5th October 2020

🗞️ Noise, noise and more noise

iTraxx Main

56.6bp, -1.3bp

iTraxx X-Over

332.4bp, -7.1bp

🇩🇪 10 Yr Bund

-0.51%, +3bp

iBoxx Corp IG

B+126.2bp, -1.6bp

iBoxx Corp HY

B+465bp, -8bp

🇺🇸 10 Yr US T-Bond

0.75%, +5bp

🇬🇧 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″]

Just trying to get through 2020…

The potential for a major market upset has faded as quickly as Trump’s remarkable recovery, his erratic behaviour notwithstanding. So he will be in place and running his show until the next inauguration, at least. For now, it’s back to the US election, the election debates (this week Pence/Harris), the pandemic, vaccine developments and Brexit. All of the aforementioned would normally have a non-trivial probability of derailing markets, but they likely will not. It’s a noisy picture, but we would think that markets are probably pricing in – with all that entails (stimulus/higher market rates) – a Biden presidency.

That’s not being complacent about the ‘noise’ element. The markets are risk-off when spooked by ‘new’ events, but have habitually and consistently recovered quickly – and usually strongly – on the follow, once those risks have been assessed. That is, excess market liquidity, the promise of more to come – and pretty much guaranteed for ever (in investment terms), is keeping all manner of markets propped up.

In hindsight, sell-offs are very short term, and playing into the old cliché that they are a buying opportunity. We’ve been through the worst recession since the Great Depression, oil prices are on the floor, geopolitical risks are everywhere, and we occupy a disinflationary macro regime with growth well below long term averages.

And all the while the chaotic nature of the current US administration has been like no other – more miss than hit.  However, there have been some clear successes while it has managed huge fiscal largesse which has seemingly mitigated even worse downside risks.

Net net, we would think he current market levels are likely going to be where we are as we go into the quieter December period. We will have more up days than falls, but we are unlikely going to break out of narrow ranges for each of the markets. No collapse in equities/credit spreads. No mad dash for safe havens. Primary ticking over (already several issuance records haven been broken) and a reset for 2021 as we look back on a quite remarkable 2020.

Dusted down, off we go again

We had a bit of mixed bag in the day’s news, but generally it pointed to a modestly better tone – And the markets played into it. The service sector PMIs suggested that those countries with lower infection rates recorded higher service sector activity – namely the UK, Germany and Italy -while we saw a decline in France and Spain. That all makes sense. Later, the US non-manufacturing index was up at a perky 57.8 (56.3 forecast).

On the flip side, new car sales in the UK slumped to a 20-year September low – and the month is usually the second best one for sales. But Eurozone retail sales surged in August and beat expectations, up 4.4% month on month (-1.8% in July), while the EC’s top politician Ursula von der Leyen announced that she was in self-quarantine after being in contact with a Portuguese council member last week who subsequently tested positive for coronavirus.

Credit primary markets offered up a tentative start to the week with three corporate borrowers in the market. However, there was plenty added to the pipeline, and we can look forward to the likes of Rolls-Royce, Arkema, Primo Water, Cheplapharm Arzneimittel and Eni amongst expected to be in the market over the next few sessions.

PepsiCo took €750m in a 12-year at midswaps+55bp and a further €750m in a 30-year at midswaps+105bp

As for Monday, Heathrow Funding priced up €750m of a 5-year senior secured deal midswaps+205bp (-45bp versus IPT) with interest pitched up at €4bn. Also in IG, PepsiCo took €750m in a 12-year at midswaps+55bp and a further €750m in a 30-year at midswaps+105bp. Books were in excess of €7.5bn for the combined offering and final pricing was 30bp – 45bp inside the initial talk across the two tranches.

X-Over rated credit Schaeffler also went for a dual-tranche offering, lifting €750m in a 5-year priced to yield 2.75% (-0.5% versus IPT) and €750m in an 8-year to yield 3.375% (-37.5bp versus IPT), with IG investors making up the most part of the €4.2bn+ book.

At the close in Europe, the S&P was up almost 50 points (+1.4%) and that helped the FTSE close 0.7% higher and the Dax added 1.1%. The exuberance took in oil, with the price per barrel up by over 5% in the session.

Rates were better offered and that left the Bund in the 10-year to close at a yield of -0.51% (+3bp), while the Treasury in the same maturity rose to 0.75% (+5bp).

Credit protection cheapened a little as we might have expected in line with the improved background, with iTraxx Main at 56.6bp (-1.4bp) and X-Over protection declined by 7.1bp to 332.4bp.

Secondary cash wasn’t doing much but the positive tone allowed better marks and as such, the iBoxx IG cash index was 1.6bp tighter at B+126bp(sterling credited edged tighter too, index at G+157.2bp, -0.7bp). The AT1 index closed marked 10bp tighter at B+639bp and the HY index at B+465bp (a squeezy 8bp tighter). That wrapped up a decent day for risk markets.

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.