5th November 2020

🗞️ It ain’t done and dusted just yet

iTraxx Main

58bp, -3bp

iTraxx X-Over

339.7bp, -9.4bp

🇩🇪 10 Yr Bund

-0.64%, -2bp

iBoxx Corp IG

B+125bp, -1bp

iBoxx Corp HY

B+469bp, -5bp

🇺🇸 10 Yr US T-Bond

0.78%, -10bp

🇬🇧 FTSE 100

5,883, +96

🇩🇪 DAX

12,324, +235

🇺🇸 S&P 500

3,443, +74

Path to victory still there, for both…

According to the polls and the popular press (read: establishment), this what we should have written. “A substantial two-day pre-election rally, and the market was pricing perfection. For once, it was right. A Biden victory looked nailed on, but the Democrats sweeping into control of both houses (Congress and Senate) is what will drive them on some more. That stimulus package is coming. The markets will love it.”

Instead, we are left incredulous at what has been a gargantuan and resilient effort, David-like from Trump against the Goliath of the establishment/’social’ media which is potentially on the brink of being defeated. All very Brexit-like.

As at the time of writing, President Trump is still in the game. And the blue-wave trade might be on the brink of unravelling – not that we would have thought judging by the euphoric Election Day rally.

We could still get a non-contestable result overnight, but if we don’t then apprehension will heighten and nerves will further be frayed. It looks also that if the Democrats win the Presidency, they won’t have control of both houses. So the stimulus package horse-trading will commence as the Democrats will have lost a lot of leverage. Markets don’t like uncertainty, so it becomes difficult to anticipate any significant rally once this relief-like trade is over. We think.

Still, up until now, we have had a good rally these opening few sessions of November. Equities, especially in the US are roaring higher, although we did have considerable uncertainty in Wednesday’s session in Europe – before they added up to 2%. As at the time of writing, US markets were up to 4.3% higher with the Nasdaq relief trade leading the way.

Rates are better bid with the US 10-year Treasury yield moving lower to 0.78% (-10bp), the Bund was higher in price too, to yield -0.64% (-2bp). Ahead of the MPC on Thursday, Gilts were better bid, the yield on the 10-year at 0.21% (-4bp).

In credit, primary has been closed for the best part of a week. We don’t see much sign of a desperate borrower out there, either, fortunately. No one is really going to test the market right now. There really shouldn’t be a need to anyway, given the plethora of deals we have had in this record-breaking year in IG and (soon to follow) HY markets.

The US election had been well-flagged as a possible sticking point for the markets while the coronavirus pandemic has also introduced enough uncertainty to make sure borrowers printed when they could.

Secondary has been in good form, too. Spreads have been holding firm for the best part of three months. IG spreads might have hit the top of their 3-month range in the face of that big equity sell-off last week, but they’re edging tighter again, the iBoxx cash index now at B+125bp (-1bp in the session).

The high yield market to be feeling some heat. The coronavirus second wave will see a dip in European growth through Q4 and that should heap further pressure on the revenues of these highly indebted countries. And we ought to expect a hit (rise) in the default rate. However, high yield spread markets are holding firm. The iBoxx index here also hit the top end of its recent ranges, but have recovered smartly this week, now at B+469bp (-5bp).

There were some economic data releases in the day. US private employment growth for October slowed, as shown by the ADP report (+365k additions, well below the 650k consensus), the services PMI beat but the manufacturing PMI missed very slightly.

So what next? More sitting and waiting. And more screen watching with little by way of business likely to get done into the uncertainty. It’s time for the FOMC on Thursday anyway, and that will serve as a useful distraction even if the Fed will see fit to sit tight as well. As for the BoE, we wouldn’t think that there will be a rate move (not yet). However, we would think that they must be announcing a £100bn QE package as the least of whatever policy response they put in place.

In all, we think the markets have done quite well this year. The stinker has been the FTSE. We have had to cope with unprecedented economic upheaval in the face of the coronavirus pandemic, an extraordinary US election and, to a lesser extent, the uncertainty thrown up by the Brexit-trade agreement – or lack of one.

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.