(MS) European Credit Strategy

What We’re Watching

* European credit markets drifted marginally wider over the past week as concerns surrounding DB affected broader risk sentiment. EUR IG non-financials closed the week 2bp wider while EUR HY spreads were 9bp wider, resulting in excess returns of -1bp and -13bp, respectively. On the fundamental front, IG-rated European corporates saw a modest deterioration in balance sheet quality during 2Q16.

* Our economists expect this week’s data releases to support the narrative of a relatively resilient eurozone economy. Their PMI-based model suggests that GDP growth likely remained firm at around 0.3%Q in 3Q16 with small upside risks. In the UK, this morning’s manufacturing PMI numbers show a rise to 55.4, well above consensus expectations, which points to upside risks to current UK GDP forecasts for 3Q16. Also on Thursday the BoE will publish the results for the first week of CBPS at 3pm.

* European IG and HY mutual funds saw net inflows of 0.2% and 0.1% of AUM, respectively.

European Credit – Flows, Positioning and Redemptions

* European credit performance softened in September as central bank actions came into focus alongside concerns around DB towards the end of the month. Despite the strong pace of CSPP purchases and the start of the BoE’s CBPS in the final week of September, EUR IG, HY and GBP IG all experienced negative excess returns.

* European IG non-financial corporates issued a record €68bn of bonds in September across different currencies. Meanwhile European HY corporate issuance also picked up significantly, with €17bn of bonds pricing during the month.

* EUR IG mutual funds saw flat net flows, while EUR HY and GBP mutual funds experienced positive net flows of 0.7% and 0.4% of AUM, respectively. Meanwhile, cash balances increased in EUR IG mutual funds, even as EUR HY and GBP IG funds saw some moderation.