1st November 2020

🇺🇸 Over to you, Mr President

iTraxx Main

65bp, +0.4bp

iTraxx X-Over

366bp, -1.5bp

🇩🇪 10 Yr Bund

-0.63%, unchanged

iBoxx Corp IG

B+128bp, +2bp

iBoxx Corp HY

B+490bp, +2.5bp

🇺🇸 10 Yr US T-Bond

0.87%, +2bp

🇬🇧 FTSE 100

5,577.27, -0.08%

🇩🇪 DAX

11,556.48, -0.36%

🇺🇸 S&P 500

3,269.96, -1.21%

The US election, what else…

Sit back and watch. Maybe go over October’s dire performance while it all unfolds over the next couple of days. October was grim as the second virus wave sweeps through Europe, creating a new epicentre in its wake. November holds no macro upside for the region. That second wave is also beginning to take hold in the US, with only parts of Asia managing to control a fresh, ravaging outbreak. US GDP bounced back in record-breaking fashion in Q3, and this final quarter should also be positive. However, Q4 macro looks dead in the water in Europe.

It all means that we have a difficult picture to entertain us in November. The Eurozone is on the edge of a systemic financial crisis and, if it starts, it will drag every other global regional into one. The ECB will do what the ECB does best – buy more bonds and finance fiscal deficits, extend cheaper liquidity to banks – and hope. It doesn’t feel like it will be enough.

The widget makers are as close to the edge as they can be. Saved by reduced (re)financing costs previously, they now need top line growth;  i.e. Revenue. Lockdowns, though, are likely through most of Q4 and quite possibly through most of Q1 2021 as well. A workable vaccine comes in Q2, if we are lucky. Financial markets will need to hang on until then.

The corporate bond default will pop higher than the currently envisaged peak of between 6 – 7%. That’s OK, markets can live with that (was 13% in 2009). And we can recover strongly once we head back towards a semblance of normality. So central banks will have another go at kitchen sinking it – if only to keep everything ticking over. And that’s about the best that corporate bond investors can hope for as well.

Equities get a good kicking in October

After a good recovery in Q3 which even saw the S&P achieve a fresh record high, it’s been a poor end to October. Despite that, with several 1%+ down days for equities, the S&P is still up for the year to end October – by just 1.2%. That’s courtesy of tech stocks littering the index. The Dow though has suffered and is now 7% lower for the first 10 months of 2020.

In Europe, the FTSE has retained its place as the worst-performing index, down by 26% in the year to end October. The €Stoxx50 index is 21% lower in the same period and the Dax has returned -12.8%. Where any of these markets head over the November/December period is anyone’s guess, depending largely on how bleak the winter months handle the coronavirus pandemic.

The fun and games have been in equities. Because credit markets have until now held up quite well. Rates in Europe have been better bid in the main part (10-year Bund now at -0.63%) and that has propped up returns. Euro-area sovereign returns are up at 4.8% for the year to end October.

The corporate sterling bond market is out in front, the longer duration index up at 4.96%. Euro-denominated IG returns have actually improved to +1.5% for the year to date, with spreads 2bp tighter in October (+24bp Jan to Oct). Non-financials are up 1.9% and financials +0.9% in the opening 10 months of 2020.

The high yield market likewise has held relatively steady, but that might change soon. For the year to end October, returns are at -2.9% (versus -3.2% in the year to end Sept) and spreads only edged 5bp wider in October but are still 145bp this year so far.

Tick tock

Credit closed out October with a couple of HY issues taking the monthly total to €12bn which was the third-best month of the year deal volume. For the year to date, we moved closer to the record, up now at €74.9bn and now just €1.5bn shy of the record for last year. We would think that, even with more volatile markets, we can get the deals away in November for that record.

As for IG markets, a lower than anticipated €20.7bn was issued in October, but it has been a record year already for issuance with €341bn printed in the first 10 months. The ECB bid has helped the record prints, but inflows into credit funds have been excellent all year, serving to help corporates get their funding away quite easily. With deals performing in most cases, it has helped retain confidence in the market. Another €20bn – €30bn is possible between now and year end.

US markets closed off the session lows on Friday. We can expect a lot of nervousness this week and most likely weakness. Only a definitive election result will assuage markets’ worst fears. We would think that the markets are betting, rather hoping, on a blue wave sweeping both houses and then a substantial reflating stimulus package to boost the economy.

There’s an FOMC on Thursday (nothing changes) and the BoE monetary policy committee also gets together; Expect no change here, either. The latter must signal some form of action, however, likely for December or January in the form of a resumption in QE.

It is a busy week on the data front, though. We close with non-farms on Friday, but before that, we have those central bank meetings and ISM PMIs from the US, Caixin PMIs Eurozone retail sales and German industrial data. That’s it. It’s all about the US election this week.

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.