The recovery of the global credit market has yet to find solid footing! Société Générale warns: The US midterm elections, employment data, and corporate earnings will bring a new round of challenges

According to news from Zhitong Finance APP, Societe Generale stated that investors are about to face a week packed with political and economic events. The U.S. midterm elections on Tuesday, the U.S. non-farm payrolls report released on Friday, and a new round of corporate earnings reports could all disrupt the hard-won initial recovery momentum in the global credit markets.

In a research report released on October 30, Societe Generale strategist Juan Esteban Valencia said that if government bond yields stabilize and geopolitical tensions do not escalate further, the corporate bond market is likely to continue its recent rally.

After weeks of selling pressure, the corporate bond market has rebounded. Last week, European investment-grade credit spreads narrowed by about 6 basis points to 116 basis points above the benchmark yield, while U.S. investment-grade credit spreads narrowed by 2 basis points to 105 basis points. The high-yield bond market also experienced a recovery, with U.S. high-yield bond spreads narrowing by 13 basis points to 341 basis points.

However, Societe Generale warns that the fundamental factors causing market instability have not disappeared. Oil prices remain high due to the Middle East conflict. For most of the previous week, Brent crude futures remained above $115 per barrel. For bond investors, more pressing concerns may be the volatility in sovereign bond markets. Over the past two months, volatility in sovereign bond markets has driven a widening in corporate credit spreads.

Further escalation of geopolitical tensions or significant fluctuations in government bond yields could reverse the recent improvement in credit markets. Societe Generale expects credit spreads to gradually narrow by the end of the year, but no longer expects the market to fully return to previously forecast levels. Moreover, the bank also expects credit spreads to face renewed pressure in the first half of 2027.

Societe Generale favors dollar-denominated investment-grade bonds over euro-denominated investment-grade bonds; at the same time, the bank prefers European investment-grade debt compared to high-yield securities. Preferred sectors include financials, utilities, real estate, and corporate hybrids. Meanwhile, the bank expects that corporate bond issuance will remain active in November, with about 20 to 25 billion euros of new bonds expected to be issued in the coming weeks.

For investors, the core issue is whether economic resilience and solid corporate profits can continue to support a recovery in credit markets, despite ongoing political uncertainty, high energy prices, and the possibility of further rate hikes.

Societe Generale expects that this week's political developments, economic data releases, and corporate earnings reports will overall provide support for the credit market, or at least are unlikely to lead to a significant deterioration in market conditions.

The U.S. midterm elections held on November 3 are a major source of market uncertainty. There are market concerns regarding future directions of U.S. economic and fiscal policies due to possible changes in control of Congress. Societe Generale indicates that if the Democrats regain control of Congress, there could be significant changes to U.S. policy.

The U.S. October non-farm payroll report to be released on Friday is another key event closely watched by the market, especially after the Federal Reserve decided last week to keep borrowing costs unchanged. Investors will use the report to gauge future interest rate trends. According to the market consensus cited by Societe Generale, the U.S. is expected to add only 55,000 non-farm jobs in October, higher than September's 29,000; the unemployment rate is expected to remain at 4.2%. Moreover, the ADP private sector employment report released on Wednesday is expected to show a 70,000 increase in jobs, below September's 90,000.

This week's economic calendar also includes Monday's manufacturing activity data, Tuesday's September job openings data, and Wednesday's services-related data. These data could influence market expectations for Federal Reserve policy. Societe Generale's economists expect the Fed to raise rates again by March 2027 and expect the European Central Bank to hike rates once or twice more.

Corporate earnings reports will provide another important test of investor confidence. Societe Generale expects the coming week to be the second busiest for earnings releases in the third-quarter earnings season for both the U.S. and Europe. As of last Friday, it was estimated that about 86% of U.S. companies and over 70% of European companies would have already reported their quarterly results.

Despite rising borrowing costs and continued geopolitical uncertainty, overall corporate profitability remains robust, providing support for both investment-grade and high-yield bonds. Societe Generale expects the next round of earnings reports to further solidify this trend.