15th September 2015

I don’t like Mondays

MARKET CLOSE:
FTSE 100
6,085, -33
DAX
10,131 +8
S&P 500
1,953, -8
iTraxx Main
72bp, +1bp
iTraxx X-Over Index
332bp, +4bp
10 Yr Bund
0.65%
iBoxx Corp IG
B+147bp, +1.5bp 
iBoxx Corp HY Index
B+476bp, +5bp
10 Yr US T-Bond
2.18%

A Monday before a crucial Fed meeting… And there’s not much to like about it. Just sitting around, waiting for something to happen – a new deal or two on the screens, perhaps even a client enquiry, but no real fresh, directional trade to put, on especially when the Fed decision on a rate move at this crucial juncture could go either way. The Chinese industrial output and fixed asset investment numbers out over the weekend were poor, leaving Chinese stocks to fall by almost 3%, but bourses in Europe were unperturbed by the drop. That would not have been the case – and wasn’t the case – a couple of weeks ago. Maybe it’s because it has happened so often, that the “boy who cried wolf” syndrome has hardened us to big moves in Asian stocks. Still, the weaker numbers point to lower demand as the Chinese economy goes through what will be a prolonged and painful rebalancing, which in turn means low(er) commodity prices for longer, and reduced consumer demand and the like for an extended period. It leaves Wednesday eurozone inflation figures likely to be anchored around zero, with little or no hope of a pick-up anytime soon. That means markets expect that more QE is on the horizon and further easier policy will give equity markets a boost. That rising tide lifts all boats. Easy really. We got our fill in primary, as we suggested we might in our previous postings. Statkraft, Pentair, a three-tranche deal from Sanofi and Pernod Ricard all kept the market focused. The downside at this moment is that building a ‘decent’ book is becoming bit of a struggle (see below).

New issue coverage ratios fall, NIPs on the up and performance wanes… In primary, Norway’s Statkraft raised Eur500m at midswaps+85bp in 8-year funding (book just over 2x, NIP of around 15bp) and Pernod Ricard (Baa3/BBB-) lifted the same amount in the same maturity. Sanofi became the latest of a growing number of entities doing three-tranche deals (one being a floater). Commerzbank was in for 7-year maturity senior fixed funding and BPIM was on the screens for a 3-year. The books on the deals are now falling into the 2-3x category rather than 4-5x or more while new issue premiums are also on the rise, which suggests a bit of indigestion (it has been a very heavy couple of weeks) or caution about adding pre-Fed. It doesn’t help that last week’s new deals have come off a little too (ITV +10bp), with few stepping into the breach to lift the cheaper offerings in secondary. As for ProSiebenSat, the media group pulled its deal following the investor call last week, and it seems the market won’t take down anything that is thrown at it after all.

Elsewhere, we fail to lift off… The synthetic indices played out in a narrow range and ended better bid (higher), while cash corporate bond also languished, not helped as the session progressed by the weaker performance in the equity markets. Most of Europe ended 0.5% or more in the red, the DAX being the exception as it closed flat on the session. The US was trading lower too into the European close, seeing to it that there would be no late recovery. September has been a quite horrible month for corporate bond valuations. The iBoxx IG corporate cash index was again higher into Monday’s close, this time at B+147.3bp or 1.5bp wider in the session, with the HY index also giving up ground to B+476bp (+5bp). The IG index level was last seen in October 2013! Yet, we have no corporate bond crisis – far from it. The weakness was clear everywhere with few stepping in, as mentioned above. Hybrids and CoCos took it on the chin. For HY, we’re just a basis point off the widest index level this year. And finally, for the synthetic indices, Main was up at 72bp (+1bp) and X-over weaker at 332bp (+4bp).

Don’t forget to cast your vote in the Fed ‘rate hike poll’. As it stands, the ‘no rate hike’ camp are in the ascendancy.

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.