31st January 2017

Trump’s still the news

FTSE 100
7,118, -67
11,682, -132
S&P 500
2,280, -15
iTraxx Main
72bp, +1.5bp
iTraxx X-Over Index
299bp, +6bp
10 Yr Bund
0.45%, -1bp
iBoxx Corp IG
B+133.8bp, +0.8bp 
iBoxx Corp HY Index
B+377bp, +4bp
10 Yr US T-Bond
2.49%, +1bp

The man’s not for turning…

The dominant theme around the markets right now is how they react to the plethora of executive orders being signed off by Donald Trump – the weekend’s travel ban being the latest and most contentious one. There’s a defensive feel to the market as a result as we also close out the first month of the year.

Italy’s largest bank expects a 2016 net loss of about EU11.8 billion on higher writedowns

Some of that market reaction has also taken in the higher inflation numbers in Germany (potentially bad for bonds), while Unicredit finally let the cat out of the bag, as the group told the markets that they will fall short on ECB-capital requirements for 2016.

So, equities had an ‘off’ day, government bonds didn’t really gain much from that weakness as a safe-haven sentiment (as any bid was offset by those good German inflation numbers), while credit slipped back into its shell as it so often does on these occasions.

There were deals, but it was a very limited session given that investors were digesting the implications of the US travel ban and probably thinking about protecting whatever they may have gleaned (not a lot in IG) from performance perspective for January.

We’re also probably looking ahead now for February’s outlook, the FOMC pops up later this week while we end it with the US non-farms report.

Sideways at best for February

We would think that February’s event-risk again centres around US policy. Macro and geopolitics will likely dominate into March too, before we start thinking a little more seriously about the French elections which are due to be concluded in early May.

The earnings season also ramps up in Europe, so earnings-related blackout periods might have an impact on primary market dynamics – especially if we get any severe ructions courtesy of President Trump.

With that in mind, we think that markets will choose to play it fairly cautiously. We will get deals, and they will likely be fairly well received, as few will want to add in secondary while the potential for volatility exists. Judging by the last week, though, we might struggle to see €20bn get done in February – and the second month of the year can be a fairly heavy one, even with those blackout periods. With nothing from IG non-financials in yesterday’s session, we’re at €25.6bn as far as January’s total is concerned.

For sure, we could probably think that government bond yields are not going to the moon as their safe-haven characteristics mean jittery markets keep government bonds better bid. That puts a potential lid on swap yields and hopefully keeps funding costs intact too.

If equities don’t fall out of bed, secondary valuations remain intact (and hopefully edge tighter) as the ECB manages to vacuum up enough paper to prevent significant weakness. This means that returns stay close to zero – after IG delivered -0.3% in January.

ECB still doing some heavy lifting

After that record €2,876m of purchases two weeks ago, the ECB announced that it lifted €1,929m last week (see chart, below), taking their total purchases to date (after 34 weeks) to €58,815m. That’s about 10% of the eligible market. That’s in excess of the long-term average of around €1.8bn.

Recent ECB weekly purchases

There has been a fair splashing of primary in this opening month and the ECB has been a participant in that market (almost 14% of purchases overall), but we would have thought the impact of the quantitative easing corporate programme to have had a more positive dynamic in driving secondary valuations (see below). Anyway, yesterday’s deal were few with Porr AG issuing a paltry €125m deal but in hybrid format (not rated, but HY implied) to yield 5.5%, and Unilever took £350m out of the UK market at G+62bp.

Port’s deal was a “sub-benchmark” deal, but with the ECB heavily involved in the market these days, traditional benchmark-sized deals in order to be included in indices don’t matter – and can’t really be used as a marketing tool by bankers trying to convince issuers to go for bigger transactions. The liquidity argument doesn’t wash either – as size doesn’t necessarily determine whether a deal is liquid (it helps at the margin).

Doing one’s best to Trump the month’s gains

The market did it’s best to give up the month’s gains in equities, with losses across the board of around 1%. It’s been a while since we had such a down day and many will make much out of it. Anyway, the FTSE closed just under 1% lower, the DAX just over 1% lower while the various US indices were pitched at around the -1% mark too.

The worst day since the election, or this year (or both) – take your pick.

The VIX index was up to at 12.0% (almost 13% higher, or +1.4 points in the session – it was higher). While that volatility gauge rose, we had a much calmer session in the government bond markets with yields barely changed. The 10-year Bund yield was at 0.45% (-1bp), Gilts in the same maturity closed unchanged to yield 1.44% while US Treasuries barely budged too.

A big underperformer was Italian government debt with some frayed nerves probably on that UniCredit news, although the IMF warnings in the session around Greek debt didn’t help the periphery. 10-year BTP yields rose to 2.33% (+9bp), while Greek yields were off the highs, eventually at 7.42% (around 30bp higher).

There have been no gains in IG credit this month from a total return perspective, but spreads have been edging better over the last week to give benchmarked investors some performance. The session closed out in quiet fashion again, and the Markit iBoxx IG corporate bond index was left at B+133.8bp (+0.8bp). The HY index at B+377bp was 4bp wider in the session, but there was little to suggest why that should have been the case apart from defensive marks on the back of lower stocks.

That followed through into the iTraxx indices, with Main left at 72bp (+1.5bp) and X-Over at 299bp (+6bp) – and levels not seen for a while.

Back 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.