19th January 2016

Stuck in a rut

MARKET CLOSE:
FTSE 100
5,780 -24
DAX
9,522, -23
S&P 500
1,880, closed
iTraxx Main
97bp, +2bp
iTraxx X-Over Index
387bp, +7bp
10 Yr Bund
0.53%
iBoxx Corp IG
B+177bp, +4bp 
iBoxx Corp HY Index
B+599bp, +15bp
10 Yr US T-Bond
2.03%

More angst after a bright start… Any signs of strength and the market wants to sell into it. That is what we were afraid of and suggested would be the case in Monday’s comment. Equities opened brightly but soon faded the rally; credit was just weak as it lagged and never really got going. Oil was unconvincingly a little higher for much of the session, but only after it saw a $27-handle price per barrel earlier – and then managed to close down anyway! French-based retailer Casino was the big faller of the day, with its hybrid issue up to 12 points lower on S&P’s CreditWatch negative action. The company’s bonds were already reeling after a damning broker report, and any rating action will take the debt into junk-rated territory. A notoriously difficult company to analyse and understand, but as it appears to have few problems servicing its near-term obligations, the price action is arguably overdone. Unfortunately, such is the unforgiving nature of the market at the moment – and non-existent is secondary market liquidity – that any selling pressure will result in these “exaggerated” moves. There’s no systemic crisis (yet), but sectoral risks and idiosyncratic events are weighing on the performance of many portfolios for now. It’s becoming increasingly difficult to avoid all the landmines. Anyway, that’s a mouthful of news flow and situations to digest, but it wasn’t really an active session – the Martin Luther King Day holiday in the US put paid to that, leaving us overall weaker in a rather limited and lacklustre session. The primary market was closed. For the synthetic indices, it has been a long time since we last saw Main at close to 100bp and X-Over just a few basis points away from 400bp. We would think that the S24 contracts are set to visit those levels with Main at 97bp and X-Over at 387bp, and quite possibly this week.

Twelve is a magic number… That is, 12-year lows for the price of a barrel of oil earlier in the session (Brent down at $28.66, -1%) and the DAX, at one stage intraday, down 12% YTD – or 1,265 points YTD. It recovered from the lows but still managed to close a touch lower (-0.25% in the session, or -11.4% YTD), as did all the other bourses. The US was closed. Bunds were unchanged, with the 2-year stuck at a yield of -0.40% and the 10-year at 0.54%. As for credit, Casino was the pick of the bunch, but energy company bonds remain under pressure too in a weak session. The broad measure for the cash market saw to it that the Markit iBoxx IG corporate cash index closed at B+177bp (+4bp) and that is some 23bp wider this year already. The HY index was marked up at B+599bp, yielding 5.92%! Not good. A 6% index yield is more than likely this week, and we haven’t seen this level of weakness for a while or these index yield levels.

Primary in the doldrums… There is little by way of fee income for syndicate desks in these difficult opening sessions of 2016, and they might have to go back to the drawing board regarding those budget targets. We would think there might be a renewed push to get deals done in February and/or March, assuming the markets are kind. Issuance in IG corporates this month so far is at around Eur4.75bn. That’s very low for what is usually an upbeat month. There is still time to claw back higher supply, but according to our data, January 2008 was the lowest January since the inception of the euro, at Eur7bn. January is usually a heavy month, and we have seen close on Eur40bn in previous years. January 2008 was the peak of the previous crisis, while this time the difficult macro and risk-off background have failed to allow the primary market to gain any traction. There are still two weeks of the month to go, and we have to believe that a couple of calmer days, perhaps when stocks rally (which they will), will see a few easy deals materialise and the subsequent prints take us past the Eur7bn level. It has been poor thus far though, with just a handful of senior bank deals, a HY issue, a CoCo and a subordinated financial transaction in addition to that IG issuance to keep us company.

There’s plenty of Chinese data to digest as we open for business today. We have GDP for the full-year (consensus 6.8%) along with fixed asset investment (10.2% YoY), industrial production (6.0% YoY) and retail sales (11.3% YoY) all for December. The numbers will be giving us direction for the session.

Good luck and 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.