21st October 2020

⚖️ 2020’s performance hangs in the balance

iTraxx Main

54.5bp, -0.3bp

iTraxx X-Over

326.9bp, -4bp

🇩🇪 10 Yr Bund

0.59%, +1bp

iBoxx Corp IG

B+122bp, -0.5bp

iBoxx Corp HY

B+462bp, -2.5bp

🇺🇸 10 Yr US T-Bond

0.82%, +2bp

🇬🇧 FTSE 100 [wp_live_scraper id=”17″], [wp_live_scraper id=”24″] 🇩🇪 DAX [wp_live_scraper id=”19″], [wp_live_scraper id=”25″] 🇺🇸 S&P 500 [wp_live_scraper id=”21″], [wp_live_scraper id=”26″]

Getting to the crunch time…

It seems that the Covid second wave is going to wreak havoc across Europe – which will keep a lid on any meaningful market rally for the moment. That rally, though, could come – in the US especially – if we get that fiscal stimulus agreement. They’re into negotiation overtime but the word is that they’re close to agreeing something.

That would be a case of one down, three to go. The three? US election, a coronavirus vaccine and a Brexit trade agreement. It’s wishful thinking perhaps that we get all falling over the right side of the line (Barnier is already beginning to make the right noises, for example), but it also highlights how finely balanced everything is.

Trawling through the mass of polls and commentary, it would appear that the US election is anything but a ‘gimme’ for Biden – as it might have once been thought. It seems close in the key swing states while it appears that the stench of scandal around the Biden family’s business dealings might just be having a greater effect on voting intentions.

In addition, ‘hidden’ Trump support – not captured in the polling, could possibly also be a significant factor. It’s going to the wire (Brexit-like all over again) and Thursday’s final Trump/Biden debate now takes on huge significance.

So markets are in a difficult if not precarious position. The earnings season at least has been better than expected with just a few misses that have mattered (Netflix a case in point) but by and large we are getting through it without too many concerns. Chinese macro is suggesting that her economy at least is in the throes of a sustainable recovery (short-lived one maybe as much which depends on how global lockdowns affect its export markets).

So there is a whole gamut of issues pending, where as usual, few are going to make any massive bets on their outcome. We will likely muddle through without any major upheaval. And hope for the best.

Primary ticking over

Sweden’s Investor AB kicked us off in primary with an increased €600m, 15-year offering at midswaps+55bp, which was 35bp inside the opening guidance off a book in excess of €3bn. At the other end of the scale, we had A2A SpA in an unremarkable €500m effort in a 12-year maturity priced at midswaps+85bp, which was 7bp inside the initial talk and books were up at just €1bn.

Iberdrola: Hybrid deals

And Iberdrola plumped for hybrid deals, with a dual-tranche effort. They issued €1.6bn in a PNC5.5 and €1.4 in a PNC8.5, priced to yield 1.875% and 2.25%, respectively. Final yields were 37.5bp inside the initial guidance and books were up at a combined near €7bn.

Year to date IG non-financial issuance has now risen to a record €339bn after €18bn has been printed now for this month.

In senior land, Credit Mutuel Arkea issued €500m in a 5.5-year senior preferred priced at midswaps+50bp (-20bp versus IPT). Morgan Stanley issued €1.75bn in a 9NC8 senior at midswaps+85bp (-25bp versus IPT) and Sumitomo took €500m in a 7-year at midswaps+70bp (-15bp versus IPT).

UK-based distribution and outsourcing group Bunzl PLC issued £400m in a 10-year at G+125bp, which was around 25bp inside the opening guidance with books at £1.8bn. While in high yield, Drax Finco issued a 5NC2 structure for €250m at a yield of 2.625%. Greece was busy tapping its 15-year Feb 2035 issue deal for a further €2bn at midswaps+125bp.

All in the mixer

Tesla earnings were due after the close, and they’ve taken on some significance which might determine where equities close the week. There is also an eye on yields, with the rise in them in the US in anticipation of a flood of issuance (should a fiscal deal be agreed) possibly putting some downward pressure in the near term on stocks – offsetting the benefits of a boost to activity.

Stronger European currencies versus the dollar heaped pressure on European markets, with the more internationally exposed FTSE companies pressured and pushing the index lower by 1.9% and the Dax by 1.4% with other markets over 0.7% lower.

In addition, sterling was also in the ascendancy on expectations of a resumption in trade talks and a deal by mid-November.

US equities rose by 1% early, before falling into the red at the close in Europe – only to rise again later on hopes of a stimulus deal after Pelosi suggested just that.

The 10-year Treasury yield was up at 0.82% (+2bp) although the Bund yield only edged a basis point higher to -0.59%. Gilts were feeling it a little more, the yield on the 10-year 5bp higher moving to 0.24%.

Credit index didn’t change much, probably slightly better offered (lower) with iTraxx Main at 54.5bp and X-Over just 4bp lower at 326.9bp.

We edged a touch tighter in cash, leaving the IG iBoxx index at B+122bp (-0.5bp). The AT1 market was also better bid (index at B+638bp, -8bp) with a slight tightening in the HY index (to B+462bp, -2bp).

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.