2nd December 2015

It’s the final countdown

MARKET CLOSE:
FTSE 100
6,393, +40
DAX
11,261, -121
S&P 500
2,103, +22
iTraxx Main
69.5bp, unch
iTraxx X-Over Index
287bp, -3bp
10 Yr Bund
0.47%
iBoxx Corp IG
B+149bp, -3bp 
iBoxx Corp HY Index
B+474bp, -1bp
10 Yr US T-Bond
2,.15%

We await the central banks… and then we will await them again, and then again. Because it won’t be over once December’s central bank activities are announced (ECB eases, Fed tightens). Should it all go as most market participants expect, we will end the year in positive mood – but then what? Well, it is no great call to say the market will be looking forward to the next meeting and the one after that. While those meetings are likely to yield very little, with the Fed suggesting a very slow take-off (further tightening trajectory), the ECB will be telling the world it needs to see how the last bout of easing has panned out. So it will likely be well into Q2 before we all start working up a fervour as to the next moves. In the meantime, we are of the opinion that Q1 will be a solid one, although we might not get the same sort of performance garnered in Q1 2015. Under the basic assumption that the ECB bond-buying programme will be expanded in some format and that the deposit rate will be cut, we might expect December performance to benefit from an immediate rally in the underlying. Q1 2016 could therefore be, or ought to be, offering a more measured performance. Credit spreads will tighten and we could match the 17bp of tightening seen in Q1 this year, but only because we are off a higher base – a much higher base (likely B+145bp versus B+111bp back then).

Primary still abuzzing… Heineken printed a 9-year deal (with a sub-benchmark Eur460m issue) at midswaps+95bp, and we had the unrated Havas take Eur400m at midswaps+178bp in a 5-year maturity. Nestlé became the latest corporate to take some sterling funding. In financials, Santander was in for 7-year senior funding, clipping Eur1.25bn also at midswaps+95bp. The risk-on nature of the market flushed out a classic risk-on issue from CNP Assurances, with a 31.5NC11.5 deal in subordinated format at midswaps+360bp (Eur750m).

And the rest… The macro data was mixed to a little worse than expected. US manufacturing contracted in November according to the latest ISM survey, and this was the first such down-leg in an age (around 3 years). The auto sales figures in the US all showed growth – but still came in below expectations, while VW’s US sales fell 24% in November versus a year ago. German medical gases giant Linde warned on profits and saw its share price tank. YoY Q3 GDP of -4.5% from Brazil leaves the country heading for its worst year since the Great Depression – and it will likely get worse. On the plus side, eurozone unemployment declined to 10.7%, with strong improvements in Italy and Germany (record low here). Not great, but we think the day’s flow of generally poorer data ought not change the course of the central bank decisions later this week (ECB) and in a couple of weeks (Fed)

Secondary subdued, but waiting… BHP and BAT were the single names in the news, but other than those two, the market wasn’t perturbed by any major negative headlines and valuations generally held steady. VW was downgraded by S&P to BBB+ and, rather unfortunately for bondholders, there is more to go we think. Stocks were choppy and closed lower in Europe, while we had a rally in the US stock market and Treasuries too! That’s unusual. The 10-year US Treasury yield was at 2.15% (-5bp), but the 2-year Bund saw a new record closing low of -0.44%. Anyway, with the S&P up strongly overnight (+1%), we should expect a good day in Europe on Wednesday. The Markit iBoxx corporate IG index closed at B+148.9bp and through that B+150bp level, but there was some month-end rebalancing in that. The HY index was B+473.5bp (-1bp). The iTraxx indices were slightly better offered with Main and X-Over at 69.5bp and 287bp, respectively.

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Have a good day.

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.