Global daily insight 11 october 2016

Daily Insight

Group Economics Macro & Financial Markets Research

11 October 2016

Corporates on track for EUR 250bn issuance in 2016 Macro & Financial Markets Research team Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com

Euro Nonfinancials Credit – QE supports EUR 200bn in non-financial corporate bond issuance – On Monday three non-financials came to the euro market to issue new debt: Italian utility Snam, Dutch utility Tennet and Spanish telecom provider Telefonica. With these three new deals, the tally for new issues in the euro investment grade non-financial bond market now stands at EUR 200bn so far this year. That is already more than the whole of last year, which was already an extremely busy year with a total new issuance of EUR 180bn for non-financials. Only 2009 was a busier year with EUR 240bn of new supply.

Obviously, the ECB with its QE corporate bond purchase programme is the driving force behind this busy market. The ultra-low yield environment makes it very attractive for corporates to pre-finance maturing debt at an earlier stage or to tender outstanding debt and replace it with new longer dated bonds with low yields. In addition, the direct ECB purchases of non-financial bonds in the primary market stimulate supply. For the entire year, we forecast that supply will surpass the EUR 240bn mark by EUR 10bn and that it will set a new record at EUR 250bn. That will make 2016 the best year for euro investment grade non-financials new issuance ever. (Hyung-Ja de Zeeuw) Euro Financials Credit: Banking sector resilient to DB worries so far – There has been further negative news surrounding Deutsche Bank (DB) over the last few days. Contrary to the original Agence France-Presse (AFP) reports on 7 October, the bank has not agreed its RMBS abuse fine with the US Department of Justice (DoJ). In addition, there was a report in the Financial Times that DB received a special concession from the ECB for their stress test results from July 2016. In the results, the bank was allowed to include an uncompleted sale in their figures, according to the report. The impact of the uncompleted sale was a benefit of approximately 40bps to their CET1 ratio. A 40bps increase would not have substantially changed the result, but it would (if true) raise questions about why it was allowed. So far since the DoJ potential fine was announced, German bank spreads have widened significantly. Indeed, the 5-year senior unsecured debt of DB and Commerzbank are 65bps and 28bps wider, respectively. Nevertheless, the impact to other bank debt across Europe has been contained. The European bank senior index is approximately 4bps wider over the same period. We continue to have a negative outlook on the German banking sector for the rest of the year. For the wider European sector we recommended Spanish senior unsecured debt due to the potential issuance of Tier 3. Meanwhile, we maintain our underweight stance on Italian bank debt (especially for Italian banks outside the top three). (Tomas Kinmonth) Euro Macro & government bonds: Portugal optimistic on DBRS review - Portugal’s government bond market rallied on Monday. The country’s finance minister Mario Centeno had a meeting with rating agency DBRS in Washington last Friday. Afterwards, he asserted that he expected Portugal not to be downgraded by DBRS. The Canadian rating agency is due to review Portugal’s rating on 21 October. It is one of four agencies recognised by the ECB, and it is the only one that still has Portugal rated ‘investment grade’. An investment grade rating by at least one of the four agencies is a precondition for the country’s eligibility

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Daily Insight - Corporates on track for EUR 250bn issuance in 2016 - 11 October 2016

for the ECB’s QE programme and is also a requirement for the collateral in the ECB’s normal refinancing operations. So a downgrade by DBRS would have serious repercussions. It would mean that the country would need a special waiver from the ECB (and probably re-enter an EU-IMF programme) to regain access. Meanwhile, comments from DBRS to the press last week, suggest that they had become slightly more negative about the growth outlook, the stalling of economic reform and the health of Portugal’s banking system. Even if DBRS were not to downgrade Portugal next week, we expect the risks surrounding the country to remain elevated and we maintain our forecast for the 10y yield spread over Germany of 350bp at the end of this year. (Aline Schuiling) ECB view: Official commentary suggests stimulus will continue – A number of ECB officials spoke over the weekend and on Monday, but the overall message seemed to be that stimulus will continue. ECB President Draghi told reporters at the IMF annual meetings in Washington that inflation would reach the central bank’s goal by the end of 2018 or early 2019. However, these projections were linked to ECB monetary stimulus. Vice President Constancio also underlined the importance of continued QE, saying the eurozone economy’s resilience reflects expected as well as actual monetary stimulus. The French central bank governor – Francois de Villeroy – noted that the ECB’s monetary policy was ‘not at its limits in terms of results, nor, if necessary, in terms of means’. We categorise Messer’s Draghi, Constancio and Villeroy as being on the dovish end of the Governing Council spectrum, but there was a similar message from Vitas Vasiliauskas, the more centrist-to-hawkish Lithuanian central bank head. He said it was ‘very important not to speak about exit’ from QE. When it was time, there would be ‘slow, slow, slow tapering’. Finally, his hawkish colleague Ilmars Rimsevics – Latvia’s central bank head – said that ‘most probably there will be less possibility for central banks to support easy monetary policy’.

Though he was not talking about the near term, but more in the medium term, when inflation picked up ‘over the next couple of years’. Our base case remains that the ECB will extend QE to September 2017 from March 2017 at the December meeting. (Nick Kounis)

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Daily Insight - Corporates on track for EUR 250bn issuance in 2016 - 11 October 2016