29th January 2016

Good riddance, January

MARKET CLOSE:
FTSE 100
5,932, -59
DAX
9,640, -241
S&P 500
1,893, +10
iTraxx Main
93.5bp, +1.5bp
iTraxx X-Over Index
375bp, +9bp
10 Yr Bund
0.40%
iBoxx Corp IG
B+175bp, -2bp 
iBoxx Corp HY Index
B+596bp, -6bp
10 Yr US T-Bond
2.01%

TGI… month-end!… Exasperated – that’s how we will all be feeling after such a difficult start to 2016. Unfortunately, we don’t think we can draw a line under the opening month and be warmed by the prospect of better climes in February. It’s looking like it will bring more of the same kind of apprehension and volatility. This has been one of the most difficult starts to a year absent a global systemic financial crisis, and we are tempted to think that the years of mass market manipulation by central banks (through monetary policy) are unravelling. Given we have little faith that government-led long-term programmes are being put in place to eventually wean us off central bank accommodation, the current volatility is an indicator of our own readjustment. And so, in the words of Kipling, now is the time to “..keep your head when all about you/ Are losing theirs…” The statements reporting portfolio performances for January will be dropping into (e-mail, letter) boxes next week. Some will panic; There will be temptation to reallocate assets and there will most undoubtedly be outflows. The corporate bond market has thus far got away with it relatively well – beaten up for sure, but not battered. We can only cross our fingers and hope that high levels of sidelined cash balances are enough to meet all (or most) of whatever outflows emerge from corporate bond funds. Nevertheless, we end the month with almost everything on the back foot except government bonds, which are boosted in the US by the Fed’s likely delay of a hike in March and by the expectation in Europe of a promise of ECB largesse in March or shortly thereafter. Equities are and will continue to be volatile, playing to the tune of the oil price and macroeconomic data/events, while the corporate bond market resides somewhere – uncomfortably (?) – in between those two.

Don’t get us wrong… we are purveyors of the corporate bond market, and we will flesh out why in a little more detail in Monday’s comment. And moreover, we found that the corporate market stood out a little in Thursday’s session – for the right reasons. We are not sure whether it was month-end effects, or if investors have realised the perceived wisdom of reflecting on the asset class’s attractions in these difficult times. Stocks may have come under pressure from the off, even decoupling from rising oil prices as that market focused more on the Fed statement and the earnings reports (generally weak). The global outlook is bleak: everyone is telling us so. We’re junked up on QE, but the medicine is losing its effectiveness. That explains lower stocks and a better bid for govvies. Credit might suffer eventually if deflation sets in for a prolonged period, but for now, corporates are a defensive asset class. Into month-end, we see that “fast money” accounts are trying to cover their shorts but can’t as no one is selling. The Street won’t go short either, or doesn’t want to lose inventory in case we’re in the throes of a bounce. Greed. “Real money” investors are looking to reduce their underweights, thinking we have gone too far (finally) and that the sell-off is unwarranted (phew). They are struggling because again the Street is not playing ball – and neither is anyone else. This means that spreads will be supported, and returns for credit will be looking like the best of a bad bunch for January when we close up for business today.

Ropey day justified… The data on Thursday should leave us in no doubt that we are nowhere near close to breaking out of the current malaise. US durable goods orders fell again in December after a 1.2% drop (revised lower) in November. The eurozone economic confidence indicator declined in January. Caterpillar warned on 2016 profits, while H&M and Electrolux and a swathe of UK corporates reported weak Q4 profits. Diageo’s sales increased, but it took a hit on earnings on the back of FX volatility. At least German inflation edged up to 0.4% in 2015, and Spanish unemployment declined again. In the penultimate session of the month, the DAX was down 2.4% and most other bourses dropped anything from 1% to 2%. The 10-year Bund yield fell to 0.40% and the 2-year remained anchored around -0.45%. Oil prices rose 5% at one stage on more noise around potential for output cuts, but few seemed to care – but later fell back to around 4% higher in a very choppy session ($34.5 per barrel, Brent).

There’s still a session to go, but this is how it looks… The DAX is down 10.5% in January, the FTSE -5% and the S&P around -7%. Eurozone govvies are up 1.5% (safe haven) in total returns, while Markit iBoxx IG corporate index returns are back in the black from a combination of tighter spreads and lower yields in recent sessions, and up 0.2% in the month! The HY equivalent is just 1.75% in the red for January (over 3% lower a week ago), while index yields have fallen to 5.81% from a recent high of 6.17% a week ago. For IG sterling corporates, returns are 0.1% YTD while spreads are 30bp wider and the index yield is also unchanged at 3.96% as Gilts have rallied. For benchmark players, Euro IG cash index spreads are 21bp wider in the month for IG and 68bp in HY. In the synthetic space, Main is 17bp wider since the beginning of the year at 93.5bp (mid) and X-Over some 60bp higher. Be careful out there.

Have a good weekend. Back in February.

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.