Corporate Credit Snapshot – 15 November, 2017

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  • Geopolitical and idiosyncratic events dominated credit markets, resulting in higher volatility and some spread widening
  • At the asset class level, investment grade outperformed high yield in both Europe and the US, while by region European high yield proved more resilient than US high yield
  • Emerging market corporates saw mixed performance with rising geopolitical risk in the Middle East somewhat offset by more positive economic developments in other regions

Geopolitical and idiosyncratic events and a lack of progress on US tax reform led to some repricing in US corporate credit markets over the first two weeks of November. The announcement of the relatively dovish Powell as the next Fed Chair proved largely uneventful after the market had priced in his appointment ahead of time. However, the proposed changes to the US tax code proved to be disappointing to the market as equities and high yield sold off after proposals emerged from Congress.  Tax reform is a critical item for the White House, but there are no assurances that material tax reform will be passed this year.  At the corporate level several items sent out mixed messages to markets.  Most issuers posted solid earnings, but those that didn’t experienced precipitous drops in the prices of their securities.  In addition, Sprint and T-Mobile US announced they were abandoning their merger and this caused investors to revaluate the TMT arena.  The technical backdrop in investment grade markets also resulted in wider spreads due to a recent surge in issuance.  The net result of these events was the first material decline in bond prices since early August as yields, and high yield spreads, retreated to the levels they experienced in the spring.  This provides investors with an interesting entry point relative to the tights of late October.

European credit markets experienced some weakness as geopolitical risk hampered investor sentiment, resulting in a slight market correction and wider spreads. However, dovish monetary policy from the ECB, which is expected to continue well into next year, continues to prove supportive for European credit over the medium term. Meanwhile economic growth surprised to the upside with flash estimates for third-quarter GDP up by 0.6% for the eurozone and EU. The technical backdrop also remained positive with strong issuance. Ongoing monetary stimulus from the European Central Bank has resulted in a record year for European corporate bond markets as borrowing costs remain at depressed levels. Nevertheless, it can be argued that it is resulting in some degradation in credit quality; early November saw the highest number of CCC rated bonds issued since 2013.

Emerging market corporates have experienced a mixed month in performance terms with rising geopolitical risk in the Middle East somewhat offset by more positive economic developments in other regions. In Saudi Arabia, Crown Prince Mohammed bin Salman focused on consolidating his power after a surprise and rapid crackdown on corruption. The country was also involved in the resignation of Lebanon’s prime minister Saad Hariri, which was seen by many as an indirect attack on Iran due to Hizbollah’s influence on the Lebanese government. However, Hariri’s apparently forced resignation appears to have backfired and is having a uniting effect on Lebanon’s Sunni and Shia populations who are calling for his return. Meanwhile Egypt’s relationship with the IMF remained positive after the latter confirmed it will provide its next US$2bn tranche of a US$12bn loan as economic reforms continue to bear fruit in the country. China’s progress on reducing financial risks showed signs of ongoing improvement following the announcement of a reduction in bank lending – further proof that efforts to reign in the shadow banking sector are working. In Eastern Europe, third-quarter GDP numbers surprised to the upside with some of the strongest numbers coming from Romania. Oil prices continued to trade above US$60 p/b (Brent Crude), benefiting oil producers, although fell back from their early month peak on concerns for the Gulf region. In Latin America, a Mexican quasi-sovereign oil firm announced its biggest discovery in 15 years. If realised, these reserves should prove beneficial over the longer term for the company, which is facing downward pressure on oil production.