What to Watch in European Credit Markets This Week

(Bloomberg) -- Good morning. Here’s what we will be watching this week:

Issuance bounceback

A brighter start to the week for bond buyers as companies announce new deals. It’s a more positive tone than the end of last week when ZF Friedrichshafen’s decided to postpone a bond sale. Friday was also the year’s 19th zero-deal day, rounding off a slow week. ICO, Allergan Plc, InterContinental Hotels Group Plc, Karbon Homes Ltd and OP Corporate Bank Plc are all due to start roadshows today, while Swedish real estate company Castellum AB has scheduled meetings for its debut euro-denominated bond tomorrow. In high-yield, a flurry of roadshows may distract the market from floor-covering seller Victoria Plc, which found itself last week trying to sell a bond amid a 35 percent drop in its shares.

Stress test fallout

The European Banking Authority unveiled the results of its stress tests on Friday evening. Barclays Plc and Lloyds Banking Group Plc were among the worst performers, faring even more badly than Deutsche Bank AG and volatility-hit Italian lenders, as regulators imagined the worst possible Brexit scenarios. The stress test was designed to reflect all macroeconomic risks that could be associated with Brexit and U.K. banks all suffered substantial hypothetical hits to their CET1 ratios, Commerzbank analysts wrote in a note. "However, even Barclays with its 657 basis point loss still maintained a safety margin of 87 basis points to critical 5.5 percent CET1 threshold." Meanwhile, reports over the weekend suggest the European Central Bank may consider further cheap loans to banks, which some have dubbed TLTRO II, which would be supportive of Italian banks in particular.

Next Brexit step

There’s much talk of a potential deal on Brexit, and sterling bounced on hints that a deal on the so-called Irish backstop ahead of a summit later this month. Analysts at Mizuho Bank Ltd have suggested it could "blast" higher if a Brexit breakthrough is agreed this week, as expected. Meanwhile, negotiators may be close to sealing a deal for financial services which runs beyond the end of the U.K’s transition period in 2020, the FT reported this morning, citing EU diplomats. So British banks may avoid the EBA’s worst-case scenario after all.

Midterm blues

Much of the news agenda this week will be shaped by the outcome of Tuesday’s midterm elections, as President Donald Trump attempts to prevent the House from flipping under pressure from the so-called blue wave. That said, much of the conversation this morning has been dominated by worsening Sino-U.S. relations and fresh sanctions on Iran. Asian equities fell overnight after China’s President Xi made a veiled swipe at Trump, saying in a speech that the "practices of law of jungle and winner take all are a dead end," while crude prices remained relatively stable as sanctions on Iran were reinstated at midnight as Trump attempted to ramp up pressure on the country over what he described as "malign" behavior.

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