5th October 2020

🔟 It’s October – This month has history!

iTraxx Main

57.9bp, -1.2bp

iTraxx X-Over

339.4bp, -3.3bp

🇩🇪 10 Yr Bund

0.54%, unchanged

iBoxx Corp IG

B+128bp, -1bp

iBoxx Corp HY

B+473bp, unchanged

🇺🇸 10 Yr US T-Bond

0.70%, +3bp

🇬🇧 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″]

All up in the air…

The coronavirus has taken in President Trump – and immediately it was risk-off. There could be repercussions for what is already probably the most contentious US election in history, although the early news on his condition is upbeat. Nevertheless, over the next couple of weeks, it is going to be mighty difficult to spin a positive market story. Second virus waves are sweeping across the globe although they’re proving to be less deadly than the first. Still, they are possibly enough to put paid to hopes for much of an economic recovery. Everything else – and there is much to reflect on, has taken a back seat.

The weekend fill of news just about totally covered Trump’s positive Covid test. Vice President Pence is next in line to take over if the president was ever seriously incapacitated. After that, it’s Pelosi! Still, the next Trump/Biden debate ( Oct 15/Miami) shouldn’t be postponed as Trump doesn’t be in too serious a condition. However, Pence and Harris face-off in the Vice Presidential debate this week.

Those headlines will dominate this week and we can look forward to quite possibly a chaotic period ahead. Markets might now start to think much more seriously in terms of how to price in a Biden presidency.

Elsewhere, although we are grappling with the virus waves, macro recovery isn’t quite busted. Local lockdown strategies are possibly going to help limit the downside (signs of evidence of that in the UK?) and the Q4 numbers might sow some seeds of recovery after the very poor Q2. Some of the data suggested that we were recovering in Q3, although it was hard not to.

The EU and the UK have additional issues around the Brexit debate. The latest moves by the Commission to enact legal proceedings against the UK regards the Internal Markets Bill/Withdrawal Agreement will be seen as symbolic. It’s a political move of course and has no teeth in reality. It does, though, buy more time for the negotiators. With Johnson and the EU’s von der Leyen entertaining calls with each other this weekend, there will be a glimmer of hope of a deal. We ought to expect an announcement of one – by mid-November at the latest!

In the meantime, the markets are reacting as we might expect to every development and announcement. For now, it’s edgy and risk is generally better offered. That’s no surprise.

But there’s been no mad dash for safe-havens suggesting that the only bit of new news was the Trump COVID-19 development. Equities were the usual benchmark taking in the directional weakness. Credit as was sidelined and spreads actually held firm. Primary was largely unaffected and we got a couple of high yield deals away in Friday’s session.

October, a torrid month

In the markets, the S&P endured a volatile session on Friday, eventually ending 1% lower but the Nasdaq gave up over 2%. The final losses might be reflected in Monday’s open in Europe, because the FTSE managed to close 0.4% higher and the Dax was off by just 0.3% having nursed heaver losses earlier.

As we suggested earlier, there was no dash for safety, the 10-year Treasury yield closing 3bp higher at 0.70% and the Bund closing unchanged to yield 0.54% in the same maturity benchmark.

Credit index moved lower as surprisingly perhaps, the cost the protect credit declined. Better offered, Main closed 1.2bp lower at 57.9bp while X-Over protection cheapened to 339.4bp (-3.3bp).

Secondary cash didn’t do too much, and in IG was stable to perhaps better bid. The iBoxx cash index closed at B+128bp (-1bp) and this index has been marked in a range of B+122bp to B+130bp for the best part of two months. That highlights the lack of flow, volumes, event risk and investor interest to get involved in secondary where the eye has squarely been on the primary market.

In primary, we ended the week with a couple of deals, namely from Italian airports group SEA SpA which issued €300m in a 5-year maturity to yield 3.5% (books just €425m) and Centurion Bidco priced €605m of a 6NC2 structure to yield 6.125%. The secondary market closed unchanged, leaving the iBoxx index at B+473bp.

So IG non-financial primary issuance stands at an all-time record €322bn and we still have the whole of the fourth quarter to go. The pace is going to slow into the obvious heightened uncertainties that lie ahead. In the high yield market, the €900m printed on Friday took the full year to date issuance volume to €63.6bn, and is now just €13bn shy of last year’s record.

As for this week, some focus will be on the Fed and ECB minutes, while Pence and Harris debate in the Vice-presidential joust. In macro, we have Eurozone retail sales, German factory output and orders US ISM manufacturing PMI and UK monthly GDP.

There’s a fair bit to contend with, but any good news anywhere (Trump/COVID-19 developments) and the markets will see reason to push on. We doubt primary is going to affected and the window remains open for borrowers.

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.