20th October 2019

Brexit’s final hurdle, Credit records to be broken

MARKET CLOSE:
iTraxx Main

52.3bp, -0.4bp

iTraxx X-Over

231bp, -2bp

🇩🇪 10 Yr Bund

-0.38%, +2bp

iBoxx Corp IG

B+118bp, -0.5bp

iBoxx Corp HY

B+403bp, unchanged

🇺🇸 10 Yr US T-Bond

1.75%, unchanged

🇬🇧 FTSE 100 6076.60, (-2.29%) 🇩🇪 DAX 11586.85, (-1.65%) 🇺🇸 S&P 500 3044.31, (+0.48%)

Magic Monday beckons…

Pffft. And so it goes on. STILL no definitive Brexit decision! A spoiler amendment to the legislation was passed, the meaningful vote pulled and the letters duly went off to the EU (not) requesting an extension. However, legislation proceeds this week to get us over the line by Halloween.. and we have the meaningful vote, still, delayed until on Monday, or possibly Tuesday. One couldn’t make it up.

Nevertheless, the odds are increasingly in favour that the vote passes finally, when it comes. In fact, the government has a matter of hours to find a dozen votes. And the markets should react positively in the immediate aftermath.

So the markets will start the week with an eye firmly on UK politics. We’re further along the line on the Brexit debate and heading for that meaningful vote (again), now knowing the number of votes needed to pass it (a dozen). We think that markets will look to the brighter side although we still await the EU’s response to the three letters.

If we are right, that means sterling will pop through $1.30, the FTSE will likely edge lower on currency strength and Gilts should be better offered. That 10-year probably has another 10bp of yield to go (to 0.80%, 10-year) on a successful vote.

We should see credit primary serve up some deals, as well. With the ECB up on Thursday and expected to leave everything unchanged, we expect borrowers to come to market hopefully without too much distraction.


Primary sniffs at that record

At almost €18bn, this October’s IG non-financial issuance is about to be the second-best such month since 2014. Another €8bn (which is not impossible) between now and month-end, and it will become the best October since 2014.

In addition, we are chipping away at the record annual level of deals (€285bn/2009) as the deal flow for the year to date 2019 stands at €269bn. Spoilt but the heavy deal flow in September, where the €49bn was the best monthly supply for any month since 2009, we are thinking that another €10-12bn is quite possible this month and then €30bn+ could be printed in November. Both of those forecasts are not impossible.

In fact, when the ECB starts lifting paper there will be a crowding-out effect (IG investors squeezed). There ought to be initial support for the markets especially if the ECB lifts somewhere in the order of €1.5-2bn per month of IG corporate debt, given secondary liquidity is scarce. The bank’s participation in the primary market is going to frustrate traditional investors.

However, we do think that some will seek to sell into the ECB bid in order to preserve performance for 2019 (given that we are so near to year-end) and/or build cash positions for 2020, and so the tightening might not go as anticipated. Overall, though, we are looking for a steady grind in secondary and a pick-up in primary into the final weeks of the year.

We predict a record year for IG non-financial issuance and expect around €310-315bn as a final total.

Senior financial issuance has come in at €143.4bn year to date, and we are looking at around €155bn for the full-year, which will make 2019’s total the best since 2015.

And in high yield, the pipeline suggests that we could see somewhere of the order of €60bn for the full-year leaving this year as the third-best on record. The current year to date volume is at €52bn.


Mish mash elsewhere

The US earnings season has got off to a better start than most anticipated, but we can’t say the same for the European flow of earnings with Renault issuing a profits warning, followed by Danone’s lowering of its sales forecasts for this year.

In macro, there was that GDP print for China, with the economy there growing at an annualised 6% between July and September, lower than forecasts and the slowest pace for almost thirty years. As if it were needed, 25% tariffs came into effect at the end of last week, on a broad variety of EU goods heading to the US. That was as a result of the WTO judgment that fifteen years worth of subsidies to Airbus had unfairly disadvantaged the US aerospace industry (or rather, Boeing).

With that mouthful, a meaningful rally in risk assets was never really going to materialise in Friday’s session, especially ahead of that key Brexit vote as the UK Parliament sat for only the fourth time on eighty years.

Instead, the blow from the confirmation of that slowing Chinese growth, those Renault earnings and, we suspect, Draghi warnings later that the financial stability environment was challenging amid overvaluations in some markets all weighed on sentiment. Mind, Schlumberger’s near €13bn impairment charge would have impacted sentiment.

So we were down in equities, rates were flattish and credit effectively unchanged. US stocks closed in the red by up to 1% (Dow) although the S&P only lost 0.4%. The FTSE was off by 0.4% but that we ascribe largely to currency strength given sterling was up at almost $1.30 (+0.7%)!

Credit index had Main lower at 52.3bp (-0.4bp) and X-Over at 231bp (-2bp) in a rather uneventful session. We had a similar situation in the cash market which closed unchanged across the board. the IG iBoxx index closed at B+118bp (-0.5bp) and the HY index at B+403bp (unchanged).

Bowing out: Mario Draghi

As for this week away from Brexit, the ECB meets in what is Draghi’s final meeting of his eight year term. With all the big decisions made in the previous meeting, nothing is expected to materialise from this one.

The earnings season in the US steps up a notch as we move away from the banks, with the likes of UPS, Boeing, Caterpillar, P&G, McDonalds, Amazon, Microsoft and Verizon give investors a better insight into the state of the domestic and international economies.

Have a good day.

Suki Mann

A 30+ 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 CreditMarketDaily.com.