12th October 2016

It started with a miss

MARKET CLOSE:
FTSE 100
7,071, -27
DAX
10,577, -47
S&P 500
2,137, -27
iTraxx Main
74.5bp, +1.5bp
iTraxx X-Over Index
335bp, +5bp
10 Yr Bund
0.02%, -3bp
iBoxx Corp IG
B+124.7bp, +0.4bp 
iBoxx Corp HY Index
B+430bp, unchanged
10 Yr US T-Bond
1.76%, +4bp

Ooh aah just a little bit…

Sterling might have been in the wars again but the FTSE hit a record intra-day high. Well, the FTSE hit that record because of sterling’s weakness, rather! If forecasts bear out, and sterling weakness has much further to go, then UK stocks will generally continue to rise – global macro permitting. They ended the session lower overall, but the intentions are clearly marked out. It was an otherwise lacklustre session to begin with, with government bonds, equities and credit all failing to hold session highs, but eventually breaking lower and out of the narrow trading ranges they established earlier in the session. It wasn’t quite the respite Tuesday it seemed that it was looking like being at one stage given the opening skirmishes, as we eventually got a little excitement and nervousness focused around old events such as Brexit, the Fed (rate hike) and earnings.

Anyway, the UK’s battered currency is trading off a $1.21 handle and its weakness is a short/medium-term boon for exporters and manufacturers. It is yet to be seen in the inflation numbers – but it will. The same ultimately for wage growth, so it goes. Away from the UK, the ZEW survey tracking economic sentiment in Germany beat expectations but failed to offer any zest to the session.

Small up and small down saw government bond yields retrace lower. The 10-year Gilt yield fell back below 1% to 0.98% (-4bp) while the equivalent maturity Bund yield dropped to +0.02% (-3bp) and at its best level in choppy trading. Portuguese bonds were again the ascendancy and 10-year yields fell 6bp to 3.34%. With Alcoa kicking off the earnings season with a miss and some fearing a US Fed rate hike in November (yes, those fears are back), equities were mixed initially but ended lower. The Alcoa report suggests we’re in for another weak quarter on the earnings front from corporate America, which might add some volatility into equities over the next few weeks.

The DAX had got to within 60-points of being flat again for the year. Riding high initially, the rally fizzled out. This index has been flat to 2015 closing levels once or twice, but has failed to be in the black at any stage for more than a session. The DAX ended needing around 160-points to get flat for 2016.

Primary keeps credit market engaged

The FTSE intra-day record aside, the bright spot – as in Monday’s session – was the primary market which gave corporate bond market participants a focus. And the deals were good in that they were generally higher beta in nature, offering some decent spread following a cluster of utility issuance (low beta) in the prior several sessions. The deals came from Chorus for €500m which plumped for 7-year funding, CRH for €600m but in a 12-year deal with easyJet going for a €500m benchmark in a 7-year maturity. The usual 5-20bp was lopped off the initial price guidance – some things don’t change. Sanef and Wendel took €300m each to take the day’s total from five IG-rated non-financial borrowers to €2.2bn and the total for the month-to-date to €10.4bn.

At this rate, we’re probably looking at the month delivering around €25bn in IG non-financial supply. There are a few HY deals currently marketing their wares and once the roadshows are done, we look for a spate of issuance from this sector to add to the €1.3bn issued this month so far. KBC was the sole financials borrower with a €750m senior deal although in dollars, DNB plumped for an $750m AT1 issue yielding 6.5%. CNP Assurances is due with a Tier 3 issue.

Secondary levels reacting to the ECB?

Not quite – or at least it is a little difficult to tell. The volatility in equities, foreign exchange and government bonds is not being felt in the corporate bond markets – that’s for sure. IG spreads barely budged, the Markit iBoxx index at B+124.7bp closing just 0.4bp wider in the session – so basically noise. We are going to argue that “it” would be a lot worse if the ECB was not buying the market. After all, 90% of its €32bn booty has been from the secondary market. The HY market was better bid for choice, the index actually closing unchanged at B+430bp.

And for UK corporate bonds? The pound is unloved, the stock market is riding high for cause and effect – and for technical reasons, while Gilts are trying to find their feet. But the corporate bond market is holding relatively well in the face of it. Spreads edged wider, as measured by the iBoxx index, up at G+156bp (+1bp), but the BoE’s interest (QE) and a fairly illiquid, closed market is containing any material fallout.

The US closed on a downer, off some 1.2% for the S&P500. Sterling saw a sub-$1.21 level before edging back into the “21s”, news of record oil production saw a small drop in the price per barrel (but still above $50 for WTI) which all combine to suggest a difficult session as we open for business today. Main closed up at 74.5bp (+1.5bp) and X-Over at 335bp (+5bp).

Good luck! Back tomorrow.

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.