4th November 2016

I’m a believer

FTSE 100
6,791, -55
10,326, -45
S&P 500
2,087, -9
iTraxx Main
75bp, unchanged
iTraxx X-Over Index
335bp, -3bp
10 Yr Bund
0.15%, +2.5bp
iBoxx Corp IG
B+124bp, -0.5bp 
iBoxx Corp HY Index
B+419bp, unchanged
10 Yr US T-Bond
1.81%, +1bp

Democracy? Where…?

Not so fast: Brexit is not a foregone conclusion

Not so fast: Brexit is no foregone conclusion, rules the High Court

A kick in the teeth was delivered in yesterday’s session to pro-brexiters, following the UK High Court’s ruling that a vote by Parliament was needed (to be successful) before the government could trigger Article 50 to leave the EU. With it comes much uncertainty which the market doesn’t particularly like, but we did see some unwinding of positions.

The immediate market reaction was for sterling to get a little bit of a bid behind it. Gilts did, too, while stocks edged a touch lower. It wasn’t huge but enough of a reaction to see how the market might evolve as we head for that Supreme Court hearing (UK government to challenge) on December 7th.

What comes out of that ruling will be crucial because it might lead to an early election in the UK split along in/out lines rather than any allegiance towards a political party. And that will open up all kinds of uncertainties as to the leaning of any new government – hard left or hard right? Other than that, various surveys suggested that the UK economy has barely been impacted by the Brexit vote, Italian and Spanish unemployment rose while the SEC became the latest regulatory body to look into the accounts scandal at Wells Fargo.

Politically, the race for White House is increasingly becoming too close to call – who would have thought that? – and we’re in for an uncertain week, with perhaps a few more after that (as Brexit comes back to the fore). It’s not how we would have wanted the year to come to an end, but it does mean that safe-havens might just hold up at around these levels, yields stay anchored or go lower and returns for fixed income players hold into year-end (central bank interventions permitting).

All said, the latest polls in the US had Clinton up by a few percentage points, and so safe-havens retreated and risk assets edged up. Government bond yields gave up earlier gains in what was eventually a fairly volatile session,. However, gilts recorded some of the day’s worst declines after the BoE kept rates unchanged but upgraded growth and inflation forecasts, the latter with a bigger overshoot than previously envisaged (2.7% for 2017/18). There’s a poke in the eye for returns in that and those corporate bond returns will be feeling some heat now. Ten percent looked like a banker a week ago, but they’re declining now.

Primary pumping them out still

Deal for BASF

BASF: €1.5bn in 4 and 10 year funding

The primary markets had another good session, surprisingly so given the Fed on Wednesday and non-farms today. It was like we squeezed in deals. In the investment grade sector, BASF took €1.5bn in 4-year and 10-year funding with Cap Gemini lifting €500m and RCI Banque €750m.

That’s €2.75bn to add to the €3.15bn in Wednesday’s session – and €5.9bn in this opening week of the month so far.

High yield investors were kept busy with Guala Closures’ upsized €510m offering and Autodis’ €520m dual-tranche transaction. SpareBank 1 SR-Bank issued €500m for the senior banking sector. Virgin Money priced a subordinated deal for £230m on a 2.5x subscribed book.

Intraday swings frustrate

The intraday moves in government and equity bond markets are enough to test the patience of the most seasoned market player. The gallery is not enjoying it. It’s best just to stay sidelined, or pick off a position should it meet one’s target.

The session was light everywhere in terms of activity. Into the close, Bund yields were higher again at 0.15%, the 10-year Gilt yield rose to 1.20% (+3bp) while the periphery was again under some pressure with BTPs up at 1.69% and Bonos at 1.23% in the 10-year maturity (both +3bp).

Equities moved between being in the red and black in a tight range, and ended in the red. The DAX was the main loser in the Eurozone, off by 0.4% and now some 400-points off being flat YTD. The FTSE lost 0.75%.

We can expect an even lighter session today going into the non-farm payroll report.

In the secondary credit market, the BoE was working hard to support the corporate bond market, having lifted £2.36bn of corporate debt in just five weeks as part of its £10bn QE effort (having given itself 18-months to do so). So, a fair effort!

The sterling corporate bond market closed unchanged but the rate sell-off wasn’t enough to push YTD returns below 10% (they are at 10.4%) for the Markit iBoxx index. In euro-denominated credit, spreads inched 0.25bp tighter on the cash iBoxx index, but returns were eaten into by the move higher in underlying yields and dropped below 5%, to +4.95% for the YTD.

The high yield market closed completely unchanged, but that comes after five consecutive days and 20bp of weakness.

Have a good weekend. Back on Monday.

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.