European Credit Last Week

Another weak day; fund flows show bearish picture Another weak day for credit last Friday. Late last week saw a confirmation of a major theme in not just credit but also bond markets in general. Whichever source is used over recent weeks, fund flows are showing a rather bearish picture for credit, on both sides of the pond the ETF and MFF developments show strong outflows. Lipper funds showed over $2.2bn in outflows in US high yield making $3bn in the past two weeks as outflows hit a 6 week streak. IG in US did manage to stay positive though albeit at a slowing pace. Other categories like EM hit record outflows at $6.6bn. As for Europe EPFR shows the outflows were widespread in Europe with over $1.6bn equivalent flowing out of IG funds accelerating from $0.4bn last week. HY in Europe now registering a third week of outflows totaling $0.4bn after $300bn this last week up to 16 November. It will be a relatively short trading week, with the US markets closed on Thursday for Thanksgiving. On Wednesday, the Fed releases its minutes from the November meeting. In Europe the recent slowing pace of CSPP in secondary in combination with higher supply with higher premiums (on the back of fears of sustained higher rates), higher rates and these flows are setting the scene for spread widening. We expect that a stabilization in credit spreads could trigger new supply and this could be a deal breaker for tighter spreads in the short term. However, supply should abate towards year end and, combined with CSPP and an expected stabilization in rates, this should result in a more positive backdrop for credit. In synthetics, the iTraxx main and Xover index widened 5bp and 2bp, respectively, over the week. LafargeHolcim was one the main underperformers in Fridays trading session, with spreads widening 8-12bp. The French/Swiss construction company lowered its 2018 EBITDA target and cumulative FCF generation over the period 2016-2018. Furthermore, the company announced a CHF1bn share buyback program over the next 2 years. In Telecom, Vodafone (VOD) and Telecom Italia (TITIM) widened 10bp, while elsewhere in the sector spreads were 5-10bp wider. The main underperformers in Consumers were Metro (+20bp) and Coca-Cola (+15bp). In Utilities, peripheral names like Iberdrola and Enel widened another 10-15bp. Not surprisingly, no new deals were printed on Friday.