5th February 2016

Rubber ball, come bouncing back to me

MARKET CLOSE:
FTSE 100
5,899, -62
DAX
9,393, -42
S&P 500
1,915, +3
iTraxx Main
105bp, +1bp
iTraxx X-Over Index
405bp, +5bp
10 Yr Bund
0.30%, +2bp
iBoxx Corp IG
B+178bp, unch 
iBoxx Corp HY Index
B+606bp, unch
10 Yr US T-Bond
1.84%, -4bp

No respite to end the week… The dollar’s big fall overnight on Wednesday bounced Draghi into action with a (no retreat) “no surrender” speech. The rise of the euro, buying $1.11 or more, is extremely unhelpful for the ECB to say the least. If it stays at these levels or goes higher, then they will have no choice but to act in March as the fight to reinflate the eurozone goes on. That aside, the rest of the market delivered only a little (an early morning bounce) by way of recovery dynamics, clearly apprehensive about being caught out by the next bit of bad news. After all, we know it’s coming. That leads to inaction and exaggerated price movements amid smaller flows/volumes, in case someone should react to emerging headlines. We ought to be comforted by the absence of panic in the context of the broader corporate bond market universe. Most investors are sidelined and outflows have been de minimis, but there is a sense that many are just itching to get involved. For that to happen, we need a floor (in stocks) from which confidence can be rebuilt. In the meantime, we had hoped – and commented – that the price action might not have been as whippy as it was in January. Unfortunately, this week has shown that it is just as volatile (oil +8% on Wednesday, having been flat at times during the session), and this type of price movement is impossible to trade. The corporate cash market has found some support – we’re sliding rather gently at worst – but there are pockets of bigger weakness (CoCos and LT2). That gentle slide was no barrier to primary as that market woke from its macro-induced slumber. We were graced with a little issuance – not to be yawned at! Ford Credit Europe (Baa3/BBB) kicked us off with a dual tranche offering and was followed by Praxair, while Goldman filled in for the senior banks. Alstria (real estate investment trust) and Schlumberger are most likely today’s business.

Volatility is as intense now as it was in January… iTraxx Main closed Wednesday at 104bp, saw 101bp on Thursday early morning and was up at 103bp by lunchtime. And higher thereafter to 106bp! Anyone who thought we had overcooked Wednesday’s weakness was proved wrong. Stocks played out the session in volatile form – no higher than 0.4% but down by up to 1.5% in the session for the DAX (closed -0.4%), which is quite disconcerting given the large falls on Wednesday. As well as corporate earnings leaving much to be desired, macro again proffered cause for concern. And it was the poor US factory orders (down 2.9%) that boosted equities – because they give hope that there will be no US rate hike. Incredibly, bad news is good news and we’re clinging on to any bit of the bad. The EU downgraded its 2016 economic growth forecasts (to 1.7% from 1.8%), as did the BoE for the UK. No rate rises from the BoE or the ECB any time this side of 2018, we would think! And all the more reason to expect ECB action very, very soon. On the corporate side, ConocoPhillips became the latest oil major to cut (its dividend in this case), AstraZeneca warned on 2016 profits, Tata Steel reported a heavy loss for its third quarter and Credit Suisse got hammered as it reported a huge loss for 2015. Glencore’s rating was cut by S&P to the cusp of “junkdom”, now at BBB-. The IMF chipped in, with Lagarde talking about the global financial safety net (external financing) for emerging markets being inaccessible.

Credit focuses on the issues… Ford Credit snapped up €1.35bn through a dual tranche offering in the form of a 2-year floater and 5-year fixed bonds. The single-A rated Praxair took €550m in an 8-year deal at midswaps+78bp. All the deals priced inside initial price talk. That takes the total year-to-date for IG non-financial corporate issuance to just €7.4bn. Goldman clipped €2.5bn in a dual tranche offering on the senior bank side. For the rest, iTraxx Main ended up at 105bp (+1bp) and X-Over at 405bp (+5bp) highlighting the sensitivity of synthetic credit product to equity volatility. For corporate bonds, we closed out unchanged oblivious for once to the volatility besetting other asset classes. Into the close, oil futures ended a little lower (-2%), European stocks mixed with the FTSE outperforming (+1%) and we had government bonds generally seeing yields back up a little. US stocks closed in uncertain fashion – to follow oil prices or focus on the data?

Have a good day and weekend, back with you Monday.

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.