26th April 2020

🗞️ Risk markets yearning to rally

MARKET CLOSE:
iTraxx Main

84.7bp

iTraxx X-Over

501.7bp

🇩🇪 10 Yr Bund

-0.47%, -4bp

iBoxx Corp IG

B+202bp, -2.5bp

iBoxx Corp HY

B+662bp, +2bp

🇺🇸 10 Yr US T-Bond

0.60%, -1bp

🇬🇧 FTSE 100 6144.25, (+1.26%) 🇩🇪 DAX 11657.69, (+1.33%) 🇺🇸 S&P 500 3036.13, (+0.74%)

L, U, V, W or even a ‘swoosh’ – anything will do….

It might be a busy week on the data front, ending with the FOMC on Thursday – ahead of Friday’s May Day Holiday, but we will only get something different in markets if the Covid-19 headlines permit. News of a vaccine trial breakthrough would be most welcome in that sense. Otherwise, we think the markets want to rally – cognisant that we will come out the other side of this crisis, but left in a range while they wait.

And it might be a rocket-fuelled, turbo-like recovery dynamic reflecting the various substantial stimulus packages in place. We’d think it won’t be that aggressive a rally, as economies open up in a phased fashion. But if we are now at rock-bottom, there’s every chance markets will try to front-run a return to some kind of ‘good old days’ period.

Markets have already bounced back hard since the initial sell-off (+20% equities, credit hasn’t fared too badly either). The bad news has piled up and while we might be in economic depression territory, the various policy reactions – arguably honed to perfection since the financial crash – seem to have kept markets afloat.

While we wait for a clearer picture to emerge, which might take several weeks, we think more of the same for now. The earnings season, macro data and ongoing lockdown measures (easing to come though) will present a triumvirate of variables preventing us from breaking out of the current ranges. So it’s a case of sitting tight.

In credit, investors will continue to play it through primary, which will slow this week. We also don’t think there will be any major tightening in spreads if equities can’t ratchet higher. It looks as if we are stuck in a range for a few weeks.


Looking forward to May…

Markets closed last week looking a tired, weary and weaker. Gilead’s coronavirus antiviral drug trial wasn’t going well – according to early reports it flopped, which were later denied with trials apparently going well! That did put an immediate dampener on things as we opened the final session, although US markets recovered after our close.

Elsewhere, UK retail sales, down by 5.1% in March, were the biggest monthly drop since records began. The EU summit failed to make any material ground on an emergency fund to support the region’s recovery from the crisis. That’s a sign of things to come regarding the Brexit deadline – and Barnier was airing his frustrations, almost apoplectic that the UK was not yielding to his demands.

In the US, durable goods orders fell by 14.4% in March versus February, although the core figure only registered a decline of 0.2%. It will be worse in April. And we must have greater concerns about Trump’s ever whackier comments in those daily press briefings.

To some good news; After the close, S&P left the negative triple-B rating for Italy unchanged (Moody’s are at Baa3).

After a choppy equity market session, the S&P closed 1.4% higher but the rally came too late to help drag European bourses anywhere near to positive territory. The FTSE closed 1.3% off the pace and the Dax 1.7%.

In credit, German real estate group Deutsche Wohnen issued €1bn in a dual-tranche deal with orders in excess of 10x for the offering and final pricing some 55bp inside the initial guidance. HIT d’Infrastructures issued €600m in a 7-year at midswaps+280bp (-50bp veers IPT) in IG non-financials. In the senior sector, Wells Fargo took €3bn in a dual-tranche trade and Swedbank lifted €1bn in a 5-year senior preferred at midswaps+98bp. In sterling, L&G issued £500m in a 30NC5.5 Tier 2 structure at G+425bp with books at £5bn.

With that HIT deal, we are now €3.7bn short of the monthly record for IG non-financial issuance. There are four sessions to go before month end in this shortened, earnings blackout period week. It’s likely going to be a big ask to get that amount done.

Still to get done, though, we had a very testing issue in the works from Merlin Entertainments (owner of Legoland and 100+ other theme parks). Particularly at risk from the coronavirus shutting down those entertainment sites and the like, they were doing the rounds for a €500m 5NC2 to price at between 7 – 7.25%. The group runs out of money by October if they don’t get their funding.

There was a mighty better bid for IG secondary in cash, leaving the index at B+202bp (-2.5bp) whereas equity weakness left the Street slightly defensive in higher beta sectors. The AT1 index closed at B+937bp (+8bp) and the HY index at B+662bp (+2bp), with little by way of flow and volume.

The IG sterling market has added 5% this month in total returns on index spreads 55bp tighter – and is returning -0.1% this year to date. That’s excellent. The euro credit market, in IG, is up 3% so far in April and showing total returns of -3.6% year to date, with spreads 100bp wider.

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.