8th November 2016

It’s a shoo-in, for Clinton

FTSE 100
6,807, +114
10,457, +198
S&P 500
2,132, +46
iTraxx Main
74bp, -2bp
iTraxx X-Over Index
326bp, -12bp
10 Yr Bund
0.15%, +1.5bp
iBoxx Corp IG
B+124.75bp, -0.25bp 
iBoxx Corp HY Index
B+421bp, -3bp
10 Yr US T-Bond
1.83%, +5bp

No rest for the wicked…

Mrs President: Surely there will be a new Clinton administration

Cleared: Expectations of a Clinton administration sparked a rally in risk assets

One would have been forgiven for expecting a fairly drab session. However, given that it does seem like the path has cleared for a Clinton victory in the US presidential race, we had the expected rally in risk assets in anticipation of it. The rally had the feel of being a little tentative, but we can expect some firmness to it come Wednesday, should Clinton succeed. Then it will be back to the economy and the macro outlook.

On that front, Chinese foreign currency reserves dropped almost $50bn last month to just $3.12trn. Just? Well, it has been a precipitous drop given they were at $4trn two years ago.

And, just when we thought the Eurozone had entered a purple patch following a slew of more upbeat economic data of late, we were hit with September retail sales dropping 0.2% MoM in the region with Germany coming out worst (-1.4%). German factory orders also fell back by a surprising 0.6% in September versus expectation of a small rise. So it is not all smooth sailing for the Eurozone’s economy as it tries to emerge from its now 8-year long slump.

We can expect another fairly limited session today into that Presidential election in the US. But with the polls now pointedly suggesting a Clinton win, we go with that expected result and believe the markets will react accordingly. We don’t expect a massive and sustained rally because it is not as if the markets have sold off aggressively previously into the uncertainty. But, with stability at the political level expected, it is one of uncertainties out of the way. The focus will soon shift to the economy and getting some trading/positions in ahead of the big Thanksgiving break.

Other news took in Spain, which was warned by Moody’s that the new minority government was a credit negative event, while Iberian neighbour Portugal’s approval of a new budget was greeted with much applause. Well, Portuguese bonds outperformed in the session, while those of Spain (and Italy) also rallied with safer-havens were better offered. German Bund yields rose a little, the 10-year to 0.15% (+1.5bp) while the equivalent Gilt yield rose 7bp to 1.20%. Spanish debt was better bid, the Bono 10-year yield down at 1.24% (-2bp) while Italian BTPs were better and yielding 1.70% (-5bp). The latter has been hit particularly hard having seen 1.00% several weeks ago! Portugal 10-year yields dropped to 3.20% (-5.5bp).

40 up for ECB bond purchases

40 not out: The ECB continues to lift

40 billion not out: ECB bond buying continues

After €1.92bn two weeks ago, the ECB’s pace of corporate bond purchases rose aggressively to €2.54bn and the second biggest weekly haul since the purchases began (see chart, below). The average has risen to over €1.9bn per week.

The central bank has now amassed some €40.4bn of IG non-financial debt – and taken it permanently out of the market – since the asset purchase programme began some 21 weeks ago. That’s all well and good, but something definitely remains amiss because spreads should be ratcheting tighter.

Recent ECB weekly bond purchases

Of the €8.4bn the ECB has lifted in the last four weeks, 90% has come from the secondary market.  However, we are surprised that we have not yet felt a more aggressive tightening trend, unless of course investors are “happy” to sell into the ECB’s bid, and then hoard their cash and rotate into primary – when they can. That might have been the case last week into that broader market weakness on US rate (FOMC) and election jitters. We would also think that investor cash levels are a little higher than normal because primary will not be satiating their needs.

Still, spreads were wider overall last week, and while some of that was probably predicated on weaker risk asset pricing elsewhere (as just mentioned), we are still flummoxed as to why euro-denominated corporate bond spreads are not materially tighter. They have been stuck in a 5bp range for several months now as measured on a broad cash index basis (Markit iBoxx).

Credit little-moved as equities take the limelight

Equities rallied in the session with the much maligned DAX seeing some good recovery as it rallied 1.9% and added 198 points. Others followed rising by 1.8% or more – including the S&P in the US (2.2% higher). We wouldn’t expect much in addition to that today, but Wednesday could be a different matter. Relief, that is.

In the credit markets, primary was closed everywhere except for a €500m deal from French real estate group ICADE, whose issues sit in the financials index (Markit iBoxx). So, nothing in IG non-financials although that was to be expected. We did see €5.95bn of supply last week, but we can expect a material pick-up once we are through the US election process – and ahead of Thanksgiving. Brace yourselves for a busy couple of weeks.

In secondary, we closed better bid for choice with the Street choosing to mark the market better into that risk-on rally. Flow, volume and interest to get involved was limited. IG and HY markets edged better while the synthetic indices reflected the better tone leaving Main at 74bp (-2bp) and X-Over at 326bp (-12bp).

That’s it. The US election is up next. We are back tomorrow.

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.