14th November 2019

Macro skating on thin ice

MARKET CLOSE:
iTraxx Main

49.8bp, +0.2bp

iTraxx X-Over

238.7bp, +2.9bp

🇩🇪 10 Yr Bund

-0.35%, -5bp

iBoxx Corp IG

B+112.5bp, +1.25bp

iBoxx Corp HY

B+397.5bp, +5bp

🇺🇸 10 Yr US T-Bond

1.81%, -6bp

🇬🇧 FTSE 100

7436.64, (-0.58%)
🇩🇪 DAX

13664.00, (-0.91%)
🇺🇸 S&P 500

3373.23, (-0.70%)

China’s triple whammy warning…

Giveth with one hand and whippeth away with the other. Germany defied expectations with a surprising albeit preliminary positive print (+0.1%) for Q3 GDP growth, thereby managing to dodge a technical recession. Few will have rejoiced given that they’re stagnating and the outlook doesn’t look great.

Before that, China reported that her industrial production rose just 4.7% year-on-year in October against expectations pitched at 5.4%, while fixed asset investment rose by 5.2% – the lowest level since records started. A thoroughly miserable set of data was rounded off as Chinese retail sales growth for October also missed.

Perhaps more important for near term market performance is a trade deal announcement and, if it ever comes, it will only serve to stem the rate of decline in the macroeconomic outlook. The rest is all noise. Equities are gyrating to the news flow, which is usually enmeshed in a Trump tweet or some other official either from the US or China suggesting a phase one deal is imminent.

Otherwise, it doesn’t look too warming on macro, and that is after the better than expected but weak data prints from the Eurozone this week. The numbers are suggesting that we potentially have a slowdown in the decline in industry/manufacturing and are seen as a cause for some sort of cheer. How desperate we have become!

That’s not to say we should throw in the towel. It’s not as hopeless as it sounds because macro weakness still presents opportunities across risk markets. For instance, this year and in the most plain vanilla sense, equities have risen by over 20% almost across the board.

Credit markets have returned between 7% and 14%, depending on the product with spreads tightening way beyond any reasonable expectations. Eurozone rate markets have returned over 8% for investors – and that after a worrying sell-off in the past month.

In credit, primary continues to spew out deals across all sectors of the corporate bond market and we’re looking at a quite heavy pipeline for the remaining weeks of business for 2019. Records have tumbled as borrowers have delivered the deals investors have demanded to help absorb their portfolio cash levels. Even in high yield, the market is making a good attempt at the 2018 record of €75bn, with €67.5bn issued year to date.

It’s been a most satisfying year for investors and borrowers alike. And now it appears that the ECB is hoovering up corporate bonds at a decent clip. Last week’s €2.8bn haul is evidence enough that spread markets ought to remain supported into the end of the year – at least. Right now though, weakness in equities and limited flow through secondary is weighing a little on spread markets and the Street has taken up a more defensive stance. We’re edging a touch wider, that is.


IG non-financial corporates hog primary

Primary markets were focused on the deluge of IG non-financial deals from the likes of ArcelorMittal, Abbott Laboratories, Coco-Cola HBC and Moody’s Corp.

Toyota kicked us off at the beginning of the year with their €500m issue. Since then we have had a record €294bn issued and we are on course for around €300bn come the end of next week.

We think that with still 4 weeks of business left in the year a level perhaps north of €310bn is likely, although we are likely going to see a slowdown in the pace of issuance either side of the US Thanksgiving period.

Anyway, first up was ArcelorMittal which took a combined €1.5bn split equally in a two-tranche deal priced at midswaps+133bp (3.5-year maturity) and midswaps+203bp (6-year), with both 27bp inside the opening guidance off combined books of €4.6bn.

US group Abbott Laboratories also went for a two-tranche offering, with €590m in a 5-year at midswaps+40bp and another €590m in an 8-year maturity priced at midswaps+52bp. Final pricing was 20bp – 28bp across the tranches. Books were at €3.6bn.

Coca-Cola HBC took €500m in a no-grow 10-year at midswaps+65bp, with final pricing 25bp inside the opening chat with interest for the offering in excess of €1.6bn. Moody’s Corp rounded the non-financial issuance off as it lifted €750m in a long 10-year at midswaps+90bp, which was 25bp inside the opening talk off a €2.7bn book.

In the high yield market, Eramet issued €300m in a 5.5-year offering priced to yield 6% and Standard Industries printed €600m in a 7-year priced to yield 2.25% (-25bp versus IPT). Those two deals have taken the year to date euro-denominated high yield issuance to €68.3bn, to just €6.7bn short of the 2017 annual record.

In the financials space, Dekabank issued €500m of senior preferred debt at midswaps+45bp.


Easy, tiger

That German GDP might have surprised but as we have suggested previously, there is little real sign of economic green shoots emerging. Industrial giant Daimler warned on profits, announced that it was capping/reducing investment over the medium term and cutting jobs aimed at saving €1bn a year in costs.

In the US, PPI accelerated by 0.4% in October versus September and was ahead of market expectations, but in the 12-month period, it recorded the slowest rise in 3-years at just 1.1% (1.4% in the period to September).

So, US markets opened in the black and were trading just shy of record levels before they succumbed to the bearish undertones. The European markets reacted to the direction of US markets and started to recover before they closed near their worst levels for the session. At the close, the Dax was off by 0.4% and the FTSE by 0.8%. At the European close, US equity indices were up to 0.3% lower.

In rates, the market was better bid for the second successive session. The 10-year benchmark yields closed with the Gilt yielding 0.71% (-5bp), Treasuries 1.81% (-6bp) and Bunds -0.35% (-5bp).

Credit index edged higher again, with iTraxx Main moving to 49.8bp (+0.2bp) and X-Over to 238.7bp (+2.9bp).

The cash market followed suit, with a second successive session of weakness, although the flows and volumes were light enough to ensure few will be anywhere near concerned. So the IG iBoxx cash index closed at B+112.5bp (+1.5bp) and the AT1 index at B+474bp (+5bp) – the later +20bp in the last two days. The high yield index moved 5bp wider to B+397.5bp, or 11bp wider this week.

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.