10th October 2019

Signs of progress

MARKET CLOSE:
iTraxx Main

56.4bp, -1.6bp

iTraxx X-Over

247.6bp, -5.4bp

🇩🇪 10 Yr Bund

-0.47%, +8bp

iBoxx Corp IG

B+124.4bp, -1bp

iBoxx Corp HY

B+425bp, -7bp

🇺🇸 10 Yr US T-Bond

1.66%, +7bp

🇬🇧 FTSE 100 6090.04, (-1.55%) 🇩🇪 DAX 12901.34, (-0.71%) 🇺🇸 S&P 500 3372.85, (+0.12%)

But too much to juggle…

We’re not out of the woods in any way but we have let some much needed steam out of the pressure cooker. Trade talks/Hong Kong/Middle East/Brexit/macro were all beginning to get too much and were clearly weighing on markets. So some of the heat has been let out courtesy of – or hope that we will see – some sort of breakthrough (a partial deal?) on the US/China trade talks which began on Thursday. Unfortunately, the Turkey invasion into Kurdish held areas in northern in Syria is doing its utmost and might warrant a degree of caution again.

It’s not been all one-way on the Brexit front, either, as the emerging headlines on the potential for EU concessions gives rise to (small?) hopes that a deal can still be reached even at this very late hour. As usual, it comes with a big, fat warning sign because it could all go awry; The day of reckoning is nigh. It’s no wonder that the week has been a little scatty, with so much for investors to chew on.

Away from that, the UK looks like it will have avoided recession in Q3, as the economy grew 0.3% in the 3 months to August and beat all market forecasts (the UK economy shrank 0.1% in August).

However, we’re in the midst of a synchronised global slowdown and the impact of it is being felt everywhere, to varying degrees. Germany, for instance, will almost certainly record a technical recession in its economy following a massive slowdown in manufacturing during the summer months, as well as the recent slowdown in the service sector. The Eurozone as a whole will not be far away.


Enel steals the primary limelight

Once gain, it was another not-so-busy session in primary, but that cleared the way for borrowers looking to get their deals away without too much distraction.

The sole IG non-financial corporate deal in the market came from Enel which offered up a three-tranche, innovative sustainability bond. The Italian borrower took €1bn in a long 4-year at midswaps+55bp (-20bp versus IPT), €1bn in a long 7-year at midswaps+68bp (-27bp versus IPT) and €500m in a 15-year at midswaps+103bp which was also -27bp versus the initial guidance. Total books for the offering came in at around €8.5bn.

Other deals of note in the session came from Ireland’s tap of its 1.35% 2031 green issue, as the sovereign took €2bn at midswaps+24bp. Property investment group Altarea Cogedim issued €500m in a long 8-year at midswaps+215bp (books €725m).


Brexit and trade hopes push markets higher

The earnings season is up next and that might act to put a brake on the level of deal flow in the primary market as corporates enter the blackout period. However, the total for the IG non-financial supply (year to date) has now risen to €262.5bn and we are just €22.5bn away from seeing out 2019 as a record year for issuance – ten years after the last one. Exciting times.

Nevertheless, we should get over the line quite comfortably as we target something close to, or in excess of, €300bn for the year. Issuance in November, for example, has averaged over €30bn in the 2014-2018 period. We might get a leg-up (in sentiment, spreads, costs) from the ECB’s QE €20bn monthly purchase programme which starts Nov 1st.

The markets, however, were boosted by hopes that a breakthrough was possible in the Brexit talks. Equities ended off their highs but were up across the board with the FTSE up just 0.3% (sterling rallied hard, up 1.5% versus the dollar), the Dax gained 0.6% and US markets around 0.5% higher, as at the time of writing.

Gilts sold off as safe havens lost their lustre, and the 10-year yield rose to 0.59% – a massive 14bp higher. The 10-year Bund yield rose to -0.47% (+8bp), while US Treasuries also sold off (on trade hopes) with the 10-year benchmark left to yield 1.66% (+7bp).

The improved tone helped credit index and protection was better offered as costs fell. iTraxx Main was 1.4bp lower by the close at 56.4bp and X-Over closed at 247.6bp (-5.4bp).

In cash, IG moved tighter and the iBoxx index closed at B+124.4bp (-1bp) while the AT1 index closed at B+507bp (-10bp). The high yield index closed 8bp tighter at B+425bp (-7bp), in a quiet session again with flood and volumes at a premium.

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.