25th February 2016

Bring back JR

MARKET CLOSE:
FTSE 100
5,867, -95
DAX
9,168, -249
S&P 500
1,930, +9
iTraxx Main
111bp, +3bp
iTraxx X-Over Index
443bp, +15bp
10 Yr Bund
0.15%, -2bp
iBoxx Corp IG
B+186.5bp, +1bp 
iBoxx Corp HY Index
B+637bp, +3bp
10 Yr US T-Bond
1.75%, +3bp

Where’s JR Ewing when the oil industry needs him?… The continued flow of weaker macro data and the market’s ongoing apprehension was again laid bare in Wednesday’s session. Italian industrial orders for December fell 2.8% MoM, or -1.5% YoY, putting paid to previous hopes of a durable recovery there. French consumer confidence fell in February, adding to the list of generally poor confidence data out for the Eurozone this month. The US service sector PMI reported a big miss and the first contraction in activity since 2013. Brazil was junked by Moody’s and is now viewed that way by all the big-three. And Donald Trump got his Nirvana, sorry Nevada. The 10-year Bund yield at 0.15% (-2bp) is eyeing up that record intra-day low 0f 0.05%, seen just about a year ago. Brexit concerns have sterling below $1.39, while the 10-year Gilt was bid-up and the yield dropped to 1.37% (-7bp). Gilts are a safe-haven asset on a “leave” Brexit vote! That Brexit vote is almost 4-months away – but the fact we’re having one is being taken as an excuse to de-risk. We think though that oil is the driver for the renewed weakness in risk markets. Prices were down for much of the session after the usual “no agreement” amid bickering and a lack of trust around potential for cuts/freezes and $30 per barrel looks like it will soon be with us – again (Brent at $34, and up for the day). The DAX was down by 2.64% and most other bourses by 2% or more. Commodity stocks took a pummelling (8%+ down again). And just a few sessions ago we hoped – and expected, for a calmer and more positive end into the month based on the markets movements last week. That response made it seem like fears for a systemic collapse were overdone, that we would not see a cataclysmic macro event and the prevailing price action had gone too far to the downside. But it appears we had a 3-4 session ‘dead cat bounce” and now we’re off again – lower.  The market is choosing to look at the glass as being half empty, that is, most news is bad news.

Corporate bond market struggling to break free… Corporate bond spreads are going wider into the big moves we see in equity and currency markets, but it does seem more of a case of the Street being defensive on low’ish selling interests. We can say this because most new deals launched in the past few weeks are actually performing and there is a tremendous receptivity to them. In a nutshell, we are struggling to break free from the correlation corporate bond markets might have with big moves in stock markets. Those big moves impact sentiment and high beta credit is where the impact is felt the most, as we would expect. If equities are in a repricing phase – and we do get a very weak growth trajectory this year and next (both likely), meaning more QE and reduced rate hikes from the US (or a reversal), then high quality corporate bonds will be worth their weight in gold (preservation and income). After all, putting cash into government bonds will cost you. Bund and other quality government bond yields are negative up to 8/9-years and we likely are not too long away from the 10-year turning negative.

Primary market offers a crumb… The much anticipated deal from LyondellBasell Industries (Baa1/BBB) graced us today as the group sold €750m in a 6-year deal at midswaps+182bp (-8bp vs IPT). It was the only corporate bond in the market in the session, the rest being covered bonds and SSA deals. With just a couple of meaningful sessions to go before we close out the month, we have had just a paltry €27bn of IG, non-financial issuance so far this year. It is unlikely we will get to the €30bn mark before the month is out, while HY will not even manage to reach the €2bn level. The HY market actually looks completely closed for business at the moment. And with that, we saw the cash market a tad weaker, the Markit iBoxx index up at B+186.5bp and the HY index at B+637bp (+3bp) and overall a quite commendable performance. The indices took it on the chin though, with iTraxx Main at 111bp and X-over 15bp higher at 443bp. The US has closed better overnight, so expect a calmer day.

Have a good one. 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.