15th October 2019

Just the tonic

MARKET CLOSE:
iTraxx Main

53.0bp, -2.2bp

iTraxx X-Over

237.0bp, -7.2bp

🇩🇪 10 Yr Bund

-0.42%, +3bp

iBoxx Corp IG

B+121bp, -1.5bp

iBoxx Corp HY

B+409bp, -4bp

🇺🇸 10 Yr US T-Bond

1.77%, +3bp

🇬🇧 FTSE 100 6144.25, (+1.26%) 🇩🇪 DAX 11657.69, (+1.33%) 🇺🇸 S&P 500 3036.13, (+0.74%)

Brexit becoming a reality…

Markets were not threatening to do too much amid ongoing apprehension around Brexit, the Middle East and the trade talks – until the afternoon session, and the US opening. And then we had a strong rally in risk assets, led (as usual) by equities and with a decent sell-off in safe havens. It was as if markets threw caution to the wind. Late into the afternoon, there was heightened hopes of a Brexit deal but we think that the receptivity to a mixed bag of reports on the US earnings stream in the session was also a driver.

A continuation in the rally on a Brexit resolution could see safe havens under further pressure, and likely see the 10-year benchmark yield in Gilts rise by up to another 15bp in a 2-3 day period in the immediate aftermath on any agreement being passed. Yields here have already risen by 25bp in the past week. The FTSE was the big underperformer, but that was because we saw another 1% rally in sterling.

Bunds will sell-off some more, too, relieved that any current weakness in macro won’t be hit further by Brexit-induced disruptions. Macro difficulties and technical factors (ECB QE) will limit any rise in the 10-year yield to 10bp though, we think.

Equities will obviously see some upside but will remain volatile and more cognisant of headline risks from the Middle East and the US/China trade situation. Credit markets are in a decent space, though, whatever. They are not directly impacted by the unfolding events, but the secondary impact of them will dictate the mood and spread directionality.

Credit spreads will tighten modestly – as they have been for the best past of the last 6 weeks – if equities rise and the news flow improves. More direct support might come from the ECB’s QE purchase programme.

Primary looks to be in decent shape. We’ve managed a steady flow of deals for pretty much the whole of 2019. In fact, it’s been more than that as IG non-financial supply heads for a record year, senior financial issuance is looking like being the best for the full-year since 2015 and, in the high yield market, we are looking at the third best year ever.

The key message for investors is to hold their nerve into the end of the year. We don’t envisage a sell-off in credit markets. In periods of stress, credit performance has been relatively solid. And that is even as primary has effectively flooded the market at times with deals. It’s given the asset class (iBoxx index) some 7% in total return in IG, 10%+ in HY, 13%+ in the AT1 market and 10% for Eurozone govvies so far 2019. Not bad at all.


Slower in primary, but deals nevertheless

We didn’t add too much in primary during a largely uneventful session. IG non-financials had €500m from Informa PLC in an 8.5-year at midswaps+150bp, where the €2.5bn of interest allowed for final pricing to tighten by a massive 40bp versus the initial guidance.

€300m deal: Unicredit Leasing

Senior financials saw SMFG issue €1.25bn in a 10-year at midswaps+65bp which was 20bp inside the opening talk off a €1.7bn book. Unicredit Leasing took €300m in a 3-year at midswaps+90bp.

In a turn-up for the books and bit of a rarity these days, Belgium-based Argenta Spaarbank postponed its €500m issue of senior non-preferred debt which was set to go at midswaps+110bp, with interest in the offering barely covering the issue size.

In the high yield market, Eircom Finance DAC issued €350m through a 5NC2 structure priced to yield 1.75% (-25bp versus IPT).


US earnings deliver the expected mixed bag

We were light on macro data, but the US banks’ earnings stream gave us plenty to think about. The IMF did, however, warn that global growth in 2019 would come in at 3% versus 3.3% the organisation had predicted only six months ago. For perspective, that would be the lowest rate of global growth since 2009. For 2020, they’re looking at 3.4%.

In a nutshell on earnings, Goldmans missed expectations after net income declined by 18% in Q3. A tax benefit kept Citigroup’s earnings ahead of expectations as revenue growth stuttered, while the troubled Wells Fargo also missed, largely on the back of heavy legal costs (related to the fake accounts scandal).

On the other hand, JP Morgan posted a record quarter for investment banking fees, revenues rose 8% and overall earnings were comfortably well ahead of expectations. Asset manager Blackrock posted lower Q3 earnings year on year, but earnings were comfortably ahead of expectations.

Away from the banks, J&J beat expectations and raised its full-year outlook. So, overall, a mixed bag and it has set the tone for the quarter as a whole.

The excitement built some more after the close, but not after we traded a good session before it. The FTSE closed flat after that rise in sterling, the Dax added 1.2% and US stocks were up by over 1%, as at the European close. The S&P was back at 3,000 as at the time of writing, and just 27 points from a new record high.

Rates were better bid early on, but moved into reverse and sold off. The 10-year Gilt yield closed 6bp higher at 0.70%, we had a 3bp rise in the Bund yield to -0.42% while US Treasuries were unchanged after playing catch up to the previous day (US market was closed), the 10-year at 1.74%.

That rally in risk assets allowed the cost of protection to fall. iTraxx Main closed 2.2bp lower at 53bp and X-Over was 7.2bp lower at 237bp at the close.

Cash was not busy, and the tightening in secondary spreads was rather moderate. In high yield, the index was just a measly 4bp tighter, at B+409bp while we had 1.5bp on the IG cash index to B+121bp.

The big winner was the AT1 market, courtesy of a squeeze taking the index 13bp tighter to B+468bp. That is the tightest level for this year.

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.