2nd Jun 2016

Things can only get better

MARKET CLOSE:
FTSE 100
6,192, -39
DAX
10,204, -58
S&P 500
2,099, +2
iTraxx Main
74bp, +1.5bp
iTraxx X-Over Index
316bp, +6bp
10 Yr Bund
0.13%, unchanged
iBoxx Corp IG
B+146bp, unchanged 
iBoxx Corp HY Index
B+488bp, unchanged
10 Yr US T-Bond
1.85%, unchanged

Chapter 6 starts downbeat…

We turned the page into June and were hit by a raft of weak macro data. Ouch. A 50.1 PMI reading for Chinese manufacturing in May might point to expansion, but it is very subdued. That continued through Asia as Taiwan and Indonesia followed with weakness (Turkey later), and then the Eurozone’s own manufacturing PMIs hit with a thud.

swiss

Swiss GDP growth was disappointing

There was slowing growth – or contraction – everywhere (even Germany) highlighting the difficulties the manufacturing sector has in breaking out from its downbeat malaise. Consumer demand is effectively on its knees. Swiss GDP missed estimates while the OECD was busy revising lower expectations for GDP growth in the US (1.8% from 2.0%) and the UK (to 1.7% from 2.1%) – and that was from forecasts made only in February! The Fed must be watching, the ECB certainly is and the markets are reacting. Lower stocks, some weakness in oil prices, a slightly better bid for government bonds and credit caught in the middle of that catfight.

That weakness and/or volatility in equites, oil, government bonds and other asset classes is increasingly having no impact on the corporate bond market in Europe. We’re not immune to event risk, but it would need to be of the “systemic” kind before we see any meaningful weakness. There’s a back-stop bid for us in both mind and matter. Sell and one risks kissing bonds goodbye (forever) with a costly recovery exercise to follow to rebuild any position. The ECB vacuum cleaner beckons and will limit/cap/prevent much or any of the weakness we ought to expect under normal market conditions. If that’s not distortion, manipulation and non-classic economics at work then we’re not sure what it is. Credit’s risk proxies are the iTraxx indices and they play to the tune of macro news flow and asset volatility. Weaker on Wednesday, that is.

There is also some greater apprehension on the Brexit issue. The opinion polls seem to be turning as the Leave campaign focuses (recently) on immigration and the follow through has seen some pressure on sterling. The OECD threw out some figures suggesting that UK GDP could be 3% lower by 2020. How do they know? After those quick-fire UK/US GDP revisions, the forecasts leave much to be desired. Anyway, 10-year Gilt yields are down at 1.37% (-6bp), the stock market is moving in line with other European bourses and only the currency is seeing the volatility. Sterling credit is returning 4% YTD, and that is the best of the bunch.

Primary keeps interest going in credit

The risk-off nature of the markets didn’t put off borrowers from raising funds. daa plcWe started June with three non-financial IG deals for a total of €1.85bn with Autoroutes Paris and Irish airports manager daa plc managing to price deals 10-12bp inside IPTs. The third deal was from the ORLEN group and they lifted €750m, some 25bp inside guidance. We will do well to reach the average level of monthly issuance of €40bn of the March-May period. Much will depend on the next FOMC meeting and whatever any impact we might get from the ECB, but also whether the European central bank does manage to push spreads tighter quickly and keep sentiment buoyant. Issuers might decide that waiting for even better funding costs is too marginal a positive to bother – and that it’s better having the cash in the bag sooner.

The final totals for May had high yield issuance at €6.5bn (best month so far this year), senior at €16bn (around average monthly supply for 2016) and IG at a stunning €45.4bn (second best month this year, third best monthly total ever). FIG had a busier session with a rare deal in euros from AIG in senior, a green bond from Deutsche Kreditbank and a bunch of covered bonds transactions. Europcar tapped its 22s for €125m to get the ball rolling for the HY market.

Gloomy – and not just the weather

It was no catastrophe, just a gloomy session. The data from China overnight set the tone for the day, and we started and remained on the back foot throughout. The DAX closed off the lows though, 0.6% in the red, as did the FTSE. Oil prices also recovered from their session low points and Brent was back close to $50 per barrel (still lower in the session). Bunds were a touch better bid and yields effectively unchanged with the 10-year at 0.13%. The ECB meets today.

In cash credit, we closed out with little altercation and unchanged. There was some pressure on higher beta IG-like risk (CoCos, for example). Remarkably – or not, as the case might be – the HY market also closed unchanged. The weakness was in the indices leaving iTraxx main and X-Over higher a little at 74bp and 316bp, respectively.

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.