17th October 2016

A Monday in October

MARKET CLOSE:
FTSE 100
7,014, +36
DAX
10,580, +166
S&P 500
2,133, unchanged
iTraxx Main
74bp, -1bp
iTraxx X-Over Index
333bp, -2bp
10 Yr Bund
0.05%, +2bp
iBoxx Corp IG
B+124bp, -0.75bp 
iBoxx Corp HY Index
B+426bp, -4bp
10 Yr US T-Bond
1.80%, +5.5bp

Sterling in name only…

There’s only one story which matters – for some. And it’s around the back-up in Gilt yields. Sterling is stable for the moment in the $1.21/2 area – and took a back seat for a change in Friday’s session, but the 10-year Gilt yield saw a heady 1.149% before edging back to close at 1.09% (+7bp). Sterling’s weakness, the prospect of higher than perviously anticipated inflation as a result and, of course, the Brexit premium are to blame. The BoE might be on a mission to lift £60bn of Gilts through its QE programme, but there seems to be plenty of sellers (and more) happy to offload their holdings. The side story is the impact it will have on corporate bond returns, which will be heading into single digit territory soon enough having been as high at 17.2% at the end of August. Oops.

Better than expected results: JP Morgan

Better than expected: JP Morgan

Away from that, we had a relatively good earnings day to close out last week as JP Morgan and Citigroup both reported better-than-expected results, albeit amid declining quarterly YoY net income. Those numbers allied with retail sales which met with expectations ensured that equities in Europe got bit of a leg up to close out the week. Some of the upside also came from Chinese producer price inflation which recorded a 0.1% rise versus expectations of a 0.3% decline for the month of September YoY – and the first rise for well-over 4-years. Fear around that potential November US rate hike was put to one side.

European stocks rose by well over 1.5%, bank stocks led the charge and bond yields rose, although Gilts were the main casualty. Portuguese government debt was well-bid, the 10-year yield down at 3.27% (-7bp) all prompted by reduced investor fears around the potential for a rating downgrade to sub-investment grade from DBRS.

The US market’s brighter open fizzled out, leaving stocks to close flat which might serve as a pointer towards some weakness as we open for business today. It is also a big earnings week with some eighty S&P500 companies reporting, taking in the likes of BofA, Goldman and Morgan Stanley while the corporate heavyweights due include Microsoft, Intel and IBM.

A potentially jittery week will also have to contend with Thursday’s ECB – although we don’t expect anything untoward to emerge from the meeting. The status quo on policy ought to remain, while an extension to the current QE programme after March next year has only an outside chance of being officially announced at this meeting – more likely in December though. Tapering? No chance! China’s GDP release and the final Trump-Clinton face-off are Wednesday’s business.

Primary market generally disappointing

There are too many days where issuance from investment grade non-financial is nil, for our liking. We had a couple of such days last week, for instance, which overall saw €5.95bn of issuance taking the total this month to €10.4bn. Given the potential for risk-asset volatility from the aforementioned events – as well as a likely slowdown in corporate activity into the ECB meeting – we’re going to struggle to match last week’s issuance total.

The pipeline is decent, especially for HY borrowers who have been on the road trying to convince investors to support their deals when they emerge and we could see a few this week. Last week was just three deals for €895m taking us to €2.15bn for the month, but we’re more hopeful that this week sees much more activity.

Credit cool as a cucumber

For the week as a whole, secondary credit has played out calmly, exhibiting no overly large moves and tighter for choice, all being told. The synthetic iTraxx indices were better offered in the session (lower) led by that better equity performance with Main closing just shy of 74bp and X-Over at 333bp. In IG cash, the Markit iBoxx index closed at B+124bp on Friday, 0.75bp tighter in the session and 0.5bp tighter in the week.

HY did a little better closing 6bp tighter in the week, 4bp better on Friday and at B+425.75bp for the cash index. We think it is fair to say that the lack of issuance, the ECB’s lifting and investors adding some risk to use up cash balances are all contributing to supporting this market.

Perhaps surprisingly, sterling corporate credit has also had a steady week. While the currency and Gilts have been losing their mojo, the corporate bond market has done no such thing. The Markit iBoxx index for sterling corporates closed the week flat (but a basis point tighter on Friday). Still, that weakness in the underlying through the week has impacted returns and they come in now at 11.2% year-to-date, versus running as high as 17.2% in August.

The ECB reports its corporate bond holdings later today. They’re up at €31,962m with 90% of the accumulated debt coming from the secondary market – a good month’s gross new issuance.

That’s it. Have a good Monday; Back again tomorrow.

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.