02 Feb 2018
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The bears were in largely the driving seat in European markets on Wednesday whether that be risk assets or EZ government bonds.
The latter were back under pressure after the brutal curve bear steepening which has largely characterised price action in government bonds post-US election reasserted itself although yields did manage to pull back from their intra-day highs in afternoon trading.
That saw Bunds largely flat at the time of writing (15:05 GMT) with the peripherals underperforming again although not led by Italy this time for a change.
Among risk bellwethers, EuroStoxx50 was down by 0.90% at the time of writing on Wednesday afternoon, although the downside was offset to an extent by the energy subsector which was up 1.31% on renewed hopes of an OPEC production cut at the end of this month.
This was not mirrored by global oil prices, however, which failed to build on a very constructive day on Tuesday, with Brent down 0.75% at 15:06 GMT having spiked 5.67% the previous day.
One theme worth noting is that this was the fifth day in a row where Stoxx50 had opened higher only for the initial upside to fade. That would appear to indicate a lack of any conviction behind a sustained upside move and also a willingness to sell into any bouts of strength in the current environment.
Elsewhere, the synthetic credit indices were bid higher, with the iTraxx Main +1.21 at 78.96 and the Crossover +3.23 at 344.12 making for a fairly underwhelming session all round.
Primary proxies not painting the whole picture?
And that includes the cash credit market which on the whole has held up reasonably well of late although has still been trending wider in the past week or so despite the ECB back-stop.
This in turn illustrates something of a disconnect from the primary market where reasonably oversubscribed books in the corporate market for example would suggest that investors are still keen to add inventory through new issues.
This is probably supported by more eye-catching new issue premiums on offer of late than we have been accustomed to, in order to offset any potential execution risk amid more volatile market conditions.
This was also highlighted by Mylan's EUR3bn 4-tranche deal on Tuesday, where the Nov 2020 line in particular screamed 15bps tighter in secondary even after the spread was tightened by 23bps from IPTs to reoffer, highlighting how cheap it may have appeared to some accounts in the first place.
APRR benefits from a sensible approach
And it was the corporate sector that once again hogged the spotlight on Wednesday, where three separate investment grade issuers added EUR2.3bn to the EUR7.35bn of supply which has already priced by the asset class in the first two days of the week.
Among them was APRR (A-/BBB+ by S&P/Fitch) which appeared to take a sensible approach to pricing, probably necessitated by the fact that the French toll road operator was looking to extend its maturity profile with a dual-tranche 10 and 14yr transactions.
This in an environment when more risk averse investors have recently illustrated a preference for more defensive shorter-dated maturities amid such a bloodbath in duration government bonds.
To recap, leads opened the books on the Jan 2027 tranche at m/s +80bp IPTs and at +115bp area on the Jan 2031 tranche, which outlined a concession of ca. 23bps on the 10yr.
This was quite attractive for a single A rated core issuer if recent history is anything to go by, with APRR also providing the added security of a EUR500m capped issue size on both tranches from the outset.
This had the desired effect, triggering combined demand of ~EUR2.8bn (pre-rec), fairly evenly split between the two tranches which allowed both to print 13bps inside IPTs at m/s +67bp and +102bp respectively.
This equated to Bunds +106.2bp and +149.9bp, with the 10yr reportedly trading down to around B+110bp on the break however.
Eastman Chemical a tougher sell?
Also taking a 2-pronged approach to funding on Wednesday was Eastman Chemical Company (Baa2/BBB/BBB � all stable) via a new 10yr EUR benchmark (Nov 2026) and a tap of its outstanding 1.50% May 2023 line.
This was an SEC-registered transaction and thus no book sizes were communicated during execution, although the fact that both tranches priced in line with IPTs (the EUR500m Nov 2026 at m/s +125bp and the EUR200m tap at m/s +90bp) indicated this may have been a more challenging sell.
The tap took the amount outstanding to EUR750m and offered a concession of about 9bps based on screen quotes around the time the books officially opened although the deal was closer to +63bp at the start of the week.
Looking ahead to Thursday
Markets will continue to watch European bond yields after Tuesday's respite was short lived with yields pushing higher again Wednesday, resuming the main post-election trend.
Otherwise, UK Oct Retail Sales, French Q3 ILO Unemployment and final Eurozone CPI for Oct form the key data highlights in Europe.
US also reports inflation numbers with consumer prices seen firming 0.4% MoM in Oct from 0.3% previously, while housing data is expected to show a pick-up in starts but a drop in building permits (both for Oct).
Government auctions feature heavily on Thursday and are likely to attract more attention than usual following the recent move higher in yields. Spain hopes to raise EUR3-4bn via 2019, 2021 and 2026 SPGBs, while France will be in the market with EUR4.5-5.5bn 2021 and 2022 OATs followed by up to EUR1.75bn worth of Linkers.
Meanwhile, Fed's Yellen makes what appears to be her first public engagement following the US Presidential election out turn, on the economy. Markets will watch for any firmer signals of a Dec rate hike with a 96% probability already assigned via Bbg WIRP.
Among other Fed speakers are Dudley and Brainard, while ECB's Mersch and Praet are also pencilled in to speak.
Earnings are light again with 12 Stoxx600 and 10 S&P500 companies due to report.
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IGM FX and Rates
By Marcus Dewsnap 09 Apr 2018
Welcome to our newsletter, The Context, from IFI Research, containing thought leadership articles spanning a host of asset classes.