As the US election draws near, it will be interesting to see the behaviour of the incumbent before, during and after.
Judging by the international blame game being waged to deflect from handling of the pandemic it won’t be elegant and, to be fair to China, they are trying hard to behave like the grown up in the room. Despite the ineptitude displayed regarding crisis management, there is still plenty of confidence that it will be a relatively short timeline for the US to return to pre-crisis levels of activity, certainly nothing seems to dissuade US equity indices. Tech continues to lead the charge and we enjoyed the stat that Apple’s market capitalisation has overtaken that of the FTSE.
Eurozone levels of activity also continue to improve even amid local virus resurgences and, as long as there is not a general relapse, this should continue although recent PMI’s were slightly weaker than expected. The cohesion of the EU member states remains impressive, possibly a factor that won’t work in our favour as Brexit talks resume with precious little time left for negotiation.
UK activity levels continue to rebound, with strong retail sales leading the way. Whilst further commitments to asset purchases are anticipated, the possibility of a negative rate scenario remains distant and the Bank remains confident of a quick recovery. There is plenty of gleeful reporting about how we have fared the worst out of all developed countries but let’s not forget we are a service-led economy and whilst parts of those services have been routed others have not. The Gilt market continues to function well and issuance continues apace amid good bid to cover ratios, helping our national debt levels to rise to £2 trillion, greater than our GDP for the first time since the Sixties.
Credit remains well supported and spreads are at or near post March tights. There is still strong demand for investment grade and dealer inventories are consequently low and they are not keen to short, i.e. liquidity is on the bid side. The summer lull in issuance means we haven’t seen a print of any note for a few weeks in GBP or EUR, however we anticipate the usual pick up in September. The $ market in contrast continues to issue in size (Alphabet issued a 30-year at 2%, so just 88bp over the Long bond), and high grade issuance has reached nearly $1.4 trillion, It’s not all plain sailing for issuance into high yield markets, Western Global Airlines came with a $420MM 5 year at 8.25% but only manage to price $350MM at 10.74%.