9th November 2016

The people will decide

MARKET CLOSE:
FTSE 100
6,843, +36
DAX
10,482, +25
S&P 500
2,140, +8
iTraxx Main
73bp, -1bp
iTraxx X-Over Index
325.5bp, -0.5bp
10 Yr Bund
0.18%, +3bp
iBoxx Corp IG
B+124.4bp, -0.25bp 
iBoxx Corp HY Index
B+418bp, -3bp
10 Yr US T-Bond
1.87%, +4bp

Quiet revolution, or just revolution…

When it is this tight, the US Presidential election day should be given as a global markets holiday. That’s how it felt as they went to the voting booth in the US yesterday. At the time of writing, few had any clue which way it would definitely go. Too close to call with any conviction left markets treading water, waiting.

But we got a taste of what follows. Chinese exports/imports both dropped by more than expected, suggesting that the global macro environment remains sluggish, while Germany delivered another weak data point as industrial production declined by 1.8% in September versus forecasts of a 0.5% decline. The UK also saw a decline in industrial production in the same month. The global economy is what is going to matter.

We expect a December rate increase

We expect a December rate increase

It does seem like the US is going it alone as their domestic economy shows signs of full-employment and wage growth consistent with it, leaving the Fed with the ammunition it requires to begin the long road back to a more normal rate environment. They will raise in December.

For the rest? They’re going to have to plod along as best they can. Higher US rates will sent some jitters through global markets and we will see a readjustment everywhere. However, depending on how US economic data points look through Q1/2, that readjustment will impact all asset classes through the first half of 2017 to varying degrees and come down to the pace/expectation of any further increases.

It could be a volatile period for equities, rates, EM and FX markets – but also leave much uncertainty around demand, consumer confidence, industrial production, investment, capex and so on. It might just slow everything down (activity wise) and be seen to have been a premature hike – or, in what will be seen as a beggar-thy-neighbour response, the Fed might just decide (or have) to go it alone.

The Fed will only be ahead of their own curve.

Quiet markets braced for Clinton victory

As outlined above, there was little happening in the markets during the session. Equities moved in very small ranges and ended slightly up in the day following a late uptick as US stocks started to move higher.  At the same time, safe-havens (government bonds) were a touch better bid at the open but faded gains – and closed weaker (yields higher) in late afternoon trading. Stocks closed off the session highs in the US (+0.4% S&P), clearly nervous but anticipating a Clinton victory and should it materialise, we’re on for a solid session here today.

Credit did little as so often the case and the primary market was closed, save for a sole covered bond. We do believe that once we are through the election result, that the two weeks to Thanksgiving ought to deliver a healthy level of supply as issuers embark on a last hurrah before we quieten down through December.

So it ended with the DAX up just 25-points/+0.24% with most other bourses up by a similar amount or more, with the FTSE out in front up by 0.53%. For government bonds, the Bund was yielding 0.18% in 10-years, the same maturity Gilt 1.23% (+3bp) and most other benchmark bonds were also better offered for choice.

As for the corporate bond market, spreads were marked a little better for choice in a lacklustre session. The Markit iBoxx IG index edged 0.25bp tighter to B+124.4bp, while the sterling corporate market reacted pretty much the same way with the index also around 0.25bp tighter. And for the second successive session, the high yield market was also better bid with the index left at B+418bp (-3bp). The iTraxx indexes were better offered, with Main at 73bp (-1bp) and X-Over at 325.5bp (-0.5bp) at the close.

It’s going to be a completely different session today, in every way. 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.