27th October 2020

💉 Vaccine’s longevity to shape the future

iTraxx Main

58.8bp, +1.2bp

iTraxx X-Over

341.4bp, +2.3bp

🇩🇪 10 Yr Bund

-0.61%, -4bp

iBoxx Corp IG

B+121.9bp, +0.8bp

iBoxx Corp HY

B+466bp, +5bp

🇺🇸 10 Yr US T-Bond

0.78%, -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″]

So fingers crossed, belt tightened…

Rocky ride? Oh yes. The impact of the coronavirus pandemic, the near-global rising caseloads and the second wave shuttering of economies has now taken in the first big-tech group. Germany’s SAP AG warned on profits on Monday – and got battered by an unforgiving market.

There will be more to come. But we will get through it. The other side will be some kind of nirvana in comparison given the awful year we have been through, although it will be no cakewalk as we get through it.

As well as those current virus-related macro issues and associated risks – and focusing on the here and now, the next couple of weeks take in the US election where the result could be more troublesome than the build-up. Sit tight.

In credit, most will sit tight through it as suggested. We would think that adding a bit of credit protection might be prudent – given that we are so close to year-end, but we do not envisage any noticeable reduction in cash portions. Most of the market weakness (if there is any) will be taken in equities; It’s usually the first port of call in extremis, and that’s what we saw on Monday. Secondary credit spreads were only moderately weaker.

Whilst not necessarily married to positions, poor secondary market liquidity will work against trying to take some risk off the table anyway. So that will not necessarily happen. After all, rebuilding back later in secondary or primary will be fraught with risks and likely result in much disappointment (costs/allocations).

Long-lived immunity needed, or else

So the desperate hope of a vaccine – Upbeat reports come from the Oxford University/AstraZeneca one which has triggered a positive immune response.  It can’t come soon enough. Unfortunately, other reports suggest that virus immunity fades within months (meaning booster jabs would be required). We could get lucky and one-shot does it. For now, it’s not going away, we’re going need to live with it.

As if we needed reminding how the coronavirus is impacting all areas of macro and society, it was reported that Spanish youth unemployment had risen to over 40% amongst the under 25s, and to over 16% overall. The country’s GDP is going to be hit just about the hardest of all the European nations this year, with the government looking for a parliamentary agreement that would allow them to extend lockdown for up to 6 months if necessary.

We’re talking ourselves into thinking that the ECB is going to have to act before year-end. And they must be looking in terms of announcing something on Thursday. Expanding the current purchase programmes (size and longevity) might underwhelm.

At least markets didn’t fall out of bed. It helped that US core durable goods orders for September at +0.8% comfortably exceeded expectations of 0.4%. US markets were flattish fort he most part.

Equities in Europe were in the red, though, with other markets underperforming versus the Dax and FTSE which both still lost around 1%. However, Germany’s largest corporate (by market capitalisation), SAP, wasn’t the worst performer (was actually up a touch after a 20%+ fall on Monday). Tech and Pharma seemed to be holding up well. And Bitcoin continued to rally.

Rates were better bid with the 10-year Bund yield back down at -0.61% (-4bp), the Gilt in the same maturity yielding 0.23% (also -4bp) and the Treasury yield back below 0.80%.

On the earnings front, 3M beat, drugs group Merck raised full-year sales guidance but lowered earnings and Pfizer tightened full-year guidance. Eli Lily had earlier lowered its guidance for 2020as drug prices declined and R&D spend increased. Q3 wasn’t kind to Caterpillar, the framing machinery bellwether seeing a crop in operating profit of 51% with revenues down by 23%, year on year.

In Europe, Novartis upgraded its full-year outlook, Santander returned to profit and HSBC was all the rage after suggesting it could restart paying dividends.

Unsurprisingly, credit primary had another quiet session with the screens mainly populated by SSA offerings. After Michelin’s trio of deals on Monday (€1.5bn combined), Spain’s Enagas followed up with a 12-year no grow for €500m offering priced at midswaps+60bp (-20bp versus IPT, books €1.3bn), and was the sole IG non-financial borrower in the session.

In senior bank supply, UBS issued €1.5bn of an 8NC7 structure at midswaps+77bp (-23bp versus IPT, €3.1bn books) and Barclays went for a green deal, issuing £400m at G+175bp (books £2.5bn+, -25bp versus IPT).

As for credit index, the iTraxx Main synthetic complex edged to 58.8bp (+1.2bp) and X-Over rose to 341.4bp (+2.3bp). In the cash market, there wasn’t too much happening and the iBoxx IG index closed at B+121.9bp (+0.8bp) with the HY index at B+466p (+5bp).

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.