7th December 2016

Time to pack up

MARKET CLOSE:
FTSE 100
6,780, +33
DAX
10,775, +90
S&P 500
2,212, +8
iTraxx Main
74.5bp, -3.5bp
iTraxx X-Over Index
316bp, -12bp
10 Yr Bund
0.37%, +4bp
iBoxx Corp IG
B+138bp, -1bp 
iBoxx Corp HY Index
B+441bp, -7bp
10 Yr US T-Bond
2.39%, -0.5bp

We’ve had enough of 2016…

2016: Hard to bear

2016: It’s been hard to bear

It certainly feels like the markets have had enough of 2016. What level US stock indices finish at (more record highs) between now and year-end will be the story for December. The corporate bond market is winding down with even primary failing to proffer much by way of activity, while secondary is in the doldrums as turnover and liquidity drop precipitously.

Protecting performance means ‘do nothing’ – or take some chips off the table – and hope government bond markets can remain at around these levels. Reducing some risk unfortunately also means that spreads might edge wider as a defensive Street won’t bid and offers remains scarce enough only to fill the ECB’s coffers.

However, one of the great imponderables emerging from the last several weeks has been that the ECB’s corporate bond QE lifting of almost €2bn per week of IG non-financial debt has failed to stem the weakening spread trend in cash valuations. We’re over 20bp wider in the cash Markit iBoxx IG index since the beginning of November.

So, Tuesday’s passed by with little altercation. The news was dominated by Brexit “negotiations” although they haven’t officially started – also by the German elections with Angela Merkel outlining some of the more populist area of her agenda when she will be campaigning. Economic growth in Q3 for the Eurozone was confirmed at 0.3% with positive contributions from all in the block. Equities spent the session treading water following stellar gains in the previous session, while bond yields continued to move higher, albeit in more limited fashion than the more violent swings in the session before.

Next up is the ECB on Thursday and we think that while policy rates across the various sectors that the ECB is in control of will remain unchanged, they will announce an extension of the QE programme for another six months at least – in its current format. They won’t be looking to rock any boats at this juncture, just when the Eurozone economy looks to have stabilised and is showing signs of life. But also, the risks are – as always – skewed to the downside amid significant political risks to come, and Draghi will make sure we get this particular message.

The ECB will want to stay accommodative through the French elections (in May), try to keep markets focused on any fallout from the Italian referendum (there is some pain to come somewhere), while Trump’s inauguration in January as US President is sure to have an impact on market volatility. In September, it is Germany’s turn but we will have a good idea whether the ECB will continue with the heavy lifting for longer, come June!

Deal

There was a two tranche €1bn deal for the medical device company

The non-financials IG new issue market saw just Zimmer Biomet in a 2-tranche offering for €1bn with both of them priced 10-15bp inside the initial guidance. Aroundtown Property was back for another €500m, but owing to its status as a REIT, doesn’t make the non-financial index. They managed to price just a few basis points inside the initial price talk which was understandable as they have been around the market quite bit of late.

The total IG non-financial issuance is now up at €3.1bn for the opening few sessions of this month into what is clearly a notable slowdown. Issuance at the €10bn level by the time we close for business for 2016 at the end of next week would be an achievement.

Risk better, DAX back in the black YTD

US stocks have been in the limelight lately with the Dow Jones index recording several session record highs. Yesterday, the DAX was back in the black! That’s about only the fourth session this year that this has been the case. Government bond yields though were heading north, with the 10-year Bund yield back up at close on the recent highs of 0.37% (+4bp), the 10-year Gilt yielding 1.41% (+1bp) while the periphery saw a better bid as bonds rallied leaving BTPs to yield 1.94% (-4bp), for example. Despite the negative referendum result, it’s beginning to look like the periphery may have been oversold.

In credit, the secondary market was better bid for choice despite the sell-off in government bonds. As measured by the broad market measure, Markit iBoxx index for IG corporate bonds was lower at B+138bp although the index yield continued to rise, now at 1.35%. We had the same trend in the sterling market amid low interest and activity/flow.

The high yield market followed the trend and was better bid too amid the lowest of activity, leaving the iBoxx index at B+441bp (-7bp). As for the indices, they also were much better offered with protection costs declining sharply leaving Main closing out at 74.5bp (-3.5bp) with X-Over at 316bp (-12bp).

Back again tomorrow. 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.