Credit Market Daily #10

05-Sep-22

Good Morning! In CMD #1 we likened the market to Dr Doolittle’s 2 headed Pushmi-Pullyu. Friday’s close in Europe was very different to the close in the US.

The totemic Non Farm Payrolls was initially cast as “goldilocks” – not to high, not too low, just right – economic soft landings ahoy and the Fed would take the numbers as meaning their goal was being achieved and hawkish-ness would be expected to fade over time.

Equity indices in Europe enjoyed a significant rally – the Dax +3.33%, CAC 40 +2.21%, FTSE MIB+2.91% and the FTSE +1.86%. This all happened as US stocks rallied (S&P 500 +c 0.80%).

Then the US started to fade – the S&P ended down -1.07%, the Dow Jones -1..07% and the Nasdaq down -1.31% .

Quite the ride. But not wholly unexpected – as the NFP had been given more significance than it deserved in terms of shaping the FED’s reaction function and the markets are plagued with a lack of conviction.

In credit – the Xover index squeezed 30bps tighter on the day – from 586 to 556bps – a 5% move in spread terms, c.0.9 points in price terms.

European High Yield Indices returned 0.21%, with longer duration BB’s up 0.25% as duration benefitted from a positive rates reaction to the NFP. US High yield indices returned 0.39% again with BB’s outperforming +0.44% on the day.

European Investment Grade indices were up 0.37% on the day with the belly of the curve outperforming.

The 5-7 yr sub index up 0.5% and the 7-10 yr sub index +0.64%. In the US investment grade indices ended the day +0.42% again with the “long maturity” sub index outperfroming its intermediate counterpart.

The IG Itraxx main index declined 6bps on the day to 113.

Equity futures are pointing to an unwind of Friday’s perfromance with the Pushmi-Pullyu’s tug of war continuing – Dax is down 3.3% and the FTSE is down 1.1%.

In the overall context of things we are back to where we started pre NFP.

However – higher vol will only lessen conviction, increasing downside risk.

Last week we said we saw the risk of capitulation – over the medium term the fundamental headwinds remain large enough that we stick with this view.

Nearer term , this week, there are a couple of catalysts that could be supportive – Governments are acting to offset the damage being done by energy prices. (ECB meeting aside).

Xover is opening 588 +32 – Friday never happened.

Government Support to the Fore

Reading over the weekend there were several articles pointing to manufacturing and businesses halting production, lobbying for action or expecting to close. Perhaps the largest headline was Arcelor Mittal’s decision to close 2 plants in Germany -you can see where this is headed – supply chains will come under increasing pressure.

Basically – the time for action is upon governments. A further delay is only going to exacerbate the situation.

This – clearly – is not good – however governments are responding and there is the increasing likelihood of measures being announced.

This in turn is positive as it will enable markets to asses the nature of the support, its size and provide clarity when uncertainty has been gnawing at confidence.

The German government announced a €65bn plan funded in part by a windfall tax on electricity producers to offset price increases. Finalnd and Sweden are providing emergency liquidity to their energy producers to ensure supply.

Finally in the UK we have a new Prime Minister being announced – Liz Truss stated on the BBC that she will announce a plan to tackle rising energy prices by the end of the week.

This morning’s paper’s mainly focus on the expectation she will freeze energy bills for consumers. The Express is quoted as saying the aid package could be as much as £100bn.

Europe is expected to announce a union level response to price rises this month.

So – risk off may pause/ bounce. Ultimately though all of these bailouts will need funding and will put pressure on rates.

Russia Oil and Gas

Russia announced over the weekend that it is halting gas supply through Nordstream 1. This looks to be in repsonse to the G7 plan to cap Russian oil prices and Europe also suspending its Visa agreement with Russia making it more expensive and timely for Russians to enter the EU.

The expectation is that this headline will likely support higher gas prices and be negative for sentiment. However, gazprom did putout a statement that it will increase its flows of gass through the Ukraine to Europe so it may not be as bad as first blush

Gazprom Reportedly To Increase Gas To EU Via Ukraine After Nord Stream Halt – Politico https://t.co/k4CgmrxFBo

— LiveSquawk (@LiveSquawk) September 4, 2022

Also of note is that Russia has been pressing Opec+ not to cut production – the WSJ reports that this is likely because Russia does not want any hint of slowing demand for oil to weaken its position with those nations buying its oil

“According to the people familiar with the matter, Russia’s objections to an OPEC+ production cut became clear last week at an internal OPEC+ meeting where the group’s baseline scenario showed the world’s oil supplies would be about 900,000 barrels of oil a day above demand this year and next, a potentially bearish projection for prices.”

WSJ 4th Sep “Russia Signals Opposition to OPEC+ Oil-Production Cut”

Expectations are for the production cut to go ahead which should be supportive of oil prices.

Eco Week Ahead

As mentioned we have OPEC+, we have the ECB on thursday which is likely to be a key driver of markets if they choose to hike 50bps instead of the 75bps the majority of the market is expecting.

Today we have a raft of PMI’s, Eurozone retail sales and UK new car registrations. Finally China looks to be extending lockdowns which will keep concerns about its economic slowdown in the fore.

Reporting

AnaCap

InfoPro

High Yield Credit

Investment Grade Credit

Rates

Equity

ECO