5th May 2016

Bs and T

MARKET CLOSE:
FTSE 100
6,112, -74
DAX
9,828, -99
S&P 500
2,051, -12
iTraxx Main
77.5bp, +2bp
iTraxx X-Over Index
327bp, +6bp
10 Yr Bund
0.20%, unch
iBoxx Corp IG
B+141bp, +1bp 
iBoxx Corp HY Index
B+490bp, +7bp
10 Yr US T-Bond
1.78%, -2bp

No rest for the wicked…

Volatile: Oil Prices

Be it Trump, Brexit or the balmy weather, the market is all one way or the other. Mind, even Moody’s threw its hat into the ring regarding existential risks to the EU. Anyway, a week ago equities were almost all back in the black after an opening quarter of woe. Now they’re back in the red. Oil prices per barrel were heading for $50, now at $45 it’s almost a toss of the coin as to whether they get to $50 or $40 at the next stop. Ten year German government bond yields touched 7bp, looked like they were going negative before ratcheting to 31bp and now reside at 0.20%. Corporate bond spreads rocketed higher in the opening couple of months, but the manipulative hand of the ECB has made for an asset class that is managing to largely withstand the severe ups and downs associated with oil, equities and at times government bonds. We’ve suggested before, boring is good.

It was not so boring in yesterday’s session as stocks again took a leg lower and this time it was on a lacklustre stream of earnings. Air France warned on its outlook while UK retail is coming under some pressure in both clothing and food. BHP’s litigation risks increased and the UK construction industry is heading for contraction.  Sales and profits were down for Imperial Tobacco and ABInBev, respectively. Eurozone services PMIs were trimmed a touch, but still showed expansion with the major countries leading the way. Overall, the newsflow led the way for a slightly difficult session overall, but we still managed to get deals away in the corporate bond markets albeit at a lower level than Tuesday’s blockbuster session.

As night follows day

rexel-building

HY Deal for Rexel

Primary keeps on coming and in Wednesday’s session, it had a higher beta flavour about it. There was drama. First off, we had two HY deals with Rexel and Gestamp pitching in to help investors put €900m of their cash to work with 3%+ coupons for maturities of 7-years down to a 7nc3 structure. But then there was the unrated Altrad issue that was in the market for €300m and they were as near as damn it getting their money – but the deal was pulled at the last minute. Not all is rosy in the garden? Well, the HY investor is a fussy and meticulous beast and caution prevails! It is just a healthy warning sign that investors will not take anything, especially if credit metrics and issuer metric visibility are poor.

For the IG community, we had some higher beta flavour from FCE for €750m in 7-years at midswaps+135bp while a couple of 10-year deals came from Gasunie (€650m) and Autoroutes du Sud (€500m). The IG transactions all came 13-15bp tighter than initial guidance. And the total for the month, in just two sessions for IG non-financial issuance is now up at €7bn.

The issuance traffic has been very good and been taken down well, but some will offer concern to the 2-4bp of weakness in the deals which came from Daimler on Tuesday. Having already raised €6.75bn in 2016, the group took another €3.25bn this week. So why the weakness if all and sundry have been suggesting the market is going tighter, there is not enough supply, the ECB is coming to town and there is enough sidelined cash to absorb just about anything banks throw at them? If only it was that simple.

Some might be full on Daimler paper (or just fed up with seeing them in the market), some might think the deals were just too rich. However, there is a broad weakness in stocks and save for the iTraxx indices, there is no liquid cash benchmark proxy. There is now. Those Daimler deals. But the small weakness is noise in the bigger picture and reflects the favourable technical bias within the cash market. A few days of stable to tighter equities and these deals will be picked off and trade again inside re-offer, in our view. Sometimes it’s good to take a breather.

No dash for safety

Whereas in Tuesday’s session there was a bid for quality, yesterday was indeed about taking a breather and letting any moderate weakness play out. Equities reacted to the slew of poorer news and were not helped into the afternoon session after a weaker than expected private payrolls report in the US – along with lowered revisions. Still, it might just keep the Fed from raising rates in June. Let’s see what the non-farms report throws up on Friday. It’s still all up in the air and even more confusing after the better manufacturing and service sector ISMs in the US.

With all that, European stocks closed off the lows with more angst heaped on the already underperforming DAX. The index closed 1% lower as did most others. As for government bonds, they mostly closed unchanged with the 10-year bund left at 0.20%, for example. The iTraxx indices saw some weakness as protection costs rose moderately with Main up at 77.5bp and X-Over at 327bp.

And finally in cash, the market just edged wider. The Markit iBoxx index for IG corporate bonds was a touch higher at B+141bp while the high yield index moved 7bp higher at B+490bp.

There’s little else to add. Have a good day!

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.