The current catalysts in the market place are economic data, the US election and the virus. Next week, we will have several economic data releases, particularly in the US where at the end of the week we will see the all-important non-farm payrolls figures for September. In addition, in China, we will have the PMI indices for September, but it is the US where we will see a flurry of economic indicators, including housing statistics, consumer confidence indices, GDP figures (which the market expects to see an annualised drop of 31.6%) and unemployment figures.
The data is becoming increasingly crucial as the market worries about the strength of the recovery, particularly in light of recent announcements of further restrictions in the UK and France in particular. The latest data has been mixed and we hope to see more upbeat results, albeit the situation remains challenging.
Next week marks the first presidential debate in the US between Donald Trump and Joe Biden. Three debates are scheduled, the last two coming in the second half of October. We do not expect a major impact on the credit markets next week, but we would not be surprised to see volatility rise, as we get closer to Election Day, partly related to fears of less than smooth transition of power gaining some traction after President Trump’s remarks about the allegedly flawed postal voting system.
Last week assets sold off in most asset classes, but do not expect it to last. Worries about the economy hit the markets, putting credit markets under pressure, and triggering an end to a long tightening run. The markets were hit by negative sentiment, partly fuelled by concerns over the risk of further lockdowns in Europe and elsewhere, amplified by poor economic data releases on both sides of the Atlantic. However, we do not think the recent weakness is the start of a sustainable widening trend and we find comfort in the sustained appetite for new issues.
We expect the markets to stabilise quickly and see a return to a slow but constant tightening trend until the end of the year. The expected rally also likely means that credit markets are set to start 2021 at very tight levels and certainly spelling the lowest yields registered at the start of any year, if not the lowest on record ever.
New issue volumes remain healthy but demand is outstripping supply, creating a strong technical bid. Investors have cash to put to work and even large transactions are being easily absorbed, despite rising volatility elsewhere. The investment grade market is on the brink of equalling last year’s tally, but overall volumes have slowed from the record pace seen in March-July, even though demand remains just as strong.
The risks are not going away any time soon. The virus continues to circulate, and the economic recovery still has hurdles to overcome. More restrictions were announced this week, and prospects of further lockdowns with their negative impact on the recovery are on the rise. For now, the technical bid for credit remains very strong. Nevertheless, it is not infinite or invulnerable.
We continue to favour euro credit over dollar credit, as we see the former enjoying better support from governments and the central bank. We view the mini-sell off last week as an opportunity to selectively add exposures to companies that in our view are the most insulated from the adverse effect of renewed pandemic related restrictions, especially being at the doorstep of the seasonal flu, posing additional challenges to healthcare systems worldwide.
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