6th May 2019

Ooooh, Donald!

MARKET CLOSE:
iTraxx Main

58.3bp, -1.2bp

iTraxx X-Over

251.9bp, -3.7bp

🇩🇪 10 Yr Bund

0.01%, -1bp

iBoxx Corp IG

B+121.9bp, unchanged

iBoxx Corp HY

B+403bp, +3bp

🇺🇸 10 Yr US T-Bond

2.49%, -4bp

🇬🇧 FTSE 100 5897.76, (-1.54%) 🇩🇪 DAX 12313.36, (-0.54%) 🇺🇸 S&P 500 3271.12, (+0.77%)

A bit of fear is back…

Trumpy, Trumpy, Trumpy. Markets have been jolted out of their complacency. One can never tell with him, but a tweet looking like a ploy to accelerate negotiations and forge a solution and borne out of frustration at their current lack of urgency had the markets all in a tizzy. The cynic in us suggests perhaps that timing is good because the markets are riding high in the US, allowing Trump a buffer. Better now than when markets are in the doldrums.

So, threatening higher tariffs just as the Chinese Vice-Premier was supposed to be in Washington made for a difficult start to the week. And it was just going so well before that. The tweet took more than 2% off the Dax earlier in the session, a similar amount in US equity indices and pushed the 10-year benchmark Bund yield back to 0.00%. It’s anyone’s guess as to what will happen next. Primary credit will be closed until we get some colour.

Before that, it was not bad at all! A raft of upbeat economic data will have markets in a positive mood. Equities looked poised even if we were blowing a little hotter on macro and investors trade into the balancing act between the potential for higher market rates against the potential improvements in corporate earnings. The S&P looked like it wants a stab at 3,000 (2,945 currently). Rates hadn’t come off as we might have expected into a potentially more risk-on environment (weaker non-manufacturing ISM) as investors might have flocked away from ultra-safe assets, while credit spreads were tightening as they squeezed into the better tone, amid scant primary issuance over the previous fortnight.

Eurozone inflation accelerated in April, the core rate rising to 1.3% from 1% in March, with consumer prices up by 1.7%. All nudging towards that 2% target area set by the ECB. Fed chairman Powell was less dovish than we might have expected at last week’s FOMC, and those non-farm payroll numbers will have corroborated his thought process. That is, 263k jobs added (180k consensus), unemployment rate down to 3.6% but wage growth stagnated at 3.2% year-on-year.

The non-farm payroll data and weaker than expected non-manufacturing ISM numbers catapulted US equities back close to record territory, while also giving something for rate investors to cling on to. Overall, they have given markets a good start to the month and sustained the momentum for what has already been a super year for them. Even Bitcoin has a good bid behind it as it nestles up at $6k a coin.

As for the spread markets, the iBoxx index us at B+121.9bp and has every chance of tightening the 20bp or so needed to see B+100bp. It would be a remarkable feat if that happened – as it would come absent any direct assistance or meddling in the corporate b0nd market from the ECB, having previously reached that level during the QE phase of the central bank’s operation. We would need the markets to continue to play ball, but given where we are at the moment (Goldilocks macro), there’s a good chance that they will.

Into it, high-yielding risk will continue to be the outperforming sector of the corporate market and a high beta portfolio bias will continue to pay. The high yield market, for instance, has already returned 6.2% this year and index spreads have tightened by 120bp so far. In the contingent convertible market, the index has tightened by 180bp and returns are up at a massive 8.1%.


Primary threatens

The deal flow of late coming from IG non-financials has been extremely disappointing. In the second half of April, just three borrowers printed for a total of €2.6bn. BP’s deal on Thursday last week opened the account for May with a sprightly €2.2bn and leaves us hoping – and maybe expecting – for a decent month to help bring the levels of issuance up to more normal levels. And to help absorb some of those investor cash levels. May can be a heavy month.

Still, we are making up for it a little in the high yield market, where April’s deal flow came in at a toppy €10bn and the opening couple of sessions in May have seen €2.8bn printed. EG Global and Altice led the way. We’re up at €23bn for the year to date and should the current run rate be sustained (and including seasonality adjustments), then our €45bn – €50bn full-year target is under threat. Last year’s full-year issuance came in at €61bn.


Waiting for the next tweet

So Donald Trump has yet again shown his propensity for upsetting the markets. It matters because it just might be the straw that breaks the camel’s back should the Chinese and US authorities not come to a trade agreement. The gamesmanship, though, could be something that some might gamble on, expecting it to nudge the never-ending talks to some (successful/palatable) conclusion.

Either way, until we get some soothing comments, markets might have had their best levels for the moment. We will likely be in a more defensive mindset which means better-offered equities, rates slightly better bid and credit treading water to weaker in secondary as the Street takes on a defensive mindset.

Primary will probably come up with the odd issue but if the market settles down we might expect a better level of deal flow – especially now given that Trump aside, it was going so well. So any window opening might be an opportunity too good to miss for many corporate – obviously tempered by the earnings blackout period for individual borrowers.

So, in the quieter, holiday-affected session on Monday, the Dax as mentioned previously lost almost 2% before recovering to close 1% lower, while in the US the S&P was down by almost 2%% before recovering to 1% lower as well (as at the time of writing). The Vix rose to 16%.

Treasuries jumped and yields dropped with the 10-year benchmark 4bp lower 2.49%. Credit markets in Europe were closed with the UK holiday, and so we won’t get an indication as to how much weaker we might be – although we will be when we open for business.

The message for corporate bond investors will be not to panic – and is one that we think they will heed. The markets will settle and any macro weakness or expectations of it will support the bid for rates and, by extension, credit – and higher beta credit at that. In all, we fully expect corporate bond market investors to hold their nerve.

The earnings season from the US slows markedly and we have US inflation numbers on Friday. We’re light on Eurozone data (German manufacturing) but the earnings reports step up a gear. Here as the likes of Deutsche Telekom, Telefonica, Deutsche Bank, Siemens and Enel amongst others are due. We suspect they will be overshadowed by the President’s next move.

Have a good day.

Suki Mann

A 30+ 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 CreditMarketDaily.com.