7th February 2017

Ooh la la

FTSE 100
7,172, -16
11,509, -142
S&P 500
2,292, -5
iTraxx Main
75bp, +4bp
iTraxx X-Over Index
300bp, +9bp
10 Yr Bund
0.37%, +-xbp
iBoxx Corp IG
B+135bp, +1bp 
iBoxx Corp HY Index
B+378bp, +3bp
10 Yr US T-Bond
2.41%, -8bp

Politics dominate the agenda…

Le Pen: Markets will react badly if she is victorious

A Monday in early February and we got just what we ought to have anticipated…very little. There was the odd deal worthy of a look, we had the ECB publishing its latest bond market purchases, the economic data was again suggesting a very solid start to 2017 and after the weekend’s musings from France’s Le Pen the Bund/OAT spread was in focus.

And we suspect that this is how it is going to play out for a while.

President Trump is still a major unknown that markets will need to contend with, while the uncertainty around the French elections is gaining momentum as Macron and Fillon fight out who will battle with Le Pen in the second round. Press intrusion into Fillon’s affairs (did she or didn’t she?) have likely done enough to have killed his ambitions.

An eventual Le Pen victory will unleash a savage market reaction given her vow to leave the single currency. Hence the weakness in OATs over the past few weeks where the spread versus the Bund in the 10-year maturity is at a 5-year, post-crisis high of around 77bp.

The Eurozone’s existential crisis of 2011-2012 saw that differential up at 200bp for a short period, before it recovered into a post-crisis low of 37bp in 2014. The markets hate uncertainty. We would think that in the near term, 100-150bp isn’t impossible should the polls and news flow over the coming months suggest Le Pen in the ascendancy.

The potential for a currency re-denomination will have a few rolling their eyes (here we go again), while French borrowers might have to pay up a little additional premium eventually if the polls into April start to suggest the “unthinkable” of a Le Pen victory outright.

Offsetting that will be the incredible depth and maturity of the French capital markets leaving non-French investors with little alternative but to participate in deals and hope for the best. The last time we currency re-denomination concerns was around the Greek crisis which for a while had engulfed Italy, the latter being the chief concern owing to the size of its sovereign and corporate sector debt outstanding.

ECB still doing some heavy lifting

After that record €2,876m of purchases three weeks ago and €1,929m two weeks ago, the ECB announced that it increased its shopping load last week to €2,165m (see chart, below), taking their total purchases to date (after 35 weeks) to €60,980m.

Recent ECB weekly purchases

That’s 10% of the eligible market and implies an average weekly hoard of €1,742m of IG non-financial euro corporate debt. Roughly 15% of the purchases have been in primary but while the impressive level of activity has been supporting the secondary market it has been giving borrowers the confidence to ratchet deals tighter – knowing that only a few investors will drop out of deals, given the ECB’s participation. Tightening deals by 15-20bp has become the norm of late.

Defensive tone starts off the week

Amid little activity the markets took a defensive stance as we opened the week. Equities were up to 1.2% weaker while government bond markets benefited from a safe-haven(ish) bid. It seems that the definition of safe-haven is now Gilts, Bunds and US Treasuries.

That helped the Bund yield to drop to 0.37% in the 10-year maturity (-5bp) and the corresponding Gilt moved the same amount to yield 1.32%. OATs are no longer (not at the moment anyway) seen in the same light with that election looming, and we saw the 10-year yield move higher to 1.13%. Italian and Spanish government debt markets were also under fire and yields there backed up by 12bp to 2.38% and 1.79%, respectively. Treasury prices gained, with the 10-year left at 2.41% (-8bp).

Mölnlycke Holdings: €500m deal

In credit, we had just the low triple-B rated Mölnlycke Holdings deal for €500m in the IG non-financial sector. The 8-year effort for €500m was priced a stunning 30bp inside the initial guidance – and this was a transaction long in the offing, but delayed.

We suggested in our previous commentaries that this was an ideal time to get deals away, given the lack of competition. Well, Mölnlycke seems to have done just that, issuing into a market which had previously seen just two deals this month for €1.1bn. Santander was the other deal of note, with a €500m lift in 3-year funding through its Norwegian subsidiary.

In secondary, cash spreads moved wider in the session, with the Markit iBoxx index for IG credit risk up at B+135bp (+1bp), in one of the biggest moves for a couple of weeks. We’re still flat in IG as far as the index is concerned, year to date. High yield markets moved in the same direction with the index at B+378bp (+3bp). There wasn’t a whole load of activity into it.

Sterling corporates had a better time of it, the index edging up just 0.35bp, and left at G+151.3bp.

The iTraxx indices underperformed cash by some margin, however, reflecting the nature of the product being a purer risk proxy for credit markets and not affected/sullied by the manipulative hand of the ECB which keeps cash valuations intact. iTraxx Main ratcheted higher and was left up at 75bp (+4bp) and X-Over was up at 300bp (+9bp).

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.