18th October 2020

🌍 Unless The World Collapses

iTraxx Main

53.6bp, -2.8bp

iTraxx X-Over

326.9bp, -11.5bp

🇩🇪 10 Yr Bund

-0.63%, -1.5bp

iBoxx Corp IG

B+123.5bp, -0.3bp

iBoxx Corp HY

B+468bp, unchanged

🇺🇸 10 Yr US T-Bond

0.74%, unchanged

🇬🇧 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″]

Small wonder it’s tough to get excited…

According to Renault, they won’t be using a dime from the public purse. Unless the world collapses. Otherwise, we are getting used to market rallies followed by a dose of crash, bang, wallop. On those occasions, there is plenty of fear and loathing amid the excitement generated by those risk-on days.  It also means that market volatility is going to be with us for a bit.

No pre-election stimulus, no Brexit-trade agreement and increasing concerns on the coronavirus pandemic as the second wave takes hold. Equities are swinging wildly at times, rates are bid and credit somewhere in the middle – but an open primary window isn’t quite firing. And while it is increasingly looking like Trump is out – and it appears he will lose by some margin – the result has become a secondary issue.

On Friday, the game of dare went up a notch with the UK essentially pulling up the drawbridge on the trade talks, unless the EU moves in its stance. Of course, lots will be said about it having been the next move by the UK after the EU played its hand following the Summit – and threw everything back into the UK’s court. Of course, the flippant amongst us are thinking a deal is going to come – in November, maybe December. But, it just might not.

The way the European equity markets reacted, closing the week on a positive note, the market here at least appears to be anticipating a deal eventually being agreed.

Primary stumbles

We are fast coming round to the view that the primary market looks like it has worn itself out for this year. Corporate funding has had a record-breaking run aided by and feeding into the investor demand for corporate bond debt, further allowing for a disintermediation of funding to the capital markets.

In a crisis year, as such, we have record IG non-financial issuance and are about to achieve the same in the high yield market. Senior bank issuance has failed to gather any head of steam, official funding windows offering cheap liquidity and reduced lending opportunities putting paid to that.

Market volatility saw to it that there were several blank sessions last week, and we only had €4.6bn issued in the IG non-financial market, bring the year to date total to €335bn. High yield rated corporate debt issuance was up at a sprightly €3.9bn aided by a couple of X-Over names, and the year to date total to €70.2bn, just €6bn shy of the last year’s record.

We’re now not expecting the issuance volumes to change much from here. The earnings blackout period will be against it, market volatility might well be, too, as those US election jitters naturally increase. Add in the huge amount already issued and we might be heading for a quieter than usual quarter overall.

Time to sit back

US retail sales for September smashed consensus (up 1.4% in the month versus 0.2% expected and -0.3% in August) and might just provide a fillip for a rally at the beginning of this week. Mind, industrial and manufacturing production both declined in the month against expectations of a rise, and might serve to temper much of any enthusiasm from those retail sales.

After rising by up to 1%, US markets faded the gains into the close and closed unchanged. European bourses, though, managed to hang on to most of the their session gains, lifting the FTSE up 1.5% and the Dax up 1.6%. Rates were mixed with the yield on the 10-year Bund declining further to -0.63% (-1.5bp) and the Treasury in the same maturity benchmark unchanged at 0.74%.

The secondary market hasn’t been exciting. Far from it. IG cash credit was probably better bid on Friday on the back go the recovering equity markets. The iBoxx index closed marked at B+123.5bp (+2bp in the week). The high yield market closed completely unchanged, with the index at B+468bp (although +14bp in the week).

The sterling corporate market was also unchanged for the most part, but the rallying Gilt has pushed returns for the year to date to 5.3%. It’s a longer duration market and benefited form the rally in the longer end of the Gilt market versus the others, but that’s still an excellent performance.

Last week, the big banks dominated and their Q3 earnings were much more hit than miss. As for this week, and in so much that they can influence broad market confidence, we have Intel, P&G, Halliburton, Tesla, Netflix and IBM all reporting – before next week sees the likes of Amazon, Microsoft, Apple and Google report Q3 earnings.

We have the final Trump/Biden US election debate and the data focus takes in PMIs from most regions (US, Eurozone, UK and Japan), while we also get Chinese GDP for Q3 (expected 5.2% annualised) and Eurozone consumer confidence. In the meantime, the clock runs down for a stimulus relief package to be agreed before the election, although we might get the smaller $300bn coronavirus relief package through the door.

And finally, the UK’s credit rating was downgraded by Moody’s to Aa3, from Aa2. The agency cited (predictably) the coronavirus epidemic and Brexit uncertainty for sapping the UK finacial strength. We’re not sure that the rating action really matters.

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.