23rd September 2020

🗞️ There’s life in the old dog yet

iTraxx Main

57.7bp, unchanged

iTraxx X-Over

330.6bp, +2bp

🇩🇪 10 Yr Bund

-0.50%, unchanged

iBoxx Corp IG

B+126.2bp, -0.5bp

iBoxx Corp HY

B+469bp, -2bp

🇺🇸 10 Yr US T-Bond

0.69%, +2bp

🇬🇧 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″]

But rowing back on overly bullish expectations…

Investors spent Tuesday licking their wounds and surveying the carnage of the day before – but the damage wasn’t too bad, as it turns out. That’s because on Wednesday, European markets rallied on expectations of further policy easing of some sort, as Eurozone PMIs pointed to a slowing in service sector activity in September. The bad news helped. How curious.

By all accounts, we shouldn’t be expecting too much improvement in activity through Q4. In anticipation of central bank action, we might have at least found a floor for prices.

Rates are stable to perhaps better bid again, and there is little doubt that yields are anchored here or going lower. In credit, the primary market effectively shut as secondary recoiled. And after so much was put on issuance records being broken this week, that record will have to wait until next week. That is even after we are likely going to get a 5-tranche jumbo deal today from medical device maker Medtronic.

In Europe, it is all about the virus, and partial or total lockdowns over the autumn/winter months to control its spread. However, we ought to be thinking about a vaccine for Q1 2021, at best. The data for August and early September seemed to show some economic recovery, but this last set of PMIs suggest services stalled. Manufacturing activity fared better but few are putting their hat on either being sustainable through the hard months ahead. The ECB will be in expansive form again.

In the US, the looming election is everything. There will be many choice words from Trump over the next few weeks and he won’t be taking any prisoners. The first televised debate is next week. In Trump’s sights will of course be Biden/Harris &  Xi of China, with the Democratic Party generally focused on the cities they control amid much social unrest. Despite the constitutional battles that may lie ahead, Trump continues to attempt get a new Supreme Court judge into the vacant seat before the election.

The race for The White House is hotting up.

So, there is likely NOT going to be the mother of all rallies in risk assets. Our expectation of 3,700 on the S&P isn’t going to happen this side of 2021. Equities are more likely going to play out in broad ranges, although should a vaccine be announced (most likely in the US), it will provide a short term fillip for assets to rally.

We have had a decent pullback in spreads as well. That was against the trend, but investors have been spooked by the money laundering revelations of last weekend. Markets are illiquid and spread moves tend to be exaggerated as a result. However, once they settle and start any recovery, we look for it now to be more laboured than previously anticipated.

Hopes of easier policy prop up markets

Credit primary had just a few deals to contend with, but investors will be readying their interest in the Medtronic transaction slated for Thursday. In IG non-financials, Diageo issued a dual-tranche sterling/euro offering. The borrower took €700m in an 8-year at midswaps+50bp, with books coming in at €2.2bn+ and final pricing -25bp versus the opening chatter. The sterling deal was for £400m of a 12.5-year maturity at G+115bp (-15bp versus IPT, books £950m).

The Diageo euro tranche takes the year to date total for issuance to €308bn and now leaves issuance this year at just €10bn short of 2020’s full-year level of €318bn. Medtronic’s offering will make a considerable dent in that €10bn, but the record won’t be going until – most likely – next week.

In financials, AIB Group issued €1bn of a 10.5NC5.5structure priced at midswaps+330bp, which was -30bp versus IPT with interest at around €2.4bn. And in the high yield market, Masmovil was also priced with their €720m 7NC3 notes printed to yield 4%.

The markets otherwise hid their disappointment at the generally weaker than expected PMIs in services across the board, preferring to hold on to hopes that further policy easing action isn’t far away. In addition, dollar strength gave a boost to European equities – especially the FTSEwhich is top-heavy with foreign earning companies. Nike had an excellent quarter and that fuelled hopes that other sporting goods makers would also report the same.

In the end, the FTSE closed off its best levels seen during the midweek session, dragged off them by a drop in the S&P. Still, the index closed higher by 1.2%, having been well over 2% higher earlier in the session, with the S&P 0.5% at our close. The Dax also exhibited the same levels of intraday volatility and managed to close up just 0.4% though.

In the rate market, we had a bit of a mixed bag with the 10-year benchmarks not really correlated. The US Treasury yield was up a touch at 0.69% (+2bp), the Bund was unchanged to yield -0.50% and the Gilt was yielding 0.22% (+1bp).

The indices edged a little lower for most of the session but closed better bid for choice (higher) leaving iTraxx Main at 57.8bp and X-Over at 330.6bp (+2bp).

The secondary market, having pulled back in the previous 2-3 sessions, saw some stability. There isn’t too much activity flowing through, and the Street is marking it all depending on the prevailing mood and equity market movement. Visibility is poor.

So that left the iBoxx IG cash index at B+126.2bp, just a tad tighter in the session. There was also a 11bp recovery in the AT1 index, at B+651bp at the close. The high yield market was stable, unchanged at around B+469bp.

The decks are cleared for Medtronic a well as the UK Chancellor’s UK job protection plan to replace the furlough scheme.

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.