15th April 2018

Don Trump? No, stick with Donald

MARKET CLOSE:
iTraxx Main

55.1bp, -0.9bp

iTraxx X-Over

276.1bp, -3.5bp

10 Yr Bund

0.51%, unchanged

iBoxx Corp IG

B+104.4bp, -1.2bp

iBoxx Corp HY

B+316.4bp, -4.4bp

10 Yr US T-Bond

2.83%, unchanged

FTSE 100

7,661.87, 10.54
DAX

12,540.73, 47.76
S&P 500

2,801.31, 3.02

West’s response sullies outlook…

Better than expected: JP Morgan

It should be time to switch focus and save the month’s performance. The earnings season is upon us and might prove to be a useful distraction as we focus on the nitty-gritty of companies and macro. With that, the Q1 earnings season has kicked off in good fashion.

US banks have been reporting record results (JP Morgan and Citigroup beat estimates) while those from Wells Fargo were understandably more difficult given the regulatory issues surrounding the institution on mis-sold car insurance and mortgage fees.

US stocks closed a small down in the final session, but we rounded off a decent week overall for them (S&P getting closer to flat year to date), rate markets held firm to seeing yields just edge higher for choice while credit ended better bid amid investors being occupied (thankfully) with a good level of activity from primary.

Unfortunately, there is much other “stuff” that we have to contend with. There is no letting up on the UK/Russia tensions which escalated further as the former hit, back releasing intelligence data on the Salisbury poisoning, but the US/UK/French response to last week’s Syrian gas attack will dominate early trading (at least) this week. In terms of the market’s reaction, the air strikes were totally anticipated – and very targeted, so we would not necessarily expect materially weaker markets as we open for business.

And then there is just President Trump. The Trump/Comey show was back in town following embarrassing revelations in the former FBI Director’s new book, while the President’s personal lawyer was also in the dock for possible misdemeanours.

With two weeks of business to go into a busy earnings season, we ought to be looking for a positive display from markets given expectations of an upbeat season of reports. But those aforementioned geopolitical issues are likely going to hold sway – and also over the niggles which might be besetting macro, coming largely from the US/China trade feud and a slowing global economy as evidenced by the opening quarter’s data.

Likely, the best we can hope for are rangebound equity and rate markets which would help feed into delivering, hopefully, a decent period for primary. Steady markets at least won’t be shutting any windows, so borrowers ought to be looking to get some funding away while the going might be good. The pipeline is bulging after all, and we would be looking for the high yield market to be particularly busy.


Credit stabilises after wobble

Good deals in primary (well-received and tighter on the break) will help the whole market, and secondary would also have a chance to keep rallying after six or so weeks – before last week – of considerable weakness.

Last week’s deal total in IG non-financial credit amounted to €4.65bn as the total for the month at the halfway stage came to €10.55bn. We think that is a low level of issuance given that we had just €55bn in the opening quarter. It compares very favourably to a difficult peril last year when just €5.6bn was issued, but the opening 4 months of 2017 delivered €99bn of issuance. This year, the run rate is at €65.6bn. The market can easily absorb €20bn in the next two weeks although we are going to need those ‘good deals’ to make sure secondary doesn’t feel any pressure.

The high yield market finally saw some deals with a bulging pipeline threatening an avalanche of deals to come! After a two and a half week absence of deals, we had nearly €1.6bn from four borrowers – the first deals of the month. The total for the year so far is at €20.65bn and compares with the €22.4bn seen in the opening four months of 2017. Given that pipeline, we could reasonably expect to be ahead of last year’s issuance level come the end of the month.

High Yield Issuance at Last

It doesn’t appear that supply – or lack of it – has had much of an impact on secondary. That’s been more about the macro environment where weaker and/or volatile stocks seem to have had a large impact on spreads. We’ve gone wider across the board for the best part of a couple of months, but we seemed to have arrested the pressure last week. Friday saw 1.2bp of tightening in the Markit iBoxx IG cash index to B+104.4bp which represented a 3bp tightening in the week. This index is now just 8bp wider year to date while total returns have recovered to -0.2% in the same period.

In the high yield market, last week closed with 17bp of tightening in the iBoxx index to B+316.4bp (and -4bp on Friday). We’re 30bp wider year to date, but total returns have managed to claw themselves into the black, and are showing up at +0.2% for this year so far.


Looking for calm

The IMF and World Bank meetings take place in Washington this week

As suggested above, we think that it is likely that the weekend’s well-flagged bombings in Syria are unlikely going to provoke any material weakness in risk assets. We closed last week with just the smallest moves in prices. Equities closed up to 0.3% higher in Europe and -0.5% in the US. We might think in terms of a relief rally given the situation in Syria doesn’t appear to have escalated, at the moment.

Rates were unchanged and we might expect yields to edge higher if the relief has set in. The 10-year Treasury yield was left at 2.83% and the equivalent Bund at 0.51%

As for this week, the US earnings season ramps up a little more with the likes of BofA, Goldman and Morgan Stanley for the banks, with J&J and GE amongst the industrial bell-wethers all reporting. There might be some distraction from the IMF-World Bank meetings while Japanese PM Abe is due to meet his US counterpart. In Europe, we have UK employment and CPI/PPI numbers for March, the German ZEW economic sentiment indicator and Eurozone CPI amongst others through the week.

Have a good day.


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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.