7th May 2019

Trade tensions sully markets

MARKET CLOSE:
iTraxx Main

61.5bp, +3.2bp

iTraxx X-Over

266bp, 14.1bp

🇩🇪 10 Yr Bund

-0.03%, -4bp

iBoxx Corp IG

B+124.6bp, +2.3bp

iBoxx Corp HY

B+415.4bp, +11bp

🇺🇸 10 Yr US T-Bond

2.45%, -5bp

🇬🇧 FTSE 100 6032.85, (+2.29%) 🇩🇪 DAX 12646.98, (+2.71%) 🇺🇸 S&P 500 3271.12, (+0.81%)

Hanging on, though – the best we can…

The US market open turned a slightly negative session into a bit of a slump. Those US markets led the way as we all felt the jitters because of the reverberations of the Trump trade-related tweet from over the weekend. But we had a raft of data pointing to Germany Inc., in particular, continuing to feel the pinch. Manufacturing continued to disappoint with domestic weakness now a concern, while on the likes of Axel Springer, BMW and Henkel all missed on the earnings front. And for good measure (timing always perfect) the European Commission produced some bleak forecasts amid expectations that Italy would break EU fiscal rules on materially slowing growth.

€500m deal for Carrefour

In markets, we had a mixed albeit predictable response. Stocks in Europe had earlier comfortably held lower at 0.5% before succumbing as the US opened, plunging by up to 1.8% at one stage (Dax underperforming). Rates were better bid – which is no bad thing for fixed income investors after having seen some selling pressure last week. Credit was stable to edging wider amid little flow, although credit primary was in full swing for more defensive covered bond and SSA borrowers. Plain vanilla corporates were much quieter, with only Carrefour showing up although we did have a raft of new deals announced.

The Chinese delegation is still showing up in Washington, but that doesn’t mean we are out of the woods with regards to a deal being agreed. The markets are erring on the side of caution. The pressure is on (the Chinese, we think) as it appears that the Trump administration’s patience is wearing thin. So we could be heading for choppier climes as evidenced by Tuesday’s market weakness – if something isn’t sorted very soon.

Despite the large drop in stocks, we feel there’s no sense of real panic. It may appear that we have fallen out of bed given the sizeable drop in stocks, but we haven’t especially when set against the super performance year to date. Markets are wary and will try and find their feet as they assess how the talks this week between the US/China might play out, but are playing it defensive into the uncertainty.

Credit markets have withdrawn into their shell. The Street bid will be non-existent and the offered side of the market showing unpalatable valuations for anyone wanting to get involved. Primary is the best route for getting paper on board, but even there, we’ve been struggling to get a decent level of deal flow on the screens. So we hold steady (relatively) or move wider as the Street takes on a defensive posture.


Corporate primary doldrums continue

The opportunity remains for borrowers to get deals on the screen. The early bird will catch the worm. Rates are heading lower and spreads are holding relatively firm. Demand is still as solid as we might expect although into broad market weakness we can fully understand why borrowers will display some reticence to get involved. Funding costs though are well-anchored or heading lower. So get it done, the earnings blackout season notwithstanding.

For Tuesday, only Carrefour piped up in the IG non-financial sector. We have been bereft of deals of late where in the past 3 weeks, just €5.3bn has been issued from 5 borrowers issuing through 7 tranches. That’s poor form especially after the mass of issuance which came previously to it.

Anyway, Carrefour issued €500m in a long 8-year finally priced at midswaps+77bp. The book came in at €1.75bp at guidance and pricing was reduced by 18bp versus the initial price talk.

For the year to date, the deal takes the total IG non-financial issuance to €99.84bn. The only other corporate deal as such in the session came from Norwegian property management group, SBB AB which issued €500m in a long 5-year at midswaps+170bp.


It could be so good, if only!

So the worst kept secret, or expectation, came in the news that that the UK will contest the European elections. That’s another blow for Theresa May. But it wasn’t the big news of the day. Those falling stock markets were. And all because with everyone back in the saddle following the UK break on Monday, the markets decided to prepare for something akin to the worst on the trade talks. As ever.

It has been a while since we dropped this much in a session in equities. It was only last week that we were thinking in terms of the S&P seeing out 3,000 as the next stop as it hit a record intraday high of 2,954, now the 2,800 level is suddenly closer. The S&P index was 1.9% lower, as at the time of writing. European stocks, also riding high in 2019 felt a little hot under the collar, the Dax off by 1.5% while the FTSE dropped by 1.7%.

The better bid for rates tipped the 10-year benchmark Bund yield back into negative territory, to close out at -0.03%, which was some 4bp lower on the day. The bid accelerated into the afternoon session as those US equities took a tumble. In the US, yields also declined with the 10-year yield dropping to 2.45% (-5bp) and Gilts in the same maturity were yielding 1.16% (-6bp) not helped by the news of those European elections needing to be contested.

In credit, the iTraxx indices were always going to rise, with the cost to protect credit higher as equities fell. So into a better bid, iTraxx Main rose by 3.2bp to 61.5bp and X-Over by some 14.1bp to 266bp in some of the largest moves not seen for a while.

In secondary cash, it was a very quiet session, but the market was in defensive mode as the marks went in, the iTraxx indices were clearly always going to show the weakness in risk. The IG iBoxx cash index closed at B+124.6bp (+2.3bp) but the rally in the underlying pushed total returns year to date to their best level at a stunning 4%! The high yield index though moved 11bp wider to B+414.4bp impacted more by the weakness in stocks.

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.