14th January 2019

It’s showtime

MARKET CLOSE:
iTraxx Main

82.5bp, +1.9bp

iTraxx X-Over

342.7bp, +8.7bp

🇩🇪 10 Yr Bund

0.23%, unchanged

iBoxx Corp IG

B+178.8bp, +0.4bp

iBoxx Corp HY

B+516.6bp, +2.5bp

🇺🇸 10 Yr US T-Bond

2.70%, unchanged

🇬🇧 FTSE 100 6049.62, (-1.73%) 🇩🇪 DAX 12489.46, (-0.04%) 🇺🇸 S&P 500 3152.05, (-0.65%)

May’s Churchillian moment lost…

The time has come. We are into probably the most important week for British politics for a generation where Theresa May has already lost her chance for greatness and democracy (as we know it to be in the UK) was quashed. It’s not even about fine margins anymore. The Brexit vote will be the focus, but we will watch what happens in the immediate aftermath, as the government (as it surely will do) loses the vote on May’s deal later today.

We’re not sure that the markets had reacted or not to that news during the session, given that the Chinese export data was more important in global context. In fact, it will be a China ‘thing’ as far as markets are concerned. Its export performance was weaker than expected in December, and the fault didn’t lay squarely on the US/China trade spat. Global macro is slowing, the repercussions are really yet to be felt, and the policy response will be too late. In the meantime, Eurozone recession fears are mounting.

The data. Eurozone industrial production fell by 1.7% Between October and November (Eurostat). In China, exports fell 4.4% YoY in December (versus expectations of a 3% decline) but she is also experiencing weak domestic demand (electronics/autos, most noticeably). We have weakness in the UK, the US labor market is in fine shape but growth is coming off the boil. The Q4 2018 earnings season has kicked off this week and it likely isn’t going to paint a pretty picture as we have passed the pet profits period for the current cycle. Citigroup reported its lowest quarterly for two years while earnings also missed in Q4 2018.

In credit, primary has surprised to the upside and issuers will be well-advised to get deals away when they can. The window will open and close with increasing regularity given the still numerous risks associated with macro and geopolitics.

In secondary, we might no longer have a marginal buyer since the ECB exited the market with its €1.4bn of monthly purchases, but the ECB’s reinvestment proceeds might eventually offer some support. Fresh money inflows are unlikely in themselves going to promote a major tightening in spreads, the inflows for the moment won’t be great enough. Few expect that anyway. That suggests that if we get 15bp of tightening this year – which is our most bullish expectation (iBoxx index, already +7.5bp), it will be a result.

How would we get that spread stability/recovery? Some stability in macro would help as it would stabilise credit fundamentals. A central bank policy response somewhere would be welcome, too. It would boost rates and underpin equities most likely and therefore sustain a better bid for safer, higher yielding corporate bond risk – something akin to what we saw in the 18 month period to end 2017.

And the primary market is expected help, in our view. We’re looking at a low €200bn of IG non-financial issuance this year which is a near 10% drop versus last year’s (€221bn) and well down on the €260bn average seen annual in the 2014-2017 period.


Corporate supply ticking over

The deal flow in corporate primary took in FedEx Corp, the triple-B rated US borrower issuing €640m in a long 3-year at midswaps+75bp, which was 20bp inside the opening talk. They were followed with a green bond issue from Enel, with the Italian utility issuing €1bn in a 6.5 year transaction priced at midswaps+135bp. The book here was at a very good €4.2bn and final pricing 20bp tighter than the initial guidance.

That takes us to €12bn for IG non-financial issuance this year so far and, should markets remain as they are, we ought to be looking easily doubling that amount by month end. SNCF was the other borrower in the market, in what was otherwise a very quiet session.


Mixed open to the week

European markets were on the back foot throughout the session, but we pulled back from the session’s worst levels into the close (FTSE aside). European bourses ended 0.3% – 0.7% lower, the FTSE managing a 0.9% decline. As at the time of writing, the US markets were also in the red, off the worst levels, and 0.4% lower.

We endured a similar time of it in rate markets. The better bid faded right at the death, leaving the 10-year Bund yield unchanged at 0.23%, the equivalent maturity Treasury was likewise unchanged to yield 2.70% while Gilts were better offered into May’s Commons performance, left at 1.29% (+2bp).

In credit, the indices reflected a cautious tone throughout. iTraxx Main was up at 82.5bp as it gave up 1.9bp while the X-Over index rose by 8.7bp to 342.7bp.

Secondary cash was quiet as we might expect for a Monday, but given the weakness in stocks and the negative general tone coming from Brexit and those Chinese export numbers, we were slightly better offered for choice. The iBoxx cash index edged 0.5bp wider, reflecting slightly better-offered market, and was left at B+178.8bp.

For once that filtered through into the higher beta financial debt market, and we had 12bp of weakness in the CoCo index for example – and the first real reversal this year, with the index at B+678bp.

The sterling market was actually unchanged, unperturbed by the political shenanigans, the index at G+190bp, -0.5bp YTD and an outperformance versus the euro-denominated corporate market.

Finally, in the high yield market, we saw some moderate weakness (noise) and the index was 2.5bp wider at B+516.6bp (-7bp YTD).

Have a good day.


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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.