13th October 2020

🇺🇸 Whether it’s Trump or Biden (or Harris)…

iTraxx Main

51.9bp, +1.3bp

iTraxx X-Over

316.5bp, +9.5bp

🇩🇪 10 Yr Bund

-0.56%, -2bp

iBoxx Corp IG

B+121.3bp, -0.3bp

iBoxx Corp HY

B+455bp, unchanged

🇺🇸 10 Yr US T-Bond

0.73%, -4bp

🇬🇧 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″]

…the net effect on markets will be the same

Excitement or fear. They elicit a similar nervous, perhaps hesitant feeling throughout the markets. But another 2% and the S&P will see out a fresh record high. Admittedly, most of the political focus is on the US election where the polls have Biden so far in front that anything other than a win for him would represent the biggest failure in polling history – well, since the UK Brexit referendum anyway. For the markets, they have quite simply moved on, eyeing stimulus packages.

On that topic, the UK/EU trade talks are continuing this week – ahead of the EU summit on Thursday, which itself is needing to shed greater light on the region’s position. There’s only so much kicking down the road that this particular ‘can’ will take.

As we suggested in the previous commentary, US fiscal profligacy is coming. There is likely going to be a lot more pressure on rate markets. Equities, though, will push higher in the first instance and are already doing that in the US in anticipation. While near-term inflation will unlikely ratchet higher – and rage out of control, while the additional stimulus is being pumped into the markets. That will most likely be a consideration for 2022 or later.

For the moment, China looks like it is leading the way on growth (and the virus containment response) and that should help European markets establish some sort of a base-level footing for the economy. Already, September’s Chinese trade data saw both exports and imports rocket higher (9.9% and 13.2%, respectively), for example.

So 2021 should be supportive for risk markets, equities will lead but we could find that fixed income from a total return perspective might struggle. Benchmark credit investors will benefit from tightening credit spreads into upbeat macro, but higher rates would eat into performance. The default rate is set to peak in Q1 2021 and will barely rise above 5%, we think, in Europe (4% now, Moody’s).

Performance and positioning is something to think about closer to year-end when investors look at their asset allocations for 2021. There is still plenty of water to pass under the bridge before then.

Sub-investment grade rated deals dominate primary

The credit primary market might be able to take upwards of €15bn of IG non-financial issuance per week. But into the third-quarter earnings season (issuer blackout periods) and reflecting on the massive, record-breaking issuance spree witnessed already this year, it’s unlikely we are going to get anywhere near that level through this final quarter.

We had just EnBW’s 10-year on Monday for €500m which was priced at midswaps+50bp. On Tuesday, there was a higher-yielding angle to the non-financial issuance with Gazprom offering up a hybrid transaction and X-Over rated Infrastrutture Wireless Italiane’s (INWIT) also prevalent. Enel plumped for sterling (sustainable-linked issue) while a couple of senior bank deals also got away.

So, INWIT lifted €750m in an 8-year at midswaps+200bp (-40bp versus IPT) off a €3.7bn book, Gazprom took hybrid funding with €1bn in a PNC5.25 priced to yield 3.9% -47.5bp versus IPT).

Enel SpA issued that first sterling-denominated sustainable-linked issue, with £500m of a 7-year at G+100bp, garnering interest of £1.8bn and priced at G+100bp (-30bp versus IPT).

In the senior bank sector, BFCM issued €1.25bn in a long 10-year senior non-preferred at midswaps+88bp (-27bp versus IPT, books €2.8bn), and Iccrea Banca took €500m in a senior non-preferred at midswaps+275bp. Insurance group La Mondiale issued €500m of a 5.5-year subordinated Tier 3 deal at midswaps+130bp, some 55bp inside the initial price talk with books up at an impressive €5.2bn.

Also of note, Slovenia went for €1bn of 30-year funding at midswaps+50bp, while UK social housing group London and Quadrant issued £250m in an 18-year at G+140bp. Rolls Royce’s three-tranche, triple currency issue (high yield rated) will likely price on Wednesday.

News flow troubling, earnings upbeat

The rising virus second wave infections in Germany put a dampener on investors’ views on the German economy as reflected in the Zew poll of sentiment dropping to 56.1 in October, below expectations and way off September’s two-decade high of 77.9.

In the UK, unemployment rose to 4.5% in three months to August from 4.1% previously, higher than expectations. There was the political backlash on the three-tier lockdown system in the UK, while a doubling in daily infections in Italy saw the government tighten Covid rules. J&J pausing stage 3 trials of its coronavirus drug was also a blow. It is going to be a long, hard winter.

In the US, CPI for September came in at 0.2% month on month, and 1.7% year on year (versus 0.4% and 1.8% in August, respectively). Higher unemployment is keeping a lid on inflation and it’s not as if the Fed needs the nudge, but policy will remain unchanged for a good while yet. Rates were better bid on it, though, leaving the Treasury yield at 0.73% (-4bp) in the 10-year and the Bund yield edged lower too, to -0.56% (-2bp).

Despite that, European equities didn’t quite fall out of bed – but they did drop. The mood was not helped by the 0.3% decline in US equities – the latter totally understandable after the previous day’s rally. The US markets are the driving force, everything else follows.

The third-quarter earnings season kicked off in the session and it will dominate over the next week or so. JPMorgan was first up and comfortably beat estimates as trading revenues surged some 30%. The group reported higher than expected overall quarterly revenues of $29.2bn and net income of $9.4bn, as well as sharply lower loan loss provisions (just $611m in Q3 versus $10.5bn in Q2).

Citigroup likewise recorded declining loan loss provisions ($314m in Q3 versus $5.6bn in Q2) while writing down the same in bad loans ($1.9bn). Net income of $3.2bn for the quarter was way in excess of expectations. Goldman’s, Wells Fargo and BofA report on Wednesday.

The decline in stocks saw protection costs edge higher, leaving Main 1.3bp higher at 51.9bp and X-Over 9.5bp higher at 316.5bp.

Secondary isn’t going to to do much now until the end of the year, either squeezing a little or edging wider if there is a broad risk-off across markets. IG closed a touch tighter with the iBoxx cash index at B+121.3bp (-0.3bp) and the higher beta AT1 market was unchanged.

In high yield, once again we had little by way of flow & volumes and spreads closed unchanged (index at B+455bp).

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.