6th January 2021

♠️ New Kid in Town Holds All the Aces

iTraxx Main

47.4bp, -1.2bp

iTraxx X-Over

246.4bp, -7bp

🇩🇪 10 Yr Bund

-0.55%, +3bp

iBoxx Corp IG

B+98.4bp, -1.5bp

iBoxx Corp HY

B+349.5bp, -5bp

🇺🇸 10 Yr US T-Bond

1.05%, +9bp

🇬🇧 FTSE 100

6840, +228

🇩🇪 DAX

13886, +235

🇺🇸 S&P 500

3781, +55

Balance of political power shifts…

The Democrats completed a clean sweep of Congress, giving the Biden administration more control of government and the direction of policy than the Obama administration ever had. Trump will eventually be on his way – somewhere. The dollar printing presses are about to kick into the highest gear. The dollar will come under pressure. Market rates are going up, and most likely quite sharply, in the US.

However, a good bid for equities will be sustained as economic growth dynamics feed into an upbeat medium-term macro narrative. Inflation will possibly – eventually – take hold (but not spoil any party yet). Bitcoin has much potential to rally (store of value and all that). Corporate bond spreads are going significantly tighter.

Some of that will be happening now, but we will need for the dust to settle with some immediate focus shifting to Friday’s non-farm payrolls report. There is a high probability that the next couple of weeks ahead of the inauguration are likely going to be volatile amid much noise likely to be generated by the exiting Trump.

But investors might also fret on how any roll-back of business-friendly (tax) policies might impact investment and growth. The Biden administration has the small issue of how to handle the China relationship. We will find out whether Trump’s previous/current actions really represent some sort of cross-party ‘agreement’. Mass arrests in Hong Kong, as the Chinese authorities target activists under the draconian anti-pro-democracy laws, will be a concern.

However, the prospect for a sharp recovery in activity and even more liquidity pumped into the market will serve to boost valuations in risk assets. That big fiscal shot in the arm should win out through 2021.

Green shoots, exuberance… hope

The service sector PMIs across Europe painted mixed picture but generally showed a moderate slowdown in activity in December. However, it seems that business expectations were more optimistic and allied with the prospect of big US stimulus likely provided a boost in investor sentiment.

It helped that later Maersk reported that demand for shipping containers (rates) had not dimmed as a result of the pandemic, suggesting that consumer consumption remains at elevated levels. However, the result of the private ADP payrolls report doesn’t auger well for the big payroll one on Friday. US private payrolls decreased by 123k in December, against expectations of a 75k gain.

European equities, though,  were in the ascendancy and once again the FTSE was leading the charge – by some margin. Some of it must be due to last year’s underperformance leaving this index now in catch-up mode following that Brexit trade agreement. However, most of it is due to the particular composition of the index where constituent corporates are export-heavy businesses (commodities a big plus). Whatever, the index is roaring ahead and is up by over 6% already this opening week.

European equities were comfortably residing in the black in the midweek session, adding up to 1.8%, with the FTSE adding even more (3.5%). In the US, they’re going to be fretting about what the Georgia Senate result may ultimately mean, and the policy unease (as mentioned above) that might come with it. The tech sector could be in for some serious scrutiny, for example.

US equities reflected that with the S&P and Dow up strongly (well over 1% higher, as at the European close) while the Nasdaq bought up the rear. The rally also saw the S&P and Dow indices (31,000 incredibly) record new highs in the process, as at the time of writing.

In rates, we had a modest back-up in European markets with the 10-year Gilt yield rising to 0.25% (+4bp), and the Bund yield in the same maturity adding 3bp to -0.55%. There was more of a tumble in the US, which saw the Treasury yield zip past 1% to 1.05% (+9bp) – the highest since Q1 2020.

As for credit, we drew a blank in euro-denominated corporate primary market issuance. However, following Wessex Water’s non-financial sterling deal on Tuesday, BNPP opened the sterling senior market with £1bn of a 10-year senior non-preferred issue at G+105bp.

The cash market in secondary was quiet but naturally squeezed in the face of that equity market rally. There’s much more to come. The iBoxx IG index tightened by 1.5bp to B+98.5bp, the AT1 index just 4bp tighter at B+440bp and the sterling IG index at G+118.7bp (-1.4bp).

The euro-denominated high yield iBoxx index closed at B+349.5bp (-5bp) and that compression between high and low beta spread risk is underway. The synthetic indices were only slightly tighter – curiously, with iTraxx Main lower at 47.4bp (-1.2bp) and X-Over 7bp lower at 246.4bp.

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.