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Q2 was a period of recovery across all asset classes, falling levels of volatility and a record amount of new issues dominated by corporate debt.
Equity markets quickly moved higher from the March lows and throughout Q2 it seemed clients were chasing equities both on the upside and downside.
Ultimately the S&P500 printed one of the best quarterly performances ever, up 20.5 per cent and at the time of writing the Nasdaq is over 10 per cent higher on the year.
Fixed income markets generally exhibited a slower recovery than equities, spreads remained elevated for April and May and really started to compress in June.
USD investment grade was resilient throughout the quarter but high yield remained choppy. It took an avalanche of new issues to really floor the market, together with support from the Federal Reserve. Once again US companies led with the default capital raising strategy of debt.
April saw the largest month ever for investment grade issuance at $288.625bn — surpassing last month’s record setting total of $256.47bn, according to IFR data. Year to date, borrowers have issued $774.82bn, well above the $419.393bn during the same period last year.
Citi said in a report that “if the proportion of new issuance between now and year-end is in line with historic averages, issuance could reach up to $1.8tn or +71.9 per cent year-over-year.”
Clients had to cross spreads to execute trades and we noticed rotations out of specific sectors and countries; we were generally sellers of LatAm credit throughout May and June.
European and UK companies that often choose to tap equities over bonds were active as stability returned. We noted names like William Hill and Aston Martin come to market to raise cash in accelerated bookbuilds. Many of these deals seemed to be on the cards for some time and, as soon as the markets allowed, banks moved quickly to execute. The equity IPO market also came back online toward the end of June and clients have started placing orders again into IPOs.
We did see a limited number of professional clients choosing to position themselves with option trades and take a short-volatility view. In general, the elevated volume levels continued to drift lower throughout Q2 as stability returned pumped by central bank cash.
No trading update for Q2 would be complete without a comment on Wirecard, a major index/DAX member going into administration is a rare event. Short term trading clients were drawn to both the debt and equity however the ultimate administration event was not foreseen by many. As soon as lawyers appointed to handle the insolvency client interest moved away from the company and speculators exited leaving the distressed funds to pick up the company’s debt.
Past performance is not a reliable indicator of future returns. Forecasts are not a reliable indicator of future returns. If the information is not listed in your base currency, then the result may increase or decrease due to currency fluctuations.
If not otherwise indicated, all graphs are sourced from Dolfin research, July 2020.
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