TwentyFour

For fixed income investors, it has been impossible to ignore the proliferation of press coverage about the growth of the triple-B rated corporate bond market, and a coming wave of downgrades for companies rated BBB to high yield, with these ‘fallen angels’ exposing investors to mark-to-market losses at best, and defaults at worst.

Investors have rightly been concerned about the coordinated global economic slowdown, but in Europe it has been worse than that with the major economies flirting with recession. Consequently investors have been cautious on European assets, but has this caution now reached its peak?

Over the past couple of quarters we have been inundated with questions regarding the banking sector, and in particular how it will perform should the current economic cycle deteriorate.

Yesterday the Office for National Statistics released strong data on the UK labour market, which was music to the ears of UK RMBS investors. The headline unemployment rate stands at 4.0%, roughly unchanged for the last six months and at the lowest level seen in the last 45 years. There are an estimated 32.6 million people employed, 444k more than a year earlier, and more importantly average weekly earnings grew by 3.4% (the highest for over 10 years and 1.2% in real terms).

The big news yesterday came from Santander, when the Spanish lender finally announced, just a few minutes before the deadline expired, that it wouldn’t be calling its 6.25% AT1 on the first call date of March 12.

For fixed income investors, it has been impossible to ignore the proliferation of press coverage about the growth of the triple-B rated corporate bond market and the prospect of the next economic downturn sparking a wave of downgrades for companies rated BBB to high yield, with these ‘fallen angels’ exposing investors to mark-to-market losses at best, and defaults at worst.

So far 2019 has been supportive for risk markets. The Fed appears to have adopted a more passive approach, easing market fears of a potential policy error, and in early January we heard conciliatory rhetoric from the US and China pointing to a workable solution to the trade tariff situation. However, the investor exuberance we saw in January has become noticeably more cautionary this week, as geopolitics have once again heightened uncertainty along with some softer looking economic fundamentals and a rather mixed set of corporate earnings. No surprise, then, that asset prices have undergone a slight correction as we head into the weekend.

The Federal Reserve’s Senior Loan Officer Opinion Survey on Bank Lending Practices – from now on let’s just call it ‘the survey’ – was released last night, and as usual provided us with useful insight. The survey was conducted between December 21 and January 7, and covered 73 US domestic banks and 22 branches of foreign banks.

After a volatile end to 2018 the European high yield market has started 2019 on the front foot, with the yield on the Euro HY Corporate Index tightening by 60bp to 4.16% since the start of the year.

January is traditionally the month of no fun. From Dry January to Veganuary, the theme is usually based on giving something up.

Friday is a big day for the US economy. We have labour market data in the form of non-farm payrolls, unemployment and average hourly earnings at 13:30 GMT, followed 90 minutes later by the ISM Manufacturing Index and the University of Michigan’s consumer confidence indicators. All of these are tier one data that have the potential to change the course of the rally we have enjoyed so far this year, for better or worse. Our view that the sell-off in Q4 2018, particularly in December, was an intra-cycle dip rather than the beginning of the end has held up, but Friday’s data dump will have a significant bearing on where we go from here.

January has been a very quiet month for the European CLO market, with spreads tightening but still relatively wide. While we know there are around 30 different CLO warehouses open – some of which are for deals that couldn’t be priced in December and were postponed – the pipeline is struggling to materialise. So far only CSAM has managed to price a new deal, and in the process showed how difficult it has become to make the arbitrage to work for equity investors (see our recent blog CLO Arbitrage Worst Since 2013).