2nd July 2018

It’s like Chinese water torture

MARKET CLOSE:
iTraxx Main

75.3bp, -+2bp

iTraxx X-Over

326.9bp, +7.9bp

🇩🇪 10 Yr Bund

0.31%, unchanged

iBoxx Corp IG

B+138.1bp, +1.5bp

iBoxx Corp HY

B+423bp, +6bp

🇺🇸 10 Yr US T-Bond

2.86%, unchanged

🇬🇧 FTSE 100 , 🇩🇪 DAX , 🇺🇸 S&P 500 ,

Drip, drip, drip…

It’s not quite how we would have wanted it, but we’re off to a weaker start to the second half of the year. Global trade war worries top the list with Trump tweeting over the weekend about the EU being ‘as bad” on trade with the US as China is and all sounding extremely ominous. However, we also have a political crisis brewing in Germany although a government reshuffle no matter how bad wouldn’t necessarily lead to any additional material economic decline. The uncertainty is what rankles with the markets. As a result they are in no mood to turn the page into some kind of new, fresh brighter outlook; We followed with sharply lower in stocks (but only at the open) after Asia markets lost 2% or more.

And then there was primary credit. It almost drew a blank with just one corporate borrower in the market. Headline risks are our nemesis. It doesn’t look like the situation is going to improve much. We would have thought that a stable market dynamic would have easily allowed IG credit deliver €15-20bn of deals in non-financials. We need them and we know borrowers are lined up to pull the trigger pre-summer break proper. For now, €10bn of IG non-financial supply would probably be seen as a good result for the month.

It is the trade war that scares. With a cacophony of situations around it, markets are starting to work themselves into a somewhat frenzied state. They include a further policy response from China just when they are heading for a slowdown with infrastructure and other investment declining and where the rest of Asia is going to feel a chill. The currency is the obvious way (in addition to that banking reserve requirement lowering last week) in which the Chinese might try to limit the domestic damage. But the international response will see Asia Inc coming apart at the seams.

In Europe, the EU prepared a fairly measured response to the Trump-tweet related threat of import tariffs on German cars. There’s also the growing rift within NATO with Trump having a bee in his bonnet that the US is spending more than its fair share and needs higher contributions from other members. So optimism is in reverse gear, general investment levels are slowing and industrial order books are beginning to look a little thinner as a more cautious tone prevails.

The drip feed of negative news and constant headline risks threatens a downturn even if the worst outcomes of the tweets and political risks don’t materialise (a very serious one if they do). We can see it already in the surveys.
Manufacturing/industrial activity PMIs are down globally, for example, versus January, just when only six months ago we were gearing up for a recovery in global growth through this year. Bucking the trend is the US with the ISM manufacturing gauge higher in June at 60.2 against expectations of a decline to 58.5.
We had previously put forward an optimistic case for July – if the markets played ball. That is unlikely. Furthermore and unfortunately, we have Trump ‘on tour’ in Europe and it is a ‘gimme’ that he will ruffle many feathers through his usual politically incorrect oratory, and all that before he meets Putin and tells the world – just he did with Kim Jong-un, that the Russian president is ‘a great guy’ or a plaudit to that effect.
Lest we mention it, we have a new left-wing president in Mexico with Andres Obrador threatening to go toe-to-toe with the US (especially on that border wall). We’re probably close to being shut for the summer as we ever could be!

And a weak start to H2

Most markets recovered off their worst levels of the day, seen mostly in early trading. The DAX, for example, was off by well over 1% before recovering to close 0.6% down, while the FTSE was also off by as much before recovering less to close at almost the day’s lows – still 1.2% down in the week’s opening session. We had a choppy session in the US with stock indices generally in red, but fairly mixed as at the time of writing.

Rates closed flattish in the session. That meant that the 10-year Bund yield was at 0.31%, the equivalent maturity Treasury at a yield of 2.86% and Gilts left to yield 1.25% (-1bp). In all markets, they rarely threatened any big break out moves.

As seen through the eyes of the synthetic markets, risk off was the view. Protection was better bid (higher) and the contracts at around their highs for Series 28. Main was 2bp higher at 75.3bp and X-Over 7.9bp higher at 326.9bp.

In a quiet session, cash was also showing some weakness into low flows and volumes but clearly a market better offered. In primary, the plain vanilla corporate bond market had only Informa PLC on the screens, to get the ball rolling for the month’s new deals. The issuer came with a dual tranche, dual currency offering. They issued €650m in a 5-year maturity at midswaps+132bp (-18bp versus IPT, books at a decent €2bn) and £300m in an 8-year maturity at G+190bp (-10bp versus the initial talk).

generally, secondary is not in the mood to buck any trend, just as we have failed to do so all year. The iBoxx IG cash index was another 1.5bp wider, at B+138.1bp at the close and yet another high for 2018. And in high yield, it was no surprise that we were also better offered, the cash iBoxx HY index left at a 2018 high of B+423bp (+6bp).

Have a good day.


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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.