14th July 2020

🔭 Looking Beyond the Earnings Season

MARKET CLOSE:
iTraxx Main

62bp, +1bp

iTraxx X-Over

376.5bp, +8bp

🇩🇪 10 Yr Bund

-0.45%, -4bp

iBoxx Corp IG

B+149.5bp, unchanged

iBoxx Corp HY

B+518bp, +2bp

🇺🇸 10 Yr US T-Bond

0.60%, -4bp

🇬🇧 FTSE 100 5919.58, (+1.49%) 🇩🇪 DAX 12908.99, (+1.62%) 🇺🇸 S&P 500 3483.81, (+0.01%)

Autumnal riches might be out of reach…

The mood music keeps on changing. And it’s an unpredictable daily playlist. If we believed the equity markets for much of Monday, then the outlook was bright. That includes an earnings season which is going to be as bad as one might imagine it to be, but it looks like that is ‘priced in’.

On Tuesday, however, after California’s rolling back reopening plans and the ramping up in US/Sino tensions – the mood looked dimmed, before better than expected JP Morgan results assuaged the worst fears.

Generally, though, we think investors are wanting to pin their hopes on the gradual resumption of economic activity, but we need some of the stars to be aligned. So just when – incredibly – coming into view again was that S&P record high, markets jitters have taken hold.

On a good day, the rising tide lifts all boats as we might expect. Maybe Trump even wins the US election. Credit spreads move tighter. The only tightly bound market comes from the daily move in rates, which leaves them in range-bound territory (for example, UST 10-year 0.60% to 0.75%, Bund -0.40% to -0.50%).

We’ve seen the best for the moment, volume-wise, in credit primary. There’s plenty of business that can still get done through these summer weeks, we believe. However, it will now be the domain of the opportunistic IG borrower (Tennet hybrid Wednesday, for example?) and the high yield corporate sector, where for the latter the pipeline is in good shape (Carnival pricing likely Wednesday).

The economic data filtering through clearly shows some sort of recovery, which is to be expected, but the pace of it looks as if it is going to disappoint. We’re by no means knocking the ball out of the park, that is. We likely need to be doing so in order to justify the current valuations. Otherwise, further stimulus is coming towards the back-end of Q3/Q4.

As it is, the UK economy barely bounced back in May, growing by just 1.8% in the month after lockdown restrictions were eased, which was well below the 5.5% predicted. That dreadful number will cast some doubt on the potential for a V-shaped bounce back in GDP growth. Of course, other ‘recovery letters’ will now be speculated on (‘W’ being top of the list).

It wasn’t just the potential UK recovery in the doldrums, as such. The Eurozone’s industrial recovery was also in a difficult space. It might have recovered by 12.4% in May versus April, but was less than the 15% anticipated (April’s activity had dropped by over 18%). And May’s activity was down by 20.9% year on year.

And then, the earnings season. PepsiCo was in decent shape on Monday but all eyes this week are really on the big US banks. JP Morgan kicked us off reporting a 50% drop in Q2 earnings, or $1.38 per share, ahead of expectations. Loan loss charges topped $10bn and the bank warned of uncertainty ahead but the market took it all very well.

Citigroup followed with second-quarter earnings also topping expectations (fixed income revs up 68%, loan loss charges $7.8bn), while Wells Fargo disappointed with a reported net loss of $2.4bn forcing it to slash its dividend by 80%.


Who’s goading who?

Elsewhere, the UK finally announced the banning of Huawei from the roll-out of its 5G network/existing equipment removal by 2027. No doubt the Trump administration will be cock-a-hoop (an easy trade deal to follow?), and no doubt we’re going to brace for China’s inevitable reprisals.

China has been busy reacting to the sanction regimes being imposed on it. As well as imposing its own sanctions on US lawmakers in retaliation to those announced by the US on human rights abuses in Xinjiang, they were in the process of doing the same on Lockheed Martin. That came on the back of the US’ decision to approve the sale of missile parts to Taiwan.

Next up? We are quite sure that a response will be coming against the UK. One will be for the granting of rights for Hong Kong citizens to settle in the UK, and the second will be on that Huawei decision – even if the Chinese government claims that the company is not in any way connected to the Chinese government! The Chinese are burning many bridges at the moment, so we might get some refrain.

In all, we had a fairly volatile session. Equities in Europe generally ended lower but off the worst levels for the session as the US was trading 0.5% higher at our close. The FTSE was flat (weak sterling) but the Dax gave up 100 points (-0.8%).

Rates got a bid behind them, leave gate 10-year benchmark Treasury yielding 0.60% (-4bp), the Bund -0.45% (-4bp) and the Gilt 0.15% (-3bp).

In credit, the iTraxx indices edged higher as nerves generally pushed the cost of protection better bid. Main closed at 62bp (+1bp) and X-Over was 8bp higher at 376.5bp. We’ve seen touches of decompression of late with the ratio between the two up at 6.07x, up from 5.8x a couple of weeks ago.

The cash market isn’t doing much when primary is shut. We didn’t get a corporate bond print in the session, but we’re looking at a couple at least to get away on Wednesday.

The secondary cash market closed probably just better bid, for choice, although there wasn’t much activity. The IG iBoxx cash index was at B+149.5bp. The CoCo index likewise was barely moved at B+716bp while the HY market displayed the same dynamic (B+518bp, +2bp).

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.