22nd January 2016

Rally with little belief

FTSE 100
5,774, +100
9,574, +183
S&P 500
1,869, +10
iTraxx Main
98bp, -1bp
iTraxx X-Over Index
391bp, -4bp
10 Yr Bund
iBoxx Corp IG
B+181.5bp, +0.5bp 
iBoxx Corp HY Index
B+630bp, +6bp
10 Yr US T-Bond

Calm permeates the market… We came up for air! The slip slide into seeming oblivion was halted, but it all felt very uneasy. Oil was still a touch lower and equities only just bounced – with a whimper. That means there is little conviction to go shopping and pick off cheap assets anticipating a bottom and a ride on the subsequent rally. Nevertheless, the markets in Europe didn’t react to another 3% China down day, or a weak session in Asia overall. And that is a relief. We were probably taking a rest from it all – fatigued and focusing on expectations of some soothing words from the ECB. After all, the news flow wasn’t great again. Deutsche Bank reported a hefty loss for 2015 on the corporate side, while the markets took a scythe to the rouble again and we saw a new intra-day record low for the currency against the dollar (other EM currencies also faltered). And here’s a fact: we believe this is probably the first week since the euro’s inception and outside the summer/year-end holiday season that we have failed to see a transaction of any sort in primary from the corporate bond space. At worst there has always been a small or short-dated senior deal somewhere. Not this week, unless one pops up today. So the ECB is ready to act at its next meeting, but all it will be doing is prescribing the same medicine as before – more easing. It won’t, or rather can’t, solve the problems we face (needing serious restructuring and some political will), but will just keep it all ticking over, so to say. After weeks of being very poorly, the market was calmed by the ECB’s readiness to act to stop the precipitous fall in asset prices evolving into a systemic crisis. We would think that if not today then next week we will be back to watching oil and economic fundamentals as a guide to where the direction of the markets might lie.

ECB’s promise of largesse doesn’t convince… It wasn’t a euphoric rally of the kind we have seen before when the ECB has signalled the potential for more easing. Still, everything rallied, so to say. Oil, equities, government bonds and credit. Oil prices per barrel gained some 5.5% to around the $29.5 per barrel area. Equities in Europe were choppy in a 1%-2.5% range for most of the session (they did fall into the red in the morning) and helped towards the upper end only when the US started going higher. The potential for more QE – an expansion of it anyway – meant that government bonds traded higher (yields declined), and that offered some respite for yesterday’s weakness in peripheral paper. In the corporate bond space, there was no real relief. We closed unchanged in many arenas but overall weakness was evident. The Markit iBoxx IG corporate bond index was up at B+181.5bp (+0.5bp, or +10bp this week) and the HY index at B+630bp (+6bp). The weakness on Thursday could just be attributable to “catch-up” dynamics given the poor liquidity the corporate bond market is plagued with. Still, for HY, that’s 60bp of weakness in the last week and index returns YTD are down at 3.4% already!

Primary closed as tumultuous week comes to an end … As stated earlier, there has been no issuance this week from the corporate sector. A real rarity for a January. Once the markets do reopen, we can only think that we will be deluged with deals. They will come cheap to start with, and that in itself will put pressure on secondary levels. And it is too soon to suggest that next week will be a better one on the supply front, given how this month has played out so far. Also, we’re at the beginning of the European earnings season now, so the blackout period will necessarily curtail much of the potential issuance. They may as well just wait and let the market play out and readjust to new levels. For now, we will be back to obsessing about oil prices, of which their importance for the level of the market which was illustrated in yesterday’s session. That is, the US stock market turned markedly higher as oil prices rose, although the former closed off the highs. There is little by way of Chinese data due anytime soon, so apart from oil prices, some attention will shift to those Q4 earnings reports for clues as to how 2016 might evolve in terms of profitability and investment. For example, Schlumberger, the world’s largest oil services group, announced 10,000 job cuts and deep losses for the final quarter while its shares bounced – but only because they announced a large ($10bn) share buyback programme.

And that’s it for this week. Have a good weekend; back Monday.

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.