Archive

Monthly Archives: July 2020

23rd July 2020

🌬️ Headwinds, but we’re working through them

MARKET CLOSE:
iTraxx Main

57.8bp, -0.3bp

iTraxx X-Over

339.4bp, -3.6bp

🇩🇪 10 Yr Bund

-0.48%, +1bp

iBoxx Corp IG

B+134.5bp, -1bp

iBoxx Corp HY

B+485bp, -9bp

🇺🇸 10 Yr US T-Bond

0.59%, unchanged

🇬🇧 FTSE 100

5884.65, (-0.59%)
🇩🇪 DAX

12854.66, (-0.42%)
🇺🇸 S&P 500

3426.92, (-0.40%)

We shall overcome…

In credit, there isn’t too much going on, save for a gentle squeeze taking IG spreads back to levels last seen in early March, taking in a 21bp tightening so far in July. The recovery in the high yield market is a little more circumspect – which is understandable, but with the iBoxx index now at B+485bp it is 40bp tighter this month so far. And the AT1 market, buoyed by those US bank earnings of last week, has seen index spreads tighten by 84bp this month.

Of course, it has come against the backdrop of equities managing to rally of late, managing to get to flat year to date, earlier this week. The earnings season has just about been what we might have expected, but the outlook for Q4 and recovery beyond is almost totally dependent on the path the coronavirus epidemic takes.

The economic stimulus has been applied. And the global economy is getting close to the maximum dosage. If the virus isn’t bought under control soon, it threatens to be a bleak autumn/winter. The development on the vaccine front is very encouraging though, but much still hangs in the balance. The renewed strength in the bid in rates is telling us that, with bonds rallying even as equities do.

Continue reading

16th July 2020

💧 Market Liquidity, My Friend, is Your Friend

MARKET CLOSE:
iTraxx Main

61.6bp, +0.4bp

iTraxx X-Over

367.5bp, +1bp

🇩🇪 10 Yr Bund

-0.46%, -2bp

iBoxx Corp IG

B+145bp, -1bp

iBoxx Corp HY

B+511bp, unchanged

🇺🇸 10 Yr US T-Bond

0.61%, -2bp

🇬🇧 FTSE 100

5884.65, (-0.59%)
🇩🇪 DAX

12854.66, (-0.42%)
🇺🇸 S&P 500

3426.92, (-0.40%)

Beginning to see the light…

The S&P is now dipping in and out of the black for 2020. The bank earnings season is off to a flyer, markets basking in a brighter than anticipated start to the season as the big US banks deliver. While a cautious tone persists generally on the medium-term outlook, markets are looking at the glass as being half full. We’d say, though, that the big driver for any upswing is the potential for success on Covid-19 virus vaccines. We’re just waiting for Trump to take credit for it.

Risk assets have made a good pricing recovery of late. We’ll take all that for now. Because we are all too aware that the market can reverse direction just as quickly. For instance, the charge sheet/grievances against China, already quite large, is growing and the sanctions/reprisals are taking a sinister turn. The next headline out of China in terms of a response to the UK’s Huawei decision, or some sanction against the US might be a trigger, for example.

While we wait for that, macro is beginning to show that activity has lifted itself off the floor. June was all about dusting down after several months of hibernation, July onwards ought to be about getting the dynamics of growth back into place. The first in/out of lockdown was the Chinese economy and the rebound is evident, as Q2 GDP growth of 3.2% (YoY, 11.5% QoQ) beat expectations.

Continue reading

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

5884.65, (-0.59%)
🇩🇪 DAX

12854.66, (-0.42%)
🇺🇸 S&P 500

3426.92, (-0.40%)

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%).

Continue reading

12th July 2020

💲 ‘Tis the Season

MARKET CLOSE:
iTraxx Main

63.5bp

iTraxx X-Over

376.9bp

🇩🇪 10 Yr Bund

-0.47%, +1bp

iBoxx Corp IG

B+151bp, unchanged

iBoxx Corp HY

B+521bp, +3bp

🇺🇸 10 Yr US T-Bond

0.64%, +1bp

🇬🇧 FTSE 100

5884.65, (-0.59%)
🇩🇪 DAX

12854.66, (-0.42%)
🇺🇸 S&P 500

3426.92, (-0.40%)

Earnings season, what else?…

The US banks are going to kick us off ‘proper’ on Tuesday for this Q2 earnings season with JP Morgan, Citi and Wells Fargo out of the blocks. The reported numbers generally will have been ravaged by the coronavirus-related lockdowns – and we know they won’t be good. Netflix though will likely buck and negative trend, as it reports Q2 earnings on Thursday.

We think that what the banks and corporates tell us about current trading conditions, as well as the outlook for Q3/Q4, is likely where the market focus will be.

Allied with the usual smattering of geopolitical tensions, those outlooks will likely determine the direction of equities over the near and medium term. It seems that in credit, though, the all-important corporate primary market has probably stopped functioning in the way we have been used to, through that record-breaking second quarter. Primary activity is likely going to remain light.

Continue reading

9th July 2020

🗞️ Enough is enough

MARKET CLOSE:
iTraxx Main

63.8bp, +1bp

iTraxx X-Over

375bp, +9.2bp

🇩🇪 10 Yr Bund

-0.46%, -2bp

iBoxx Corp IG

B+151bp, unchanged

iBoxx Corp HY

B+518bp, +2bp

🇺🇸 10 Yr US T-Bond

0.62%, -3bp

🇬🇧 FTSE 100

5884.65, (-0.59%)
🇩🇪 DAX

12854.66, (-0.42%)
🇺🇸 S&P 500

3426.92, (-0.40%)

Primary pace couldn’t just go on and on…

It’s not quite the cocksure market we thought it could have been. Credit primary was threatening a pre-earnings blackout-period deluge, but it hasn’t quite arrived. We are at a lower level of deal flow dynamic but ought to see €20bn or so of IG non-financial issuance (around €10bn at the moment) get away this month.

