9th March 2016

From China to the ECB

MARKET CLOSE:
FTSE 100
6,125, -57
DAX
9,693, -86
S&P 500
1,979, -23
iTraxx Main
92bp, +2bp
iTraxx X-Over Index
379bp, +10bp
10 Yr Bund
0.18%, -4bp
iBoxx Corp IG
B+175.3bp, +0.5bp 
iBoxx Corp HY Index
B+596bp, +1bp
10 Yr US T-Bond
1.83%, -8bp

Method in the madness… Where else to start but with China? You just can’t keep a bad data print down with those shocking trade numbers out yesterday. A drop in exports for February of 25.4% YoY – and a fall in imports of 13.8% – were both far worse than expectations, so no surprise therefore that the Chinese served up bit of a stimulus package over the weekend designed to shore up the domestic economy. Meanwhile, German industrial production jumped by a whopping 3.3% in January, so something somewhere isn’t quite tallying up. There might be an element of seasonality in the Chinese data (late lunar year in 2015 etc), but the picture isn’t great and small wonder the Chinese “ranged” their growth forecasts for 2016 for the first time – at between 6.5-7%. It was bit of a knock-out blow for the markets and put paid to any hope that we might have stabilised or perked up into the ECB meeting, but it gives much food for thought as to how the poor Chinese/excellent German data might weigh on the QE decision. We need a 20bp deposit rate cut and €15-20bn added to the monthly asset purchase programme to keep the markets ticking over with a positive bias through to quarter-end and possibly for much of Q2. Anything short of that will be met with much disappointment and derision, in our view. Unfortunately, the ECB has rarely, if ever, thrown us the right-sized bone. Some might ask why the ECB should play to the market tune and satisfy its every whim. In hindsight, the market has actually been right (suggesting more aggressive easing than delivered) given we’re into the eighth year of the downturn and quite possibly will have to endure a few more weaker years, at least.

What goes up, must come down… So the saying goes. And we saw exactly that with government bond playing into the risk-off tone and yields dropping quite markedly. We might have had the 10-year Bund at 0.24% post payrolls, but it is now yielding 0.18% (-4bp in the session, off the intraday low) and seemingly on the way (again) to 0.10% and, we think, ultimately through the previous record low of 0.05%. Gilt yields plummeted with the 10-year down at 1.38% (-10bp) in a big flattening move. Likewise in the US, there was a flattening move in the Treasury curve as the 10-year yield dropped 8bp (2-year by 4bp). Stocks have had a super recovery run of late but were down again for much of the session before seeing a fight back, only to lose steam into the close and end almost 1% lower in Europe. Credit wasn’t spared, but the weakness in spread markets was minimal. The new issue market for non-financial corporates saw just a €350m print from Securitas and €500m from Hammerson, while covereds and SSAs once again dominated. The running total for the week in non-financial primary issuance is now €2.85bn (IFF and America Movil on Monday). Elsewhere, DVB Bank was the senior banking sector’s sole contributor with a €500m deal. We suggested previously that it might be a more limited corporate primary market this week and that is how it is playing out. The data hasn’t helped and there’s the small matter of the ECB meeting. Today might bring a deal or two to the table, but we don’t hold out for anything on Thursday or Friday.

Credit plays out quite well… The corporate bond market withdrew its interest in a session that saw the action, whatever little there was, elsewhere. The Markit iBoxx IG corporate bond index closed just 0.5bp wider at B+175.3bp while there was little discernible price action anywhere. In HY, we were left pretty much unchanged which is a good sign given the weakness in stocks and the usual close correlation between the two asset classes. It’s also fair to say that the synthetic indices also performed very well – admittedly weaker and underperforming cash, but measured with it. They were better bid, with Main up at 92bp and X-Over higher at 379bp.

US equities lost ground into the close, with the S&P finally down by 1.12% which will probably leave us with an uncertain open. Try and have a good day, back in the morning.

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.