29th November 2020

🗞️ 2020’s final countdown begins

iTraxx Main

48.7bp, -0.7bp

iTraxx X-Over

265.0bp, -3.4bp

🇩🇪 10 Yr Bund

-0.59%, unchanged

iBoxx Corp IG

B+104bp, unchanged

iBoxx Corp HY

B+374bp, -1bp

🇺🇸 10 Yr US T-Bond

0.86%, -2bp

🇬🇧 FTSE 100

6,367, +4.65

🇩🇪 DAX

13,335, +49.11

🇺🇸 S&P 500

3,638, +8.7

Crypto way out in front…

As we close out November, IG credit (iBoxx index) total returns come in at 1.1% on spreads 22bp tighter, and the index is back to flat for 2020. The HY market is up 4% in the month. The FTSE has rocketed 13.5% higher so far in the month and the S&P 10%. Global equities have had their best month, ever.

Bitcoin’s worth more than a mention, having wobbled last week – thought to be a correction (sizeable at that) Its price has recovered much since and is higher by over 30% in November – and by 360% since the March 2020 low.

November’s been a fantastic month for risk markets. Everything from oil to equity markets to credit have seen such massive performances that investors’ returns for the year have recovered their respectability. It wasn’t looking so great into the coronavirus second wave, but the various COVID-19 vaccine developments have unlocked the rally.

We’re into what is essentially the final couple of weeks of business for the 2021. Judging by the pick-up in activity in the primary credit markets over the past couple of weeks, and the pipeline of borrowers looking to get deals away, we can expect some decent levels of activity in this closing period.

November has, nevertheless, seen below average levels of IG non-financial activity with just €13.5bn printed, while October and November have only delivered €34bn of issuance (€63bn last year). Mind, that’s set against record volumes for the year, so far at €355bn (€318bn 2020).

The high yield market has similarly had a record year of issuance (currently at €81.3bn) although the €18bn issued through October and November falls short of the near €25bn printed in the same period in 2019. There’s probably another €4bn – €5bn left in the market for this year.

And despite all of that record issuance, we have IG spreads back at flat year-to-date at B+104bp (iBoxx index) and a sub-100bp is likely. In HY, another 30bp of tightening and the HY market could boast also boast being flat again for the year. Judging by the current euphoria around risk markets, we wouldn’t rule it out.

More records beckon

So we had another record close in the S&P last week, Bitcoin stabilised after a drop of around 13%, rates didn’t move and credit spread closed unchanged with primary drawing a blank on Black Friday, as we might have expected.

The general mood music is good. Trump is drip-feeding the White House to Biden, but Biden will get there. The vaccine distribution is a week away and that will serve to uplift markets as well. Macro isn’t going to help though as we expect any data flows will highlight that many economies likely double dipped. However, they’re backwards-looking and we already know it.

There is cash that wants and needs to be invested. Residual balances from this year, but also those looking to ahead of the game and get risk on board before we head into Q1. Surely, we are going to open next year upbeat, with the focus on recovery, growth and calmer US political scene.

Brexit might be the biggest toggle factor, but we’re not sure that whatever outcome eventually emerges, that markets will pay much attention. That’s often been the case. Having said that, the FTSE probably has the most to gain from a deal being announced (relief more than anything else) just as it will if global macro generally starts a sustainable recovery given the international flavour of the companies in the index.

We still think that the S&P will make that 3,700 level and the Dow will end the year through 30,000 again. Everything else will be dragged higher. Tighter spreads, probably higher crypto. Rates look like they will tread water and we don’t think they will break out of their established ranges.

This week should predominately be about the Brexit trade negotiations (again) and non-farm payrolls. The current set of meetings between Barnier/Frost are being billed as the last ones. Apparently, the talks have reached their do-or-die moment. The headline risks will rumble through the week.

We close out with the non-farm payroll report looking for 500k of new job additions and the unemployment rate to fall to 6.8% (from 6.9%). In between, we have US and Eurozone PMIs, Eurozone unemployment data and PPI/CPI for October along with German retail sales, as well as a host of manufacturing reports. Busy week.

Have a good day.

Suki Mann

A 30+ year veteran of the European corporate bond markets and in his role as Credit Strategist, Dr Mann has been ranked number one in the Euromoney Investor Survey eight times in ten years. Previously with Societe Generale and UBS, he now shares views of events in the corporate bond market exclusively here on CreditMarketDaily.com.