Why? China. Hong Kong. Increased geopolitical uncertainty. Virus spreading almost uncontrollably across the US. Some indigestion. And the earnings season.

Actually, they’re all the reasons primary ought still to be firing on all cyclinders. Because most of the above have the potential to derail risk markets. Arguably, there is a case for it still to be about getting cheap cash on the balance sheet, and relax into the summer months and Q4.

However, with just over 6 months of the year behind us, in excess of €270bn has been issued (equivalent to the long term annual average) and it is questionable as to how much more is needed/possible right now. We expect half of that total to be issued in the second half.

Continue reading

7th July 2020

💷 HY Strategy Portfolio: 10%+ Profit in Under 3 Months

Market Overview

It’s very early days with a mixed start to the second half, but the key takeaway is that markets can continue to move higher. Economies are generally back in business. In some cases, further policy stimulus is coming, consumer confidence and industrial sentiment are recovering, while manufacturing and service sector activity hauls itself off the floor. It’s been a deep recession but also a ‘V’ recovery to start with.

The risks are clear, though. We have an earnings season coming up which isn’t going to be a good one, virus second waves are in evidence across several jurisdictions, and the US promises a more disjointed recovery as a result. China is being a nuisance in several key areas although it has pulled back (for now) in its confrontation on the disputed border with India.

In credit specifically, however, we are in the midst of a record run-rate in IG issuance, where Q2 saw €50bn or more issued in each of the months – the first time in Eurobond history. Few treasury desks are taking chances of something more sinister later in the year.

At €268bn of IG non-financial issuance year to date, we should be past the record €318bn from last year by the end of September – en route, quite possibly, to €400bn for the full-year.

The high yield market has finally plugged into the narrative. In a 6-week period from late February and taking in the whole of March, we didn’t get a single deal. But the primary machinery has started to churn them out now, with €13bn issued in June and July off to a decent start (€3.4bn).

And the pipeline builds. Last year’s full-year record total of €76.4bn looks like being surpassed IF risk markets don’t fall out of bed between now and year-end.

So the appetite for HY paper is recovering as the overall news flow improves. Low rates ‘forever’ and the ECB’s recent increased QE-related purchases have turned the screw. There’s a subliminal message in there somewhere. The crowding-out effect (in IG) will reinvigorate that bid for higher-yielding corporate debt.

Continue reading

5th July 2020

🗞️ Plugging into the (initial V-shaped) recovery

MARKET CLOSE:
iTraxx Main

64.0bp, +0.6bp

iTraxx X-Over

372.8bp, +5.2bp

🇩🇪 10 Yr Bund

0.44%, +1bp

iBoxx Corp IG

B+153bp, unchanged

iBoxx Corp HY

B+520bp, -2bp

🇺🇸 10 Yr US T-Bond

0.67%, unchanged

🇬🇧 FTSE 100

5884.65, (-0.59%)
🇩🇪 DAX

12854.66, (-0.42%)
🇺🇸 S&P 500

3426.92, (-0.40%)

As IG primary records broken…

The bounce in economic activity (from the early 2020 Q2-lows) will likely continue with a broadly positive trend in asset prices over the summer months. We could still be looking at the potential for US stocks to rise and get close to those record highs seen in February before the year is out. Rates look anchored though. Credit spreads will tighten if equities manage that rally.

There will be stumbles and dents in market confidence en route. And it’s most likely going to come courtesy of the Q2 earnings season and virus-related lockdowns. Both have the potential to inject considerable volatility into the markets through July and August. We think the increased stirrings of global discontent against China on several fronts will only lurk in the background, for now.

Credit primary, the only market functioning in this asset class – for what feels like has been a decade or so, is still buzzing nicely. We come off the back of a record quarter of deals in IG non-financials (€50bn+ per month in Q2).

Continue reading

2nd July 2020

🗞️ Yield sells

MARKET CLOSE:
iTraxx Main

63.6bp, -2bp

iTraxx X-Over

367.6bp, -5.3bp

🇩🇪 10 Yr Bund

-0.43%, unchanged

iBoxx Corp IG

B+153.3bp, -2bp

iBoxx Corp HY

B+522bp, -1bp

🇺🇸 10 Yr US T-Bond

0.67%, unchanged

🇬🇧 FTSE 100

5884.65, (-0.59%)
🇩🇪 DAX

12854.66, (-0.42%)
🇺🇸 S&P 500

3426.92, (-0.40%)

But all eyes on China…

The second half has got off to a promising start. The data is supportive and the main driver for it. Credit primary continues to furnish us with a plethora of deals and the pipeline suggests deals to come throughout a busy July. Covid19 outbreaks and subsequent localised lockdowns are going to keep corporate treasury desks busier than usual. Still, we ought to get a short break in early August, but it’s likely an early start post holidays – perhaps in the last week of August.

The risks remain. Geopolitics are front and centre at the moment, and in the middle of it all is China. They’re picking fights with India, are in one with the US on trade, and possibly the rest of the world will get involved on trade as they pull away on their reliance and dependency on the country’s manufacturing facility. And then there is the breakdown in the rule based international order as China rubs out the joint Sino-British declaration on Hong Kong’s independence some 27-years early.

There’s plenty more as the gremlins lurk, but these are the most pressing issues at the moment.

Continue reading