Credit Market Daily #2

23-Aug-2022

Good Morning! Reality bit somewhat yesterday in European High Yield and Xover leaked a further 26 basis points wider to reach 550. European High Yield cash indices were down c 0.75% with similar perfomance across all ratings. Recent wides in Xover were c.626 and we are opening wider at 564:

Jackson Hole and the expectation of tough talk from the FED – inflation to be thwarted, rates to go higher and no one believing in their ability to deliver a soft landing, This has pretty much been the script ahead of any FED meeting, with relief often following the event.

The real question is – is the latest Bear Market Rally over?

In terms of perfromance equities in the US down c.2% and headlines like “DOW LOSES 600 POINTS” showed news outlets making the most of the sell off. Europe faired about the same yesterday with the DAX down 2.32% and the Eurostoxx 600 down 91bps. The FTSE was the cleanest dirty shirt down 22bps on the day.

HOW Much?

In yesterday’s CMD we provided a list of known and unknown factors that are all infliuencing the price of risk right now. Looking at fundamentals it is very hard to hang your hat on “Fed Pivot” and a return to Central Banks starting easing any time soon.

Indeed – Citi stole the limelight with headlines that it expects UK inflation to top 18%. on the back of higher energy prices Jeroen Blokland’s tweet on forecasting a fall in inflation is quite sobering:

Economists ALWAYS believe #inflation will quickly fall to 2%.

Forecasting inflation is incredibly hard!

It is impacted by demographics, supply chains, productivity, war, monetary policy, globalization, and luck

Too many factors to correctly ‘model.’

chart via @biancoresearch pic.twitter.com/NteKrq48Z8

— jeroen blokland (@jsblokland) August 21, 2022

To the Moon

And UK/European Gas prices did decide to moon yesterday – rising over 20% as if we needed reminding that winter is likely to be very expensive, at least we will appreciate that christmas jumper.  

This is the UK Nat Gas future, priced at 546p per therm. This is nearly 10x higher than it’s long term average pricing of 50p per therm:

The problem of higher nat gas prices is so pervasive and impacts both consumer and industry that government level relief in some form or another is the likely end game.

In the meantime its PMI day which means that will be Pretty Much It in terms of direction for the day – we will get an update on the economic health of Eurpe and the US, with Europe and the UK all tallied by 9.30 this morning.

Corp News

In terms of corporate news – Ford announced it is cutting 3,000 jobs as it transitions its business to compete in the era of electrification. Job cuts in general are on our watch list, and whilst Ford has a rationale outside of margin pressure, strong employment is one of the counter arguments to recession currently.

On a more positive note Renault / Stellantis announced they expect production to normalise at the end of the summer break – semi conductor chip shortage is less of an issue but still requires mornitoring.

Vodafone announced the sale of its Hungarian unit for €1.8bn – this is inline with the company’s strategy to simplify its business and focus on its core geographies

Finally Revlon is grabbing headlines in the US with its bankruptcy proceedings. The equity is a beneficiary of meme stock support has increased over 7x since the bankruptcy announcement. Revlon’s debt however is trading at distressed levels as debt holders are taking a much more sober view of the company’s prospects. The interesting thing is Equity holders are arguing that the equity does have economic value and they should be allowed a seat at the restructuring table. This article from the FT is well worth the read.

Reporting In European High Yield Today:

McLaren

Douglas

Modulaire

SNF

Nobian

CABB

B2 Holding

TAP

Credit

Equity

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