31st August 2020

🚀 US equities provide the rocket fuel

iTraxx Main


iTraxx X-Over


🇩🇪 10 Yr Bund

-0.40%, unchanged

iBoxx Corp IG

B+124.5bp, unchanged

iBoxx Corp HY

B+458bp, unchanged

🇺🇸 10 Yr US T-Bond

0.70%, -3bp

🇬🇧 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″]

A brave new world…

We are off and running proper for the year’s final run-in. The big takeaway is that it’s low rates, forever. We knew it anyway. But it is always reassuring that the Fed’s Chair effectively confirmed it last week. The ECB and BoE will follow suit. The S&P is through 3,500 while the tech-lite Dow has managed to claw itself back almost into the black for the year.

Improved corporate earnings and a greater contribution from ‘traditional industrials’ as the economy opens up suggest that the path of least resistance is for equities to push higher. There’s never a no-brainer trade, but we believe the S&P index is heading for 3,700 by year-end.

Event risk – be it geopolitical, macro or whatever, and trepidation of rising valuations will occasionally serve to check asset price inflation. In addition, US election politics will increasingly take centre stage and we could anticipate a more volatile period through October. However, we should at least feel comfortable that central bank policy isn’t going to scupper risk asset performance for a good while yet.

For now in credit, we have a clear run and credit investors are preparing for a potential deluge of deals this month. The hunt for yield has just received another boost. Primary reopened last week and the main feature was the plethora of hybrid deals – non-financial and financial which hit the screens. Cheap ‘equity’ pretty much as corporates seek to fortify balance sheets into any potential for economic uncertainty ahead. Credit spreads are going tighter while rates look range-bound.

Performance perkier across the board

European credit has fared just as well as some European equity market over the summer period. Although August was a quiet month, the rise in the S&P especially has filtered through into helping spreads squeeze throughout this period.

IG credit spreads tightened by 12bp in the month, leaving the iBoxx index at B+124.5bp and just 20bp off where they started the year. Total returns for the index in the month saw +0.2% of performance leaving IG credit now up 0.5% for the year to end July.

The late August sell-off in Gilts eroded some of the total returns performance garnered previously in the sterling corporate bond market, but this market is still well out in front, returning some .3% in the period to end August (iBoxx sterling spreads -9bp in August).

The high yield market also continues to claw back some performance, with total returns in the year to end August improving to -2.6% (to end July was -4.1%).

In between the sterling market and IG euro credit, is the Eurozone sovereign one and iBoxx total returns for this index are at +2.7% in 2020, to the period end August.

As usual though, the US markets lead especially in equities. The tech-boosted S&P has recorded its best August in decades rising by 7% in the month and is now 8.3% higher in the first 8-months of 2020. The Dow however is 0.4% lower year to end August.

Dollar weakness will serve to keep the lid on somewhat on European equity markets, but many have still managed to recover well. For example, the Dax has been on a flyer although the €Stoxx50 has lagged. Those two are now 2.3% and 12.7% lower this year to end August, respectively.

The FTSE, however, takes the wooden spoon as UK equity markets continue to struggle. The index is down by some 21% for the first 8 months of 2020, by far and away the worst-performing index of the major markets.

So as we head into September, and expectations rise, IG non-financial issuance in 2020 to date comes in at €277bn. Deal flow is the already running at a record annual run rate, and the current volume level is the third-best total for supply ever. We must be thinking in terms of €30bn of issuance on the low side and in excess of €40bn if we are in a bullish phase in September.

The same goes for the high yield market. The pandemic and subsequent global shutdown ought to have shut this market dead. It hasn’t. The €2.7bn of issuance in August is a record for that month – although it mostly was comprised of IG senior debt rated hybrid deals. Nevertheless, the deal total stands at over €53bn and just €23bn more is needed to be printed for a fresh record year for supply.

Should macro start to perk up, a vaccine is found and/or additionally supportive government schemes keep it all ticking over through the harsh winter then we have a good chance of avoiding the worst in terms of defaults. Spreads should hold steady and perhaps trend tighter (with higher equities) with knowledge that the low rate environment being with us forever keeping funds invested in the sector.

Reason enough to be positive

The UK markets were closed on Monday for the Bank Holiday and so we had a quieter session. After a bright start to the month’s final session markets fizzled out. However, the slippage in stocks will fail to dent the broader upbeat mood.

The macro news came in the expansion in the Chinese service sector which grew at a faster pace in August than expected, although the growth in manufacturing activity was a bit more subdued. Oil prices were higher with Brent at a post pandemic high while Italian GDP for Q2 just missed forecasts (-12.8% versus expectations of -12.4%, both QoQ).

For the rest of this week, the non-farm payroll report rounds off a fairly busy one on the data front, with expectations for a further 1.7m jobs being added as the economy claws its way back to normality. There are Eurozone area and US manufacturing PMIs on Tuesday along with Eurozone CPI and the region’s unemployment rate (8.0% forecast).

The Beige Book report on current US economic conditions is out on Wednesday and various Caixin PMIs greet us on Thursday. A host of services PMIs follow as well as Eurozone retail sales, and we have weekly US jobless claims before Friday’s big payrolls report.

Overall, we are set up for a positive September – we believe. There should be the traditional post-summer high level of investor enthusiasm to boot. That run-in to year-end begins now. Hopefully, we will have the benefits of a buoyant equity market which if sustained will help to prop up most other risk markets.

Already we are seeing reduced headline risks (they could easily reappear, admittedly) and the fear gauge on the virus pandemic is declining. In credit, primary will dominate and deals will be absorbed without to much fuss. Secondary spreads should continue to claw back more of the second quarter’s lost performance.

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.