23rd October 2019

Focus back on macro

MARKET CLOSE:
iTraxx Main

50.6bp, unchanged

iTraxx X-Over

227.2bp, +1.5bp

🇩🇪 10 Yr Bund

-0.40%, -3bp

iBoxx Corp IG

B+116.7bp, unchanged

iBoxx Corp HY

B+399bp, unchanged

🇺🇸 10 Yr US T-Bond

1.75%, -2bp

🇬🇧 FTSE 100 6176.19, (+1.33%) 🇩🇪 DAX 12799.97, (+1.32%) 🇺🇸 S&P 500 3185.04, (+1.01%)

If only it were that simple…

An extension will be granted and we’re most likely heading for a general election. However, let’s not consume ourselves through November with Brexit. Time to move on.

November could be good for markets and, for the moment, credit markets have come to a standstill. Actually, most markets have. There is arguably a slightly better tone, if anything, to risk assets. As such, we have only moved moderately higher in equities these past few sessions, but more obviously tighter in credit amid little secondary activity, while government bond prices have started to claw back some gains as focus switches back to macro.

Of course, it’s gone all quiet on the US/China trade front with little news flow as to the current state of play in the negotiations. In credit, spreads are grinding tighter for choice, but there is nothing spectacular in this market happening right now. IG primary has slowed and become a little more hit and miss at the moment. Everything though might be about to change as we hone in on the resumption of the ECB’s QE purchases, due to begin from November 1.

That grind in credit spreads has the AT1 market – the ‘go to’ market this year, with spreads at their tightest level since May 2018 (iBoxx index). At B+117bp, the IG index is at the tightest level since July this year – and 10bp away from the B+107bp tight print. We could, if investors don’t sell into the ECB bid looking to book profits into year-end, zip through that level during November.

Lower levels of primary at the moment will have jarred with a few. The market has the capacity to take down more risk – and will probably prefer to. Usually, we have seen a decent November, with up to €40bn issued in that month. However, if we are exhausted following the near-record issuance year to date in IG non-financial issuance, then expect an almighty squeeze in spreads.

It would appear that the dynamics for a tightening are in place. As suggested, the market can easily absorb another glut of deals. If we don’t get them, we should squeeze tighter as spare cash looks to chase the secondary market. And we have the ECB manipulating the equation, crowding out IG investors from their market which in turn might just offer a late boost to the high yield market.

Win, win … possibly!


High yield on Tuesday.. same for Wednesday in primary

Crown Holdings‘ €550m 3-year maturity issue on Tuesday, came the lowest ever coupon for a high yield rated issue in the euro-denominated – of just 0.75% ! Others will not necessarily be funding with such incredible rates and there will be investor resistance where merited, but the market is wide open.

Nonetheless, it was high yield rated deals in the corporate bond market again. Accor was the pick of the bunch as its hybrid deal saw books of around €3bn for the €500m issue. The borrower went for a PNC5.5 hybrid note priced to yield 2.75% and 50bp inside the initial price talk of 3.25%. Of course, the predominant interest would have been from IG accounts.

French long-term investment company FFP, whose main shareholding is in the PSA Group, issued a no-grow €300m in a 7-year offering at midswaps+210bp, on books over €700m. Kantar is also in the market with a sizeable transaction (almost €1.5bn), still to be completed/priced, as at the time of writing. And we’re still waiting on VodafoneZiggo’s pricing.

The other notable deal came from Indonesia, with the sovereign printing €1bn in a 12-year maturity priced at midswaps+130bp (-30bp versus IPT).


Markets searching for an excuse

We were light on economic data in the session, but we did have Peugeot report a rise in revenues in Q3  amid difficult conditions which seem to be having a much larger negative impact on other car makers.  Peugeot for the moment appears almost an industrial outlier and there will only be few other such companies which might surprise to the upside.

Good results from the car manufacturer

Against that for instance, US bellwether industrial giant Caterpillar missed, after reporting a 13.5% fall in Q3 profits as the group also cut its 2019 expectations. Boeing‘s earnings were also a notable big miss, earnings coming in at $1.45 per share against expectations of $2.09.

Equities didn’t do much in the session and were trading in a small range (small up/down) for much of the day, amidst an almost end of year feel about them. But a late mini-rally saw the Dax close 0.3% higher, the FTSE was up 0.6% and, at the European close, US stocks were 0.2% in the black.

In rates, the 10-year Gilt yield was 3bp lower at 0.68%, the Treasury yield edged to 1.75% (-2bp) and the Bund yield dropped to -0.40% (-3bp) with a better generally for safe havens.

Credit index was not doing too much and that left iTraxx Main to close at 50.6bp which was unchanged and X-Over was was 1.5bp higher at 22.7.2bp.

The credit snoozefest was reflected in the IG market, with the IG index left unchanged at B+116.7bp and the high yield index at B+399bp.

The ECB’s up next and it’s Draghi’s central bank swansong gig; Don’t expect any changes to policy.

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.