11th October 2020

🗞️ Election, Brexit & Earnings all in the Mixer

iTraxx Main

52.1bp, -2.2bp

iTraxx X-Over

317.7bp, -1.7bp

🇩🇪 10 Yr Bund

-0.54%, -2bp

iBoxx Corp IG

B+122bp, unchanged

iBoxx Corp HY

B+456bp, unchanged

🇺🇸 10 Yr US T-Bond

0.78%, +1bp

🇬🇧 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″]

US election in view, but we’re already over it…

It would now appear that the US election is unlikely going to inject much in the way of any serious levels of intraday/daily volatility into the markets. There has been too much crying wolf. Investors have now moved on to the post-election stimulus boosts – and which administration might have the greater impact.

The net effect of either in the near term – and through 2021, is that we’re possibly going to see a similar boost to US GDP growth before the different policies see a growth divergence (Democrat stimulus resulting in higher growth/higher national debt, too).

Thus any fall in markets on domestic US political issues, poor data, spurious geopolitical events or pandemic/vaccine-related woes won’t leave too much of lasting impression. They will most likely be viewed as a buying opportunity. As it is, US equities are roaring ahead again looking forward to the (fiscal and perhaps monetary) stimulus that’s on the horizon. Surely we won’t be testing those record highs on the S&P this side of 2021?

As well as those US stimulus hopes, there seems to be some light appearing at the end of the Brexit trade talks tunnel. The to-ing and fro-ing between the principal protagonists is possibly reaching its denouement and the mood music is more good than bad.

We expect a deal, likely by mid-November, and that news would most certainly provide a boost to markets as we head into the year’s finale. The FTSE might even outperform, having been a massive laggard this year.

What’s more, it will set us up nicely for a positive start to 2021 on the expectation that the year can be a solid recovery one (reduced coronavirus fears, vaccines approved and the rebuilding of broken economies). Investors will play it being long risk.

Investor pockets deep enough for much more deals

The market can easily absorb the current level of deal flow and isn’t close to being challenged to discover how deep investor interest really is. The first week of October saw just €9.5bn of IG non-financial issuance. We think that pockets are deep enough to take down €15bn – €20bn per week of this issuance without much, or any, impact on secondary. We will slow only into the second week of December.

Year-end dynamics are coming into play. Q4 is usually about getting risk on board to help absorb residual portfolio cash before year-end. Into the opening weeks of the new year, we then have the usual pent-up demand as new cash inflows, coupon income, redemptions and investment strategies and so on usually have investors upbeat and needing to get involved.

So, there is a decent pipeline building and if some of the aforementioned factors coming into play, we should be looking for at least that €10bn per week of IG non-financial issuance through to the end of the month. But, we’re not filled with confidence that will necessarily be the case.

It is still difficult to gauge whether a whole amount of funding has already been brought forward. After all, we have record issuance in IG non-financial markets (€330bn) and are closing in on a record year for HY issuance (€10bn short of it).

A Democrat sweep to hammer Treasuries

There is increasing analysis on US economic growth once we get over the election and potentially face a new administration splashing the cash. Bond markets are reacting to a limited extent at the moment but yields are edging higher, although it is far too early to draw any firm conclusions.

The outlook for the equity market might be brighter, though, given that the fiscal profligacy will see significant growth upside – before we get the inflation headache (could be a while away).

Nevertheless, if the analysis proves right, then that benchmark 10-year which is currently at 0.78% will be through 1.00% by year-end (if not sooner). A clear Biden win (Democrat sweep) will take them higher thereafter, quickly.

So, the S&P added another 30 points on Friday and is less than 4% away from that record high set earlier this year. Even our previous 3,700 year-end target could be back in view. Of course, lots can go wrong and we’re into much choppier climes as the election looms.

Cash secondary credit ended unchanged on Friday. There’s usually nothing doing if primary isn’t firing and we didn’t get any deals either. The IG iBoxx index closed 5bp tighter in the week at B+122bp and the HY index some 17bp tighter at B+456bp, the latter on a tightening trajectory for the best part of three weeks now.

As for the indices, iTraxx Main closed 2.2bp tighter at 52.2bp and X-Over edged just 1.7bp lower to 317.7bp.

On to this week, and it’s third-quarter earnings season. It will hog much of the headlines likely now – for the next couple of weeks anyway. As usual, it will be dominated by the big banks as the likes of JP Morgan, Wells, BofA, Goldmans and Citigroup to kick us off, while we have healthcare group J&J and Schlumberger also in the mix.

There is the EU summit on Thursday (15th) while the Brexit talks will continue ahead of it. Boris Johnson had previously set a deadline of the 15th for a deal in principle to be agreed – or the UK walks away. Let’s see.

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.