Market Views

GLOBAL CREDIT BULLETS | Monday 26th October 2020

US Election – Biden leads, blue wave likely.
The election is 8 days away, and our latest estimates forecast 88% probability of Biden winning and 61% chances of a Blue Wave. Our Twitter analysis revealed more negative sentiment for Trump following the final debate on Thursday night. Pennsylvania and Florida remain key states. In markets, Biden – especially in a blue wave – should be positive value trades, inflation, and non-US assets, and negative for the Dollar and Treasuries. We see more room for these trades to work.

Rates – Duration desperation.
The zero-yield environment is pushing investor to chase every basis point in traditionally “risk-free” assets. We fear this may be like picking pennies in front of the steamroller. New EU common issuance saw record demand of €233bn for -0.25% yield. For the new Italian BTP issued last week, a 5 basis point discount to the curve brought about €90bn of orders, more than 11x the amount on offer. 10y bonds now yield -0.6% in Germany, -0.3% in France, 0.8% in Italy, vs a 1-1.3% average inflation in most European countries over the past 10y. A small move up in inflation or further global fiscal stimulus would have easy time bringing “safe” government bonds down 5-10%.

China – Solid footing.
We expect recent Renminbi appreciation to continue, as three divergence trends favour China. First, the economy keeps outperforming Europe and US, both looking at leading indicator and realised data (Q3 growth, out last week, was 5% year-on-year). Second, a bottom-up approach to the pandemic is de facto preventing a second wave, as opposed to Europe. Third, China didn’t expand monetary policy vs massive global loosening. Such set of factors was worth already a 7% appreciation since May, but is well set to continue into next year, making it possible for CNH to test low 6s again. Asian equities will continue to be also strong beneficiaries of the trend.

Turkey – Instability grows.
The recent central bank meeting illustrates well why Turkish assets are bound to deteriorate despite already weak levels. The CBT missed the opportunity to hike rates on Thursday, showing excessive relax about recent lira stability. Needless to say, such stability was gone a few minutes post meeting. Large imbalances and bleeding reserves would suggest a proactive approach, while authorities stubbornly pursue a reactive/loose stance. Experiences in many emerging markets show that these vicious dynamics often lead to a realization moment once it is already too late, and we think Turkey makes no exception. An additional 20-30% depreciation and an old style BoP crisis are a matter of time, in our view.

To read more on our latest views, please see our Silver Bullet | The Anti-Bubble Portfolio or visit our Insights section.

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