11th February 2016

Boing, boing, boing

MARKET CLOSE:
FTSE 100
5,672, +40
DAX
9,017, +138
S&P 500
1,852, unch
iTraxx Main
117bp, -5bp
iTraxx X-Over Index
455bp, +7bp
10 Yr Bund
0.24%
iBoxx Corp IG
B+187bp, -0.5bp 
iBoxx Corp HY Index
B+644bp, -1bp
10 Yr US T-Bond
1.67%

Tentative recovery, deep suspicions remain… Who wasn’t tempted to think we’d turned a corner? Such is human nature: we’re either cock-a-hoop or morose. And with stocks offering an upbeat session despite overnight weakness in Asia – although once again we believe they were playing catch-up rather than leading – the temptation must have been to get some risk on board at these “distressed-like” valuations. We say “temptation”, because few really traded into it. Prices were marked better, as we would expect, but with little conviction behind them. After all, the newsflow once again left much to be desired. AP Moller, Hermes and Akzo-Nobel – all “crystal-ball” companies – warned on 2016 profits, the UK suffered its worst monthly contraction in industrial production in several years (France and Italy also saw poor numbers for December), while BP warned on downside risks to oil prices in the next six months. Given that we swatted all that aside, it leads us to believe that the session was more than likely a dead-cat-bounce in valuations that had been pummelled for too many sessions than we can care to remember. If we are right, then the next stage might well take in some calmer climes before we resume some sort of slide lower. After all, the newsflow is unlikely to perk up any time soon. We also concede that there is no obvious developing situation pushing markets to the brink of a capitulation event. There are many fears around what is now the obvious – China, US rates, global growth, oil prices and the effectiveness of monetary policy – and they are all keeping the investor/public mood circumspect. The problem is, we’re seemingly always a headline away from a 5% drop in oil prices, a 2-3% fall in equities and, say, iTraxx Main/X-Over gapping 5-6bp/15-20bp. That’s hardly a recipe for making a considered investment decision. So don’t.

Banks bounce, equities up, let the good times roll… Well, not so fast. After the pummelling taken by bank stocks in particular, there was always going to be a feeding frenzy of short covering – and, dare we suggest, some bottom fishers. Deutsche Bank led the way, the market warmed no doubt by the possibility of bond buybacks. CoCos got a leg-up from the speculation, while its stock price rose double-digit figures. Interestingly, the better tone failed to bring out any new non-financial corporate borrowers, although a calm day today and we would expect a few of them to chance their arms. In our view, Yellen said all the right things in her testimony on Wednesday, aware of the impact on domestic growth and global turbulence of any misjudgement regarding the pace of tighter financial conditions in the US. The market might therefore actually be encouraged to think that the next hike in US rates is not imminent and, if moves in the past are anything to go by, this could help to find a floor – for a while – in risk asset prices (until the next headline, anyway).

Stocks up, credit better, government bonds give a little back… It all seemed like a bit of short covering. Not long ago, 2%+ rises in stock markets used to be what dreams were made of. Now, they’re greeted with suspicion and a wariness that suggest a “suckers rally”. Still, we’ll take it. The precipitous decline in stocks and credit spreads was bought to a halt. The DAX popped higher and back over 9,000, with most bourses  1.5-2% higher in the day. Oil prices gained 1-3% after US inventories showed a surprise decline with WTI up at $28 and Brent at around the $31 level. While bund yields rose, peripheral yields declined suggesting some short covering in the latter as bonds had come under pressure in the flight-to-quality trade earlier in the week. US Treasury 2s/10s was down at 98bp suggesting the potential of a reversal in the course of US rate hikes. Confused yet? In credit, a recovery of sorts was inevitable given the moves in stocks. Most evidently, that came through the synthetics, with iTraxx Main a little better at 117bp and X-Over at 455bp. The cash market was also a touch better bid, but few chased it better. CA Immobilien, Bpifrance and Goldman printed a combined €1.9bn in a trio of quite unremarkable senior bank deals. That was it for primary in credit.

US stocks have closed flat, and the 10-year Treasury has outperformed, to yield 1.67% (-6bp). It was 2.0% not too many weeks ago. What’s that telling us?

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.