23rd November 2019

Looking to close out

MARKET CLOSE:
iTraxx Main

49.9bp, +0.2bp

iTraxx X-Over

234.5bp, +0.5bp

🇩🇪 10 Yr Bund

-0.36%, -4bp

iBoxx Corp IG

B+118bp, unchanged

iBoxx Corp HY

B+404bp, unchanged

🇺🇸 10 Yr US T-Bond

1.76%, -1bp

🇬🇧 FTSE 100

5415.50, (-1.18%)
🇩🇪 DAX

9525.77, (-0.47%)
🇺🇸 S&P 500

2488.65, (-2.54%)

China playing the long game…

We should probably start to be thinking in terms of there being ‘no trade deal’ anytime soon. There are many reasons why the Chinese (and the US) ought to agree to one. However, in doing so, it would possibly mean the inevitable shoo-in for Trump who would milk it into a second term, but serve more angst down the line as trade deals elsewhere come under greater scrutiny.

Stretching out the current talks for up to another 12 months (US elections due) might be seen as being bit of an ask, but we just need to cast an eye on those Brexit negotiations which have been ongoing for over three years! If little gets agreed over the next, say, six months then the Chinese negotiators will increasingly gain the upper hand. China can afford to play the long game.

The waters are further muddied by the impeachment hearings – and the potential outcome, as well the Hong Kong rights bill which is expected to be signed in the next week. For markets, we should get used to trading the headline risks and associated volatility, amid weakness in macro as tariffs are duly slapped on Chinese imports to the US.

That volatility will principally take through equity markets, rates will stay around these levels at worst – or yields go lower for choice, and credit spreads will tread water. For credit, high beta risk has been outperforming of late, possibly on the back of the heavy supply burden IG investors are carrying.

We could be in for a choppy ride during the first half of 2020. The macroeconomic outlook doesn’t look great anyway and whence those tariffs are increased, as threatened in December, we might be staring at further weakness needing to be offset by more central bank action in Q1/2 2020.

If that scenario materialises, rates will get a better bid. Growth will slow a little more – but (we think) without falling off a cliff.  Under this scenario, credit retains a good bid as money pours into a higher-yielding fixed income – deemed to be safe – asset, with investors comforted by the current performance and chasing 2019’s returns. Those feeding into the primary market right now will be able to clip much upside through those months, leaving 2020 as not quite the disaster – or dustbowl – (total returns wise) that we might have envisaged.

And that’s the explanation for the current massive bid for all things primary. We’ve got record issuance in IG and corporates falling over themselves to get deals away. High yield borrowers are about to meet with the same good fortune, where the current lower growth economic environment has deterred few investors, comforted by a very low default rate across the asset class and gorged on returns pitched up in excess of 9% this year.


High yield primary joins the record party

With the Thanksgiving holiday and Black Friday event due this week, it’s fair to assume that activities in the markets will be curtailed after Wednesday. Thereafter, we’re going be winding down for the year and we can expect primary markets to slow the pace of deal flow. Some of the rush to print last week would have to take this into account.

It’s been a good November but, on reflection, issuance in IG is only up at the average we have seen for this month when assessed against the last five years. At €29bn and the likes of Stryker Corp due this week, we are looking at somewhere up at €35bn – €37bn for the full-month, after what could be a busy few days.

November for the high yield market has been excellent. The €14.3bn of issuance leaves the monthly volume the best ever in the euro-denominated high yield market. The previous monthly record came in October 2017 (€13.7bn). Friday’s deals took in Portuguese airline TAP’s increased €375m 5-year to yield 5.75% and Greek industrial group Mytilineos’ €500m issue, also in a 5-year maturity priced to yield 2.5%.

High yield issuance

It rarely looked as if the high yield primary market would have reached such heady heights this year (€71bn issued so far) after a weak start amid fears of severe economic weakness, but we’ve ground out a welter of deals – especially in the second half. That is, €42.4bn has been issued in the second half of the year to date.

We’re not discounting the possibility that another €3bn is squeezed out over the next few weeks – with the full year total then exceeding the record €75bn issued in 2017.


Green shoots? Naah

We had a mixed effort on the data front to close the week, with the German manufacturing PMI for November coming in at a better than expected 43.8 – and the highest level since June. The same number for the Eurozone came in at 46.6 (46.4 expectations) and against 45.9 in October. A slowing down in the deterioration, so to say.

The Eurozone’s services PMI disappointed though, at 51.5 versus 52.5 expected and 52.2 in October. Within that, the German services activity declined, the PMI indicator dropping to 51.3 from 51.6 previously. So the sustained levels of weakness seen in manufacturing generally seems to be now spreading to the services sector.

Equities didn’t show much angst from the weaker data, and managed to push higher in last week’s final session, especially in the UK with the FTSE gaining over 1%. That was most likely on currency weakness, but also perhaps on the view that Labour has ended its chances of power in government following that publication of an extreme left-wing election manifesto. The Dax rose by only 0.2% US markets also closed in the black.

Rates were mixed with the Bund yield declining to -0.36% (-4bp), the Gilt yield to 0.70% (-6bp) and in the US, the Treasury yield was left unchanged at 1.77% – all in the 10-year benchmarks.

It seemed as though the credit markets took the day off. The synthetic indices closed unchanged with iTraxx Main at 49.9bp and X-Over at 234.5bp.

IG cash closed unchanged, leaving the iBoxx index at B+118bp although that is 5bp wider in the week. The AT1 and high yield markets also closed unchanged in last week’s final session, leaving the indices at B+463bp (-10bp in the week) and B+404bp (+4bp in week), respectively.

It’s the US Thanksgiving break on Thursday and it will dominate the week’s events. The markets will be rushing to get business done ahead of it and we might reasonably anticipate a busy two or three sessions. US GDP for Q3 is due (1.9% expected) long with durable goods and inflation numbers.

Have a good day.

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.