Now we’re talking. It’s time to sit up and take note. Finally, we have a major company, in Apple, warn on Q1 revenues. Of course, they’re suggesting it’s temporary. Let’s see if this hits home. This warning, though, is the tip of the iceberg, and others will follow quickly. We’re looking at a […]
Subscribers can log in to continue reading. Otherwise, purchase The Monthly Access Pass or One Year Subscription to become a subscriber.
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.

Continue reading

12th February 2020

🗞️ Another one bites the dust

MARKET CLOSE:
iTraxx Main

41.7bp, -0.6bp

iTraxx X-Over

210.1bp, -0.4bp

🇩🇪 10 Yr Bund

-0.38%, +1bp

iBoxx Corp IG

B+101.4bp, -0.6bp

iBoxx Corp HY

B+331.5bp, -4.5bp

🇺🇸 10 Yr US T-Bond

1.63%, +4bp

🇬🇧 FTSE 100

5563.74, (-5.25%)
🇩🇪 DAX

9815.97, (+1.90%)
🇺🇸 S&P 500

2626.65, (+1.89%)

If you can’t beat ’em, join ’em…

Lord over them, admire them or just join them, because we ain’t going to beat them. The ability of the markets to swat aside any number of risk-events which might ordinarily have derailed them has been fantastic.

Indeed, it looks as though investors have taken the view that the spread of Covid-19 won’t be a Black Swan event. We’re going to need something spectacular now for that to be the case. The doomsayers have once again, seemingly got it wrong. Crisis averted.

Markets are trading on that assumption. Event-risk is sooo yesterday. We have record highs being set across many equity markets. Corporate bonds (in developed markets anyway) have held resolute throughout.

And we have a rate market generally on the defensive (relatively better bid), just in case – but also reflecting the non-trivial probability of policy action as Q1 economic weakness threatens to spill over in Q2.

However, it’s not quite a case of ‘crisis over’, but there is little point in pushing back against the current tide. 3,500 and 30,000 on the S&P and Dow indices are in sight, and any push to those levels is going to see corporate bond spreads (in Europe) back at, or close to, record tights as well.

Continue reading

11th February 2020

😷 A sharp intake of breath

MARKET CLOSE:
iTraxx Main

42.9bp, -0.6bp

iTraxx X-Over

210.5bp, -2.6bp

🇩🇪 10 Yr Bund

-0.39%, +2bp

iBoxx Corp IG

B+102bp, -0.5bp

iBoxx Corp HY

B+336bp, -7bp

🇺🇸 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%)

Hoping for the best…

Markets are back to trading the headlines. Their inertia rarely seems to last too long. Any data which suggests that there is a slowdown in the spread of the virus and the market rallies – and rallies hard.

And so the markets have recovered after a period weakness to hit record highs again in the US, as the rate of infections slows. In some respects, investors in the US are almost completely ignoring the closure of China Inc, judging by the robustness of asset prices there – or just anticipating Fed action to limit any downside risks.

It is going to become apparent soon enough as to whether the spread of the coronavirus (now named Covid-19) is ultimately going to get under some kind of control – and the number of cases outside of China is contained. Or it is all going to go awry. It’s become very binary.

Those ominous warnings, about ‘sparking bigger fires’ and all that, from a hitherto cautious and perhaps vacillating WHO appears to be laying the ground for a ‘get out of jail for free’ card for the under-fire organisation. That is, we can expect the announcement of a Covid-19 pandemic imminently.

Markets, though, are not trading as though they are expecting the worst. That is, there is still a view that the authorities outside of China can contain the virus’ spread. Hence it would follow that the economic fall out will be contained and weakness confined to Q1 only.

Continue reading

9th February 2020

♠️ Calling a spade a spade

MARKET CLOSE:
iTraxx Main

43.4bp, +0.7bp

iTraxx X-Over

215.5bp, +4bp

🇩🇪 10 Yr Bund

-0.39%, -2bp

iBoxx Corp IG

B+102bp, unchanged

iBoxx Corp HY

B+339.5bp, +2bp

🇺🇸 10 Yr US T-Bond

1.58%, -6bp

🇬🇧 FTSE 100

5563.74, (-5.25%)
🇩🇪 DAX

9815.97, (+1.90%)
🇺🇸 S&P 500

2626.65, (+1.89%)

Cavalier rally…

Much low(er) growth for longer, low(er) rates for longer. Add into the pot reduced consumption levels, declining investment, activity on the wane as the closure of China Inc spreads to other countries then we have the ingredients in place for a synchronised global recession.

Surely those equity market record highs are set for a reverse? Markets are currently trading on expectations that the central banks will come to the rescue and limit the potential for an economic and financial market meltdown.

Increasingly, the coronavirus spread is being talked about as being the market’s Black Swan event, but investors are choosing – or being forced, to ignore it. That’s largely a result of the copious levels of liquidity in their hands needs investing but also because if it materialises that it isn’t such an event, the catch-up trade would be painful.

Continue reading