Credit Market Daily #15 %author %

12-Sep-2022

Good Morning!

Quite the Rally on Friday.

It is always worth asking “what has changed?”.

We have had the UK announce £150bn or 4.3% of GDP in support of consumers and businesses.
The ECB hiked 75 basis points as expected
J Powell gave a hawkish speech
Oil sold off on the expectations of weaker growth
the G-7 committed to capping Russian oil prices

Net-net, the fundamental challenges remain – slowing growth, tightening central banks (who are probably glad they have a way out of the zero interest rate trap), tight labour markets and lower earnings.

What is changing is the level of fiscal support.

If you think you have seen this movie before, you have governments are effectively “flattening the curve”, this time with energy prices, not Covid Infections.

How quickly this feeds through the system, and how much of the damage already done can be offset will be key.

Over the weekend we saw Ukraine make substantial gains in retaking land and routing Russian forces.

This is for me the largest positive catalyst for markets. Peace or a ceasefire would have an immediate impact on energy markets and would likely see prices considerably lower. We live in hope.

This week is all about inflation. Expectations are for signs of inflation rolling over – key will be measures of core inflation and the level of month-on-month growth.

The Bank of England meeting has been postponed to the 22nd of September following the Queen’s passing. This means we will have 2 central bank meetings next week.

Credit

High Yield

Friday saw the Bloomberg Barclays High Yield Indices all close higher.

European High Yield was up +30 bps, the UK up +17bps and the US +68bps. As with Thursday higher beta outperformed with single Bs and CCCs up the most.

In CDS we had a significant tightening Xover some 24bps tighter on the week to 524.

A reminder that we have the index roll on the 20th with the next series on the run series being introduced and this has a positive technical effect on spreads.

In terms of single names – the winners, as per the Markt Iboxx Indices, continue to be food retailers in GBP high yield. Mitchell’s and Butlers continued to decline as did fellow pub operator Marstons.

In Europe, lottery company Intralot rallied on what looked like news it had extended a contract. Automotive systems manufacturer Standard Profil rose following its positive investor call on Wednesday.

There is increasing talk of the primary market re-opening and if the more positive risk tone persists we may see banks testing the waters.

In the US we had crossover-rated Newell Brands Ba1/BBB-/BB+ come with a $1bn dual tranch deal split evenly across a 5 and 7-year non-call life tranches, pricing at 6.375% and 6.625% respectively. Both bonds were up c.0.5 and c.1pts according to Bloomberg trace.

Leaders and Laggers

Investment Grade

Investment grade also netted positive returns on Friday.

The Bloomberg Barclays Corporate Aggregate index in Europe returned 28bps, which compares favourably with the Euro HY index’s return.

Lower rated single As and BBBs outperformed as did the longer duration segments. Industrials and Financials outperformed Utilities.

US investment grade returned c.20bps.

In terms of new issuance in Europe, we had €1.45bn of issuance from BNP Paribas and a tiny £50m issue from Severn Trent in GBP.

Rates

Rates in Europe rallied on Friday, as did those in the UK where the moves were more broad-based across the curve.

In the US curves were slightly higher.

The 10-year US treasury yields 3.33%, the 10-year bund 1.69% and the 10-year Gilt 3.09%

Equities

Not much to say here except equities enjoyed a broad-based rally on Friday.

At the time of writing, US futures are flat to small down whilst the FTSE is up c.20bps and the DAX +64bps.

I would expect the weekend’s news out of Ukraine to be supportive today.

One thing to note and something I want to expand on tomorrow is the level of investor sentiment remains low as does positioning – this should be a supportive technical.

📌 Equity

Consolidated equity positioning is in the 8th percentile
👉 https://t.co/Lec7q10LT3

h/t @SoberLook #markets $spx #equities #investing #sp500 #spx $spy #stocks #assetallocation #stockmarket pic.twitter.com/DXrrqA1t6z
— ISABELNET (@ISABELNET_SA) September 8, 2022

Today’s Events

Eco Data

Reporting

Business Integration Partners

David Llyod

Lutech

Preem

What Has Caught Our Eye

A Metaphor for Markets

I was trying to think of a metaphor for markets right now and I remembered the video below.

It shows how important weight distribution is when loading your trailer.

When correctly loaded it is stable. When incorrectly loaded, a small nudge can cause a significant amount of wobble.

Markets are like a badly loaded trailer and have been for some time as the “everything bubble” has grown.

Central Banks are now trying to redistribute/reduce the trailer weight – whilst the car is moving.

Volatility is certainly going to be higher over the next 2 quarters in my mind.

Global Liquidity Drain

This tweet shows just how much liquidity conditions may tighten as Central banks look to reduce the trailer load:

A #liquidity projection from Central Bank statements… pic.twitter.com/mNpxwqhsbL
— CrossBorder Capital (@crossbordercap) September 11, 2022

Credit Market Daily #15