Credit Market Daily #27 %author %

30-Sep-2022

Good Morning!

Yesterday was a relative weak day in equities and we appear to be recouping lost ground this morning with equity opening higher and Xover some 17bps tighter at 645.

Relief. Rally?

It has been an eventful week and so a pause may be what everyone is after – we have had quite a few rally and fade days of late so I am not holding my breath, but respite would be welcome.

GBP regained some of its poise – rising above pre-Kwasi Mini budget levels in Asian trading. At the time of writing, it is sitting pretty at 1.115.

Germany has announced a bumper €200bn energy aid package to cap energy prices for its citizens and business. For context, this is roughly 4.7% of German 2021 GDP similar in size to the UK’s announced mini-budget.

The German package will also be funded by borrowing with German Authorities keen to emphasize that the proceeds will solely be used to cap energy prices and re-iterating that their “debt brake”, a curb on constitutional on new debt will be reinstated next year.

This comes on the back of German CPI hitting close to all-time highs yesterday at 10.9% vs. 9.4% expected. Interestingly ( see “what caught our eye” below) Germany is introducing an outsized increase in its minimum wage.

So it is not just the UK spinning multiple plates in regard to its inflationary outlook.

source: tradingeconomics.com

Credit

High Yield

It’s the last day of September month to date the Bloomberg European, Sterling and Dollar High Yield Indices have returned -4.02%, -6.18% and -4.14% respectively, outperforming equities over the same period.

The table below summarises index Z spread performance.

USD High Yield has underperformed on the month, whilst Stirling High Yield has outperformed on a relative basis.

Euro and GBP High Yield Z spreads are similar distances from their pandemic wides whilst USD High Yield is much closer to that peak, which interestingly is the opposite in the IG space.

HY Index Spread Performance

Index	Current Spread (bps)	Pandemic Wides (bps)	% from Wides	Spread Change MTD (bps)
European High Yield	619	672	7.9%	+63
Stirling High Yield	692	749	7.6%	+48
Dollar High Yield	571	602	5.2%	+71

Source: Bloomberg

In terms of Yesterday’s performance, GBP HY underperformed returning -60bps whilst European and Dollar High Yield returned -42bps and -48bps respectively. Single Bs and CCCs continued to underperform higher quality BBs