Credit Market Daily #11

06-Sep-22

Good Morning!

Yesterday’s give back saw CDS indices widen first thing and then stay there.

Xover widened some 30bps on the day to 586 intra-day the range looks to have been 575-595.

Equities across Europe were down with the FTSE outperfroming on the day ending flat helped by commodities based companies Glencore leading the advance up some 4%.

Big brother is back with the US markets reopening after the Labour Day break and Futures for the region point to a 30-40 basis point gain on the day at time of writing. The Dax and FTSE futures are slightly lower down -14 and -18bps respectively.

May You Rule In Interesting Times

Liz Truss won the Conservative leadership contest as expected. “May you live in interesting times”, may not actually be a Chinese curse, but it neatly captures Liz’ predicament.

This FT article “Liz Truss will have to be great just to be good” calls for a strong response from the incoming PM if she is to successfully tackle the cost of living crisis and win public opinion.

It seems, as the article suggests, that the conservative leadership get this and Bloomberg reports this morning that Liz Truss has earmarked upto £130bn to cap household energy bills at c.£2,000 p.a. and avoid the £3,600 expected with no cap.

The devil wil be in the detail, the overall size of the relief package will clearly give some comfort to consumers.

Meanwhile the FT reports that Europe is also looking at caps on wholesale gas prices – proposals include limiting the price paid for Russian gas or country specific caps that would reflect a countries energy mix.

Macron speaking yesterday said he supports a windfall tax as well as purchasing gas at a European level.

Positive catalysts, or at least stop gaps are shaping up.

UK BRC Sales and PMIs

Early doors we have had BRC/KPMG publis their UK retail sales report for August – LfL sales remianed positive YoY but declined sequentially from 1.6% to 0.5%.

Key points from the press release:

• “While inflation in retail prices is lower than general inflation at over 10%, this still represents a significant drop in sales volumes”
• “White goods and homeware remained hardest hit, but products such as air fryers and knitwear did get a boost as thrifty consumers prepare for soaring energy bills”
• *Worryingly, August data revealed a significant fall in clothing sales – the category which has been the most robust performer this year which could signal the start of shoppers pulling back from non-essential spending.”
• “Food and drink sales volumes spent the entire month of August in negative territory, with value sales propped up by the ongoing inflationary pressures that are being steadily fed through the supply chain”
• “Our data shows that shoppers are investing more time in how they can save money by planning more and searching for value with private label options and seeking out discounts.”

August PMIs across Europe all pointed to flat or slowing growth with levels at or below 50 in both Service and Composite indices – France and Italy actually ha numbers slightly better thean survey expectations and priori readings.

Germany, however, saw its Services PMI decline to 47.7 from 48.2 sequentially vs. 48.2 expected. and its Composite PMI fell to 46.9 from 47.6 prior and 47.6 expected.

This morning German Factory orders MoM came in lower than expected for July at -1.1% vs. -0.7% expected.

Europe’s engine is definetly moving to a lower gear.

The UK’s August PMIs came in at 50.9 and 49.6 for services and composite respecively both lower than survey and prior month.

Today we have ISM and PMIs for the US.

Russia, Gas & Oil

Yesterday’s announcement by Russia that Nord Stream 1 would be closed indefinitely sent Gas prices initially 30% higher before they settled 10% higher on the day.

The Wall Street Journal’s article, here, is a good summary and they mention that Europe’s efforts to get ahead of supply issues is bearing fruit.

“Gas storage levels have risen ahead of European targets and analysts increasingly think the region will survive the winter without state-directed rationing, albeit at exorbitant costs to the economy through record prices. “

Wall Street Journal “Russia’s Nord Stream Pipeline Closure Lands Economic Blow Against Europe” 5 -Sep

Having had a google I came across this page with this infographic which gives a relatively upto date measure of Europe’s storage situation.

The good news is Europe looks to be ahead in terms of storage secured:

You have to wonder long term, once Europe is through this incredibly painful period in terms of supply, if Russia is shooting itself in the foot.

A cynic would say that cheap gas will eventually prove too tempting, but questions of resolve are not for now.

As an aside – I mentioned yesterday Gazprom had said that it would continue to supply gas through its Ukraine Pipelines, so the closure of Nord stream 1 might not be as bad as advertised (flows were already very low).

Below is a summary of existing pipelines and I plan on digging a bit deeper into what flows have been doing – but this is a start in terms of providing context:

Opec+ went with compromise announcing a small 100k bpd cut on the back of a weaker global economy and potential increase in supply from Iran.

This comes on the back of headlines that Russia was looking to keep production constant – Russia voted with the group hence my assumption of compromise.

Brent climbed initially and then ended the day lower and WTI was up 2%.

Oil was not the only commodity where growth expectations weighed heavily on prices – the FT comments this morning – “Industrial metal prices melt as global recession fears flare up“.

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