5th January 2020

Time for cool heads

MARKET CLOSE:
iTraxx Main

44.8bp, +1.1bp

iTraxx X-Over

209.7bp, +5bp

🇩🇪 10 Yr Bund

-0.29%, -7bp

iBoxx Corp IG

B+104.6bp, +0.3bp

iBoxx Corp HY

B+349bp, +4bp

🇺🇸 10 Yr US T-Bond

1.81%, -7bp

🇬🇧 FTSE 100 6049.62, (-1.73%) 🇩🇪 DAX 12489.46, (-0.04%) 🇺🇸 S&P 500 3152.05, (-0.65%)

We were raring to go…

We wanted to be able say that we’re just a couple of days old and believe that the markets will be champing at the bit to get going. Alas, we row back a bit.

The US drone strike in Iran has markets in retreat and on the defensive with pundits already suggesting a long old grind ahead. Event risk comes to the fore and threatens a more wary investment stance for the foreseeable future. Predicting the outcome or evolution of such an uncertain situation threatening to once again engulf the whole Middle East is so difficult, that investors are largely going to remain sidelined during the early part of this week at least. There’s little choice, really.

Predictably, oil and safe-haven assets jumped. Risk asset prices were headed lower following that positive opening session of 2020. In a sense, back to square one but feeling concerned and showing little of the early year optimism weight have had from just a week ago. Much strategising will commence, but if there is only a calibrated (limited) response immediately by Iran to the US drone hit, we expect the de-escalation to help markets to settle quickly.

That said, there is a possibility that we will get the first corporate borrower this week. Usually it is a frequent borrower from the utility or auto sectors. Last year Toyota and RCI Banque opened the account, while in 2018 it was RCI again and BMW.

Had markets played ball and event risk (headline or otherwise) was far enough on the edge of the radar as to hold minimal sway, we could have looked forward to a fairly active opening quarter. In IG non-financials, somewhere in the region of €80bn – €100bn would have been possible for issuance in Q1. Now? It’s anyones guess.

The last time that we had a serious market disruption (macro driven), in 2015/2016, January issuance for IG non-financials came in at a very low €5bn, but as markets calmed through the quarter, corporates made up lost ground and printed €45bn in March. Spreads back then were already widening through the second half of 2015 and so showed little further reaction in that opening quarter of 2016.

For now, we can expect a back-up – this week at least. With markets subject now to the laws of unintended consequences, the Street will take up a defensive stance and market illiquidity will possibly leave a disproportionate widening in spreads. Few will be looking to add.
However, there ought to be no panic trades in credit.

Still, we think that the IG iBoxx index has the potential to move by up to 10bp wider over the next few weeks – dependent, of course, on how the Iran-US situation evolves. And we would think that spreads are unlikely going to tighten in any meaningful way, anytime soon.

Time for cool heads.


Markets jolted

The bid for safe-havens was always going to be extreme given that we were heading into the weekend, and all the uncertainties that might bring. Yields fell by 7bp in the 10-year benchmark Bund to -0.29% and US Treasury to 1.79% (-9bp). There was a 6bp readjustment in the Gilt yield, lower at 0.74%. Of course, oil prices spiked with Brent and WTI both jumping by over 3.5% (the former to $68.7 per barrel).

In equities, the FTSE alone managed to rise in Friday’s session, but just by 0.24%. As for the rest, the Dax lost 1.25% and US market closed off the day’s lows – but still by up to 0.8% lower. And all that after a solid opening for the year in the previous session.

Most of all that market movement was related to the US drone strike, but the data flow during the session wasn’t uplifting. The US manufacturing ISM for December fell to 47.2 to record the lowest reading since the financial crisis began (2009).

Unlike equities, credit markets delivered a very measured response amid moderate bouts of weakness. The IG market was essentially unchanged amid a limited investor participation rate (might be different this week) and the iBoxx index closed at B+104.6bp (+0.3bp), while the AT1 market only edged 3bp wider to B+398bp (noise).

In high yield, much of the same with little movement and just a touch wider for choice, the index left at B+349bp (+4bp). Sterling markets closed slightly better bid for choice, with the index at G+135.6bp at the close.

As if to highlight the limited reaction in the credit market, even synthetic markets only edged higher – and they are more reactive and correlated closer to equities. So, iTraxx Main edged 1.1bp higher to 44.8bp and X-Over moved just 5bp higher to 209.7bp.

As for this week, investors will start with assessing the weekend’s repercussions, threats and development in Middle Eastern geopolitics. We would think that an election year in the US probably makes Trump (and his actions) more dangerous as he possibly pursues more high risk moves in his cause to fight America’s corner (trade, geopolitics etc) – all en route to seeking another term in office.

Anyway, for this week, we are a little light on US data as we close out with the December non-farm report  with expectations pitched at 155k of job additions (266k previously), with the rise in average hourly earnings expected at 0.3% and the unemployment rate unchanged at 3.5%. Before that, several Fed speakers are up on Thursday and on Tuesday we have the non-manufacturing ISM print.

In Europe, it’s retail sales, services PMIs, inflation and sentiment indicators. That is, nothing much market moving here.

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.