The Zhitong Finance App learned that Société Générale said that investors are about to enter a week of intense political and economic events. The US midterm elections to be held on Tuesday, the US non-farm payrolls report released on Friday, and a new round of corporate earnings may disrupt the initial hard-won recovery momentum in the global credit market.
In a research report released on October 30, Société Générale strategist Juan Esteban Valencia said that if government bond yields stabilize and geopolitical tension does not further escalate, the corporate bond market is expected to continue its recent gains.
The corporate bond market rebounded after weeks of selling pressure. Last week, European investment-grade credit spreads narrowed by about 6 basis points, to a level higher than the benchmark yield of 116 basis points; US investment-grade credit spreads narrowed by 2 basis points to 105 basis points. The high-yield bond market also rebounded, and the spread on US high-yield bonds narrowed by 13 basis points to 341 basis points.
However, Société Générale warned that the underlying factors leading to market instability have not disappeared. Due to the Middle East conflict, oil prices are still high. For most of the previous week, Brent crude oil futures were above $115 per barrel. For bond investors, the more pressing concern may be the volatility of the sovereign bond market. Over the past two months, fluctuations in the sovereign bond market have driven corporate credit spreads to widen.
Another escalation of geopolitical tension, or large fluctuations in government bond yields, could reverse recent improvements in the credit market. Société Générale expects that credit spreads will gradually narrow before the end of the year, but it no longer expects the market to fully recover to the level previously predicted. Furthermore, the bank also anticipates that credit spreads will once again be under pressure in the first half of 2027.
Société Générale favors investment grade bonds denominated in US dollars rather than investment grade bonds denominated in Euros; at the same time, compared to high-yield securities, the bank is more optimistic about European investment grade debt. The bank's preferred industries include finance, utilities, real estate, and corporate hybrid securities. Meanwhile, the bank expects that corporate bond issuance activities will remain active in November, and new bonds of about 20 billion to 25 billion euros are expected to be issued in the next few weeks.
For investors, the core question is: can economic resilience and steady corporate profits continue to support the recovery of the credit market despite political uncertainty, high energy prices, and the possibility of further interest rate hikes?
Société Générale expects that this week's political developments, economic data releases, and corporate financial reports as a whole will support the credit market, and are at least unlikely to cause a sharp deterioration in market conditions.
The US midterm elections held on November 3 are a major source of market uncertainty. The possibility of a change in congressional control has raised concerns in the market about the future direction of US economic policy and fiscal policy. Société Générale said that if the Democratic Party takes back control of the National Assembly, there may be major changes in US policy.
The US non-farm payrolls report for October released on Friday will be another important event that the market will pay close attention to. Especially after the Federal Reserve decided to keep borrowing costs unchanged last week, investors will use this to evaluate future interest rate trends. According to consistent market expectations quoted by Société Générale, the number of non-farm payrolls in the US is expected to increase by only 55,000 in October, up from 29,000 in September; the unemployment rate is expected to remain at 4.2%. Furthermore, the ADP private sector employment report released on Wednesday is expected to show an increase of 70,000 in employment, down from 90,000 in September.
This week's economic schedule also includes manufacturing activity data released on Monday, September job vacancy data released on Tuesday, and service-related data released on Wednesday. These data may affect the market's expectations of the Federal Reserve's policies. Economists at Société Générale expect the Federal Reserve to raise interest rates again before March 2027, while the ECB is also expected to raise interest rates once or twice.
Corporate financial reports will be another important test of investors' confidence. Société Générale expects that the upcoming week will be the second week with the most intensive earnings release in the US and Europe in the third quarter earnings season. As of last Friday, about 86% of US companies and more than 70% of European companies are expected to have announced quarterly results.
Despite rising borrowing costs and ongoing geopolitical uncertainty, the company's overall profit situation remains stable, providing support for investment-grade bonds and high-yield bonds. Société Générale expects that the next round of financial reports will further consolidate this trend.