9th April 2018

Risks intensify

MARKET CLOSE:
iTraxx Main

57.9bp, -0.1bp

iTraxx X-Over

284.6bp, -1.5bp

10 Yr Bund

0.50%, unchanged

iBoxx Corp IG

B+106.8bp, -0.5bp

iBoxx Corp HY

B+330.3bp, -3bp

10 Yr US T-Bond

2.80%, +3bp

FTSE 100

7,683.97, 7.69
DAX

12,686.29, -79.65
S&P 500

2,815.62, 6.07

But tell that to US equity markets…

European markets opened in sprightly form, refusing to be dragged lower by the difficult close previously in the US. That didn’t quite last, even as US equities surged higher. The latest data from Germany is now beginning to be a concern on the macro front, but yet another atrocity in Syria is weighing on sentiment, too (or ought to be).

German exports for February declined sharply (-3.2% MoM, versus expectations of +0.2%) adding to a recent crop of poorer data from that country (and the Eurozone as a whole), suggesting we’ve had the best of it for this cycle.

Industrial production in the opening quarter has been weak and retail sales have been disappointing, too. So both the industrial and consumer sectors are off the Q4 2017 highs, and it is difficult to see how we might fashion a recovery given those increasing geopolitical and other risks in the system.

Over the weekend, we had the Syrian conflict re-emerge with a Syrian/Iran/Russia axis versus just about everyone else again threatening to spiral into something completely out of control. And then we still have the trade conflict which right now is probably the chief culprit for any hiccups (weakness) in the export sector and investment – and obviously market volatility. The next ECB meeting is a couple of weeks away leaving them with plenty of time to digest the current crop of data, before they likely sound a little more dovish than of late – citing the geopolitical and trade tariff feud as reasons enough to remain vigilant. There will be little else they could add as they retain the status quo in policy.

£250m deal for BMW

What did we miss? Our expectation was for a weaker opening, but European equities were trading the latest tweet although the gains were eventually faded, as stated above. Trump’s latest tweet about becoming/remaining best of buddies with China’s President Xi, eventually likely to agree reciprocity in taxes and form a deal on intellectual property rights – as well as heralding a great future for both countries, was not quite enough to send huge relief around the markets.

It wasn’t enough either to boost the primary market, although we did have BMW visit in the sterling market for £250m/4-year (as did New York Life for £500m/long 4-year) and there were several mandates announced, especially in the high yield market. The next two weeks could still be quite heavy from an issuance perspective, given the bulging pipeline – but how much we get will always depend on the state of the broader markets (volatility, news flow and sentiment) in any given session.

The deal of the day though came from Egypt, with the low single-B rated sovereign (much in the news of late) didn’t have too much trouble securing €2bn in a combined two-tranche 8-year and 12-year offering priced at 4.75% and 5.635%, respectively (and 25bp – 37.5bp inside the original guidance). The Arab Republic had little trouble in gaining enough interest, as the order book came in at over €7bn.


ECB fails to get €150bn – again

The ECB announced that its corporate debt purchases since the CSPP began had still not reached the anticipated €150bn mark. They’re still €491m short (!) of that target, following a couple of weeks of lower-than-expected IG debt accumulation.

Following a lift of just €238m in a shortened Easter week, the ECB’s haul of IG non-financial corporate debt rose in the previous week to €807m. In the last two weeks, the ECB has lifted an average of just €522m and the cumulative monthly run rate has dropped to the lower end of the established €5-6bn range. Spreads last week closed unchanged in both IG and HY markets though.

Recent ECB Weekly Purchases

The total purchases to date, after 95 weeks of market participation, stand at €149,509m with the long-term weekly average purchases at €1,573m. We’re almost certainly just a week away from the headline €150bn mark!


Mixed markets open the week

All the markets were in generally in jittery moods and were playing to the tune of the prevailing headlines emerging from the US, China and on events in the Middle East. European equities eventually traded out in no-mans-land, sharply higher, then in the red, and finally just a small higher into the close as US stocks surged higher. We closed with European stocks just a small up, while in the US, equities were riding high, up by over 1-2% (at the time of writing).

Duration was mixed, too. Gilt yields edged a touch higher, with the benchmark 10-year at 1.41% (+1bp) and the equivalent Treasury at 2.80% (+3bp). The 10-year Bund closed the session unchanged, to yield 0.50%.

The iTraxx indices were barely moved in the session, albeit better offered for choice, with Main left at 57.9bp (-0.1bp) and X-Over at 284.6bp (-1.5bp) reflecting the lack of movement in European equities.

There was little expectation that secondary cash would have done much. And it didn’t. Still, we did edge a little better in line with the indices and amid little activity. That all left the Markit iBoxx IG cash index at B+106.8bp (-0.5bp). We also had a slightly better bid (or improved trader marks) for high yield risk, the iBoxx index there at B+330.3bp (-3bp). Sweet!

Have a good day.


For the latest on corporate bonds from financial news sources, click here.

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.