25th May 2020

🇭🇰 Opportunity Knocks for China

MARKET CLOSE:
iTraxx Main

80.2bp

iTraxx X-Over

478.3bp

🇩🇪 10 Yr Bund

-0.50%, unchanged

iBoxx Corp IG

B+194bp, unchanged

iBoxx Corp HY

B+634bp, -3bp

🇺🇸 10 Yr US T-Bond

0.65%, -3bp

🇬🇧 FTSE 100 6157.30, ERROR 🇩🇪 DAX 12528.18, (-0.64%) 🇺🇸 S&P 500 3130.01, (+0.45%)

Impeccable timing and opportunism amid the distraction…

China is going to take over Hong Kong in every sense of the word – and sooner, rather than later. They won’t be rowing back on the latest security legislation. That is that for Hong Kong as we knew it. The question is whether the Trump administration (and the world, in that sense) blinks despite the strong words from Pompeo. We might have to.

China’s Xi has prepared the ground for a drawn-out battle. The world is in Covid-19 disarray and China is seizing the moment. The stirrings of this geopolitical situation will have markets gripped this side of November. Market volatility is sure to follow.

The US administration can withdraw some or all the special rights the former UK colony has, which would easily and almost immediately plunge it into a financial crisis – but the knock-on effects will be felt globally. China seems prepared to take the hit, although the broader region will also be massively impacted. US stocks might have seen their best levels this side of the US election.

In the meantime, the timing appears impeccable, if not opportunistic. We can all identify with China deciding not to set a GDP forecast for 2020. It will be awful by their ‘reported’ standards, anyway. But few elsewhere (Europe, US) will be able to stomach more macro disruption which might come trying to defend Hong Kong’s freedoms. Australia is already feeling the heat, for example. It’s all in the timing.

The risk-off tone into Friday’s session threatened much more, but equity markets managed to stem much of the decline experienced in Asia markets previously. Further, Monday’s UK Bank Holiday/US Memorial Day disrupted session saw a resumption of the risk-on trend in markets that were open amid hopes of economic recovery.

In credit, we had been tightening nicely during the last week – seeing an unexpected but much welcome recovery in secondary spreads. As that trend halted, primary corporate markets also drew a blank for the second successive session. Admittedly, that’s no bad thing as it allows investors some respite, given the record pace of issuance (€200bn IG non-financial issuance) so far.


Good start to the week

So what does the week hold? We are now in the run-in to the month-end. Monthly performance will now come into view.

Having widened mid-month by 13bp iBoxx IG index spreads have fully recovered and are flat in the month, at B+194bp. That’s a surprise because the pace in primary has shown little let-up, but rising stocks have improved sentiment. The sell-off in the underlying though has seen total returns for the month to date at -0.5%.

The high yield secondary market has surprised, though. It also felt the heat of the early May weakness, the index some 20bp wider into the middle of the month, but has seen a 40bp recovery and is 20bp tighter after last week’s rally. Returns are up at 0.3% in the month to date.

Equities are in a better position, the Dax is up 4.9% this month, the FTSE +1.6% and the S&P by 1.5%. Indeed, equities got off to a bright start on Monday, and so we can expect a follow-through in other markets as we re-open proper on Tuesday. Futures are higher, suggesting that markets will re-open in the US and UK reflecting some or all of the 2.8% gain seen in the Dax.

The US-Sino situation will see much headline risk, and so we will have some associated volatility and potential weakness as events evolve. Primary markets will see corporates pick and choose their moment.

In IG primary, the non-financial issuance for the month is at €48bn – leaving it just €1bn short if the second-best month on record. We need €9bn in order to match April’s record €57bn. It’s not impossible, but we think that it might be an ask too far, given we have just four trading sessions this week.

IG Issuance for May so far

Elsewhere, we don’t particularly have a busy week on the data front. There is some Eurozone services/industrial sentiment data due and CPI, while US jobless claims data is also due (2.1m expected). We also have US durable goods orders for April (-15.5% month on month, expected) and CPI on Friday.

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.