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FIG market braced for 'chaos of uncertainty' following US election

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FIG borrowers’ last clear window for issuance hangs in the balance ahead of Tuesday’s US elections, as bankers fear a victory for Donald Trump would limit November supply and raise new issue premiums considerably.

Over the weekend the Federal Bureau of Investigation determined (for a second time) that Democratic candidate Hillary Clinton had committed no criminal wrongdoing while using a private email server, pulling credit spreads tighter in the week’s opening session.

Bankers said the development was positive for any borrowers considering low-beta issuance ahead of the election, but no financial institutions were active in the senior market on Monday, and only ING-DiBa was looking to raise funding in covered bonds.

A number of FIG issuers will have been steering clear of primary markets ahead of Tuesday’s vote, as senior spreads widened by roughly 5bp across the board amid last week's uncertainty.

But a Clinton win may trigger a relief rally and allow for what one head of syndicate described as a “final phase of activity” in new issuance markets.

“People believe there will be less volatility following a Clinton win, but it still is not too clear what that will mean for the market,” said a FIG banker.

“I think it will be a quiet week this week either way. The election result should be clear on Wednesday, but it would be a brave issuer to come on the same day. Thursday and Friday could be in play but banks may want to wait to see some positive movements before they consider

ANZ is a clear candidate to follow the election with a new deal. The Antipodean bank could issue a transaction including senior and covered bonds, having used a roadshow to bridge the vote on November 8.

And a strong enough rally following a Clinton win could even create the right conditions for Italian mid-cap banks Credito Valtellinese and Credito Emiliano to launch new tier two trades, after the pair both spoke with investors in September and October about the possibility of raising capital through bond transactions.

‘The chaos of uncertainty’

Though Hillary Clinton remains the favourite to win, the election has become closer in recent days as her lead in several swing states has narrowed considerably.

A victory for Republican candidate Donald Trump could weigh on new issuance volumes, as market participants assess what impact he could have when the presidential office changes hands in January 2017.

“If Trump wins, short term, we’ll get a big selloff of risky assets,” said Erik Nielsen, chief economist at UniCredit. “You’ll have noticed that the key stock indices have been down — and the VIX up — every single day since the FBI announcement of additional investigations of emails turned the momentum in the polls.

“A Trump victory is far from fully priced in yet. Fixed income markets still assign a stunning 80% probability to a Fed hike in December, a move I find highly unlikely in the chaos of uncertainty following a Trump victory.”

Given that opportunities to issue new bonds are already dwindling this year, a Clinton loss could empty the pipeline and leave FIG issuance volumes behind those recorded in 2015.

Thanksgiving is just over two weeks away on November 24, and marks the point at which new issuance generally slows down for the year. 

Beyond November, market participants will be mindful of Italy’s important referendum on constitutional reform on December 4, as well as the US Federal Reserve’s policy meeting in the middle of the month.

“I am loathe to say a Trump win would put paid to new supply because of how quickly the US market came back following the Brexit vote,” said one FIG banker.

“This time around it could be the reverse, and the euro market could be the first to re-open. I think any volatility will be more relevant for how it affects new issue premiums, and for coming to terms with where spreads have gone to.”

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