6th May 2016

Not a whole lotta shakin’ going on

MARKET CLOSE:
FTSE 100
6,117, +5
DAX
9,852, +24
S&P 500
2,050, -1
iTraxx Main
79bp, +2bp
iTraxx X-Over Index
330bp, +3bp
10 Yr Bund
0.16%, -4bp
iBoxx Corp IG
B+141.7bp, +0.6bp 
iBoxx Corp HY Index
B+493bp, +4bp
10 Yr US T-Bond
1.75%, -3bp

It’s all over – for this week…

The week has not been without its own little dramas. And that after Ascension Day and non-farms (due later today) combined to bring the week to a premature end. It’s been a poor one for stock markets. It’s been an indifferent one for government bonds. And it’s been a so-so week for the corporate bond market. Crammed effectively into just two sessions because of the UK holiday on Monday, we have still managed to take down €7bn of IG issuance, some HY supply too and had a deal pulled.

mohed altrad

Altrad President Mohed Altrad

The story for the week which some might seek to extend into something bigger – no need, because it will not – could be the Daimler deals which saw the borrower’s capital markets funding hit €10bn this year. Or it could be the pulled deal from Altrad, with some suggesting the market could be heading for some kind of fall because of it. For the former, the weakness on the break was just a case of too much, too quickly – and hopefully that’s it for a while from them. For non-rated French corporate Altrad, their €300m deal closed with over 300 in orders apparently (including, unusually, the leads interest). The company makes machines for use in the mining industry (and construction), so not a corporate one would want to own an illiquid bond in. Just as well it was pulled!

Growth fears everywhere, inflation (or the lack of it) fears in the eurozone and a more difficult week on the earnings front saw to it that, for the opening week of May, it was a case of risk off. That sentiment has been most obviously reflected in equities with the S&P barely in the black YTD having been as much 3% into positive territory in late April. In Europe, the German DAX has had a difficult year, in the red YTD in every session. That has never looked liked changing even when rising several hundred points last week, but still barely getting to within 300 points to the 2015 year-end close.

What’s bad for some, is good for others

What’s bad for equities is classically usually seen as being good for government bond markets. But so much have markets been manipulated by central bank action in order to try and stave off a global financial crisis, that classic economic theories are no longer relevant. In a beggar-thy-neighbour environment, it’s every man for himself. The Fed is looking out for number one. The Japanese certainly are. Chinese economic policy has to, while the ECB is getting no help from the eurozone’s political elite.

It’s left us with distorted growth patterns across the globe, a general deflationary environment everywhere and policy in which interest rate tools have failed to correct any imbalances. We’re into uncharted waters, but it has left the corporate bond market – in Europe – to establish itself as a core, necessary incoming boosting asset class.

Gloomy newsflow, again

Jobless claims rose in the US rose to their highest level in several weeks, and while the data is volatile, it might be a harbinger of things to come later today when we get the non-farm payroll print. And fresh from his Republican nomination win, “The Donald” was again making news by suggesting he would probably replace the Fed’s Janet Yellen once her term is up.

Over here, the UK services PMI dropped t0 its lowest level in 3-years and suggests a cooling of the UK economy. No doubt some will use Brexit fears as the reason for the slowdown, but we think the problems are more fundamental. Dare we think a rate cut? Oil watchers will have noticed the rise in the price per barrel, with wildfires in Canada disrupting supply being excuse aplenty to drive the price up (back into $46+ territory). And while we’re in a downbeat mood, the ECB capped it off with a rather gloomy outlook on eurozone inflation. Core inflation remains stuck at 1%, wage growth is weak and the currency too strong.

Fading away into the weekend

Travis-Perkins

Only One: Travis Perkins’ HY deal

The sole borrower was UK building merchant group Travis Perkins with a £300m 4.5% 7-year HY deal. The pause yesterday might have been predictable but perhaps needed. That’s because the overall macro picture is offering a poorer set of data and newsflow and market volatility. Therefore, it’s always useful for us to take a breather and reflect. Next week is a clear week which could be quite heavy again on the primary front given that May is usually flush with supply ahead of the summer holiday season.

Anyway, stocks did little – perhaps a small up or down in the session and ended flattish. We had government bonds close better bid though and a big move in yields with the 10-year Bund down at 0.16% (-4bp) while the equivalent Gilt yield was 6bp lower at 1.46%. For corporate debt, IG spreads were better offered for choice but in a very lacklustre session. And this was replicated in the HY market. The drop in the underlying yield has seen the Markit iBoxx IG index yield fall too, to just 1.29% and the lowest level this year so far. To be more precise, we have to go back exactly a year to see index yields for IG credit this low and we continue to believe the 1.02% record low index yield (in Q1/2015) is under threat.

And finally, IG returns for 2016 are up at 2.95%.

That’s it. Have a good weekend.

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.