7th December 2015

Pressure’s already back on the ECB

MARKET CLOSE:
FTSE 100
6,238, -37
DAX
10,752, -37
S&P 500
2,092, +42
iTraxx Main
73bp, +2bp
iTraxx X-Over Index
302bp, +6bp
10 Yr Bund
0.68%
iBoxx Corp IG
B+147bp, unch 
iBoxx Corp HY Index
B+467bp, +4bp
10 Yr US T-Bond
2.27%

Gimme, gimme, gimme… The ECB didn’t do enough, whatever Draghi’s protestations to the contrary; the Fed ought to show it the way. Comments from the ECB’s Constancio at the end of last week that “the markets got it wrong in forming their expectations” miss the point. It’s about doing the right thing. The markets/participants can take it on the chin – and they did. Our view is that the ECB failed to deliver much of anything. They won’t be happy about the strengthening of the euro or the additional funding costs for everyone given the back-up in yields. OPEC’s decision to keep/increase the current oil ceiling is unhelpful too. Price pressures will persist. The ECB’s consistently poor consensus-driven policy response in both timing and size over the past 7 years has unnecessarily dragged out the eurozone’s problems. Unfortunately, we believe much more needs to be done from an easing perspective. The winners in the very near term will be the sidelined cash from, say, insurers able now to pick off the extra few basis points of yield, which although it doesn’t satisfy their long-term yield bogey, does make them feel better that they can manage to get the extra bit of juice. Secondary market liquidity permitting, of course. The losers are the total return accounts, already probably just managing a small positive performance YTD but now licking their wounds and hoping that the market can settle and yields – at worst – start to edge lower again through the next few weeks. Corporate bond spreads have fared relatively well and while not bullet-proof, we need sellers to see spreads shift higher and stay higher. They’ve barely emerged. We still think spreads are going tighter, but unlikely in any significant way into the end of the year.

US to show how to do it… A rate rise in the US will now be taken in its stride. The stock market is no longer concerned at it. On reflection, the Fed’s dithering over the past few months has seen to it that they’ve played a blinder. There’s a bit of seemingly sustainable growth, some inflation, and the consumer is spending. The pummelling of oil prices will see to it that the consumer has a little more on the disposable income side, while the shale industry is readying for a shocker on the default side. The S&P500 closed up 2% on Friday. The good news is that the rally in the US stock markets will drag European equities higher, and that augers well for other risk assets through the final month of this year.

Touch weaker in credit, returns bashed… We closed out Friday unchanged in IG spreads amid little activity, and that was to be expected given we needed to digest the ECB news and waited for the non-farms report. The Markit iBoxx IG corporate index was left at B+147bp, around 4bp tighter on the week, although a couple of those were on the back of month-end index changes. The HY index was 4bp higher at B+467bp, or 7bp tighter on the week. Yields for the indices rose to 1.76% and 4.76% respectively, eating into returns a little more. The 2-year Bund yield rose to -0.31% having seen -0.45% earlier in the week, and the 10-year was up at 0.68% having flirted with 0.45% pre-ECB. 10-year Italy and Spain yields were up at 1.65% and 1.73% respectively. In the synthetics, we had Main up at 73bp and X-Over at 302bp. From a total return viewpoint, they’re down some more and the index is back in the red year-to-date.

This is likely going to be the last week in which to get some business done. Go do it. have a good week.

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.