9th December 2015

Heavy metal is back in fashion

FTSE 100
6,135, -88
10,673, -213
S&P 500
2,064, -13
iTraxx Main
73bp, +2bp
iTraxx X-Over Index
302bp, +10bp
10 Yr Bund
iBoxx Corp IG
B+149bp, +1.5bp 
iBoxx Corp HY Index
B+481bp, +7bp
10 Yr US T-Bond

It’s not getting any easier… If it is not about the oil price, it is about metals prices. Then it is about stocks, or bonds – or both. Or currencies for that matter. They’re mostly going lower or weaker unless directly benefiting from the manipulative hand that comes from a central bank. There are ‘routs’ all over the place as we close out this quite eventful year. And we can extend the list of concerns to global growth, the lack of inflationary forces and US interest rates. The usual upbeat comments and hopes will soon be with us for 2016, but to be frank, we will roll into the new year with just about all the same concerns we have currently. The line in the sand we draw will only be to reset the counter for performance. Global growth will fail to take-off in any sustainable fashion, disinflation or rather deflation will continue to plague many products (pricing), markets and economies. There will likely be no rate hikes outside of the US while geopolitical angst around the Middle East and Europe will very much intensify. The hatches will stay battened down for another year, it seems. Which asset to go for? Well, here it is a case of “you pays your money, you takes your choice.” Equities have had a superlative 2015, amid some terrifying drops in Q2 and Q3 – but have recovered and done fantastically well. Government bonds had a super Q1 but are ending more mixed/weaker, but Eurozone bond yield should diverge versus the US. It will take a brave investor to bottom fish in commodities even with the current rout making entry points much more enticing, while the dollar/euro, dollar/EM currency trade has too many volatile variables to juggle with. Credit? Well, apart from idiosyncratic situations, names impacted by the commodity rout, potential for HY contagion in Europe from the US shale fallout and so on.. could be the boring, safe, low return/principal-back investment class for choice!

Taking evasive action… On Tuesday, with copper prices and the like coming off, dividend and capex cuts galore being announced at commodity groups like BHP – and renewed concerns on Chinese RMB weakness and another set of weak trade data, mining stocks took a pummelling, down by up to 9%. Their debt prices dropped by up to half-a-point to a point or perhaps a touch more an liquid paper like the recently issued OMV hybrid saw price declines, also off a point. Pretty much anything raw material or Brazil related took it on the chin and one shouldn’t have been looking for a bid on afflicted names in the session. The corporate bond market wasn’t really spared, but was relatively well-supported, especially low-beta corporates as we could expect. The lack of activity helped. The Markit iBoxx corporate IG index closed a touch higher at B+149bp while the HY index gave up 7bp to B+481bp. In synthetics, iTraxx Main and X-Over were better bid, (higher) up at 73bp and 302bp, respectively, in line with weaker stocks.

But it was a bad day at the office… Stocks in Europe were up to 2% lower as the commodity story continued to unravel. Government bonds closed the session close to unchanged with yields +/-1bp across the curves in most cases. The oil price see-saw left prices very slightly in the red while metals were down 1-2%. There’s little reason to be cheerful. At this rate, while we were upbeat that the market would take a US hike next in its stride, we’re reassessing that view.

Just three days to the weekend. 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.