2nd December 2019

Trump still pulling all the strings

MARKET CLOSE:
iTraxx Main

48.8bp, +1.1bp

iTraxx X-Over

225.4bp, +4.6bp

🇩🇪 10 Yr Bund

-0.28%, +7bp

iBoxx Corp IG

B+114bp, unchanged

iBoxx Corp HY

B+378bp, -5bp

🇺🇸 10 Yr US T-Bond

1.82%, +4.5bp

🇬🇧 FTSE 100

5563.74, (-5.25%)
🇩🇪 DAX

9815.97, (+1.90%)
🇺🇸 S&P 500

2626.65, (+1.89%)

Manufacturing fog not lifting…

Well, that was a bit of a rollercoaster ride. We had an early shot in the arm from those Chinese factory orders for November with the Caixin PMI index up at a 3-year high of 51.8. German manufacturing also showed some signs of life, the PMI for November rose to a much better than expected 44.1 (expected 43.8), as France (51.7) and Italy 47.6) also beat expectations.

For the region as a whole, we had still further factory sector shrinkage, the Eurozone’s manufacturing PMI at 46.9 (45.9 previously). Based on those numbers, the headlines ought to have been about macro bottoming out amid some kind of platform possibly being established with which to hopefully launch a moderate recovery dynamic.

Unfortunately drawing on any positives was short-lived, ‘Trumped’ by the Donald, while the US rounded off the manufacturing PMIs with a 48.1 print for November (49.2 expected, 48.3 previously). Ouch!

During the session though, the President signed off on heaping tariffs on imports of steel and aluminium from Brazil and Argentina (both large suppliers to the US) on currency manipulation accusations. The Eurozone’s governments will be a little nervous as Trump has oft accused the euro’s value as being manipulated. It’s all clear as mud. Markets took cover.

Rates took an early kicking with the Bund yield rising to -0.28% (+7bp) at one stage, and the Gilt yield to 0.75% (+6bp), both in the 10-year. Equities rose, of course, as we might expect (initially) and credit spreads were better bid. It didn’t take long for the bullish mood to dissipate though and all the gains in European equities were totally reversed(!), although the sell-off in safe-havens was maintained after an attempt to recover the losses.

Right now, we could do with a signing off of the first phase US/China trade deal and decisive win for Boris Johnson next week, for markets to be assured (as they can be) of a happier ending for 2019, and allowing perhaps for an upbeat start to 2020.


Primary not too shabby, with more to come

Primary markets came up with a few deals to ensure that December likely sees some good business before coming to a close, we think, by the end of next week. The day’s deals were all unannounced and we think this kind of opportunistic borrowing might be the way forward into this year’s close.

As it happened, the EDF bond issuance spree continued. Having taken funding in dollars, euros already in hybrid format, this time the French utility plumped for long term plain vanilla funding. They issued €1.25bn in a 30-year maturity at midswaps+165bp which was 20bp inside the initial price talk, with books up at around €3.25bn.

The other IG non-financial borrower in the session was Italgas, with the issuer taking €500m in a 12-year offering at midswaps+83bp, which was also 22bp inside the initial guidance. The borrower managed to elicit interest of €1.2bn for the deal.

The rest was financials. We had a couple of deals. Mediobanca issued €500m in a no-grow long 6-year senior preferred priced at midswaps+103bp and was followed by Barclays’ 5.5NC4.5 €750m offering priced at midswaps+105bp (-15bp versus IPT).


Trump and US manufacturing throw spanner in the works

The ECB’s new president was up before the European Parliament, and in her first testimony since taking over the reins from Draghi, she was stating the obvious about global factors impacting the Eurozone affecting investment, confidence and sentiment.

However, everything was overshadowed by the US steel import tariffs and, to some extent, the worsening state of US manufacturing. The Dax fell by 2%, the FTSE just 0.9% and US bourses were up to 1% lower, as at the European close.

In rate markets, the attempt to recover earlier losses met with a mixed response, as the sell-off saw the yield on the 10-year Bund rose to -0.28% (+7bp), the Treasury yield rose to 1.82% (+4.5bp), with the equivalent maturity Gilt yield up at 0.73% (+3bp).

ECB Bond Buying

In credit, the ECB’s fourth week of QE activity (in green – weeks 133 onwards in the chart) saw the latest reported weekly haul of corporate bonds come in at €1,086m (€825m the prior week) with the central bank’s holdings of IG corporate debt up at €183,014m.

Credit protection costs rose, obviously pushed higher with the big decline in equities. So, a better bid market saw iTraxx Main up at 48.8bp (+1.1bp) with the X-Over index at 225.4bp (+4.6bp) to kick-off the final month of 2019.

In secondary cash, it was a quiet session but a tightening bias in the opening session of the month was limited, while the month end index considerations took hold and led to a modest tightening in the indices.

The Street took up its customary defence stance amid low flow and volumes. In all, we were left with the iBoxx IG corporate bond index at B+114bp (unchanged), the CoCo index at B+434bp (-3bp, effectively unchanged) and the high yield index at B+378bp (-5bp).

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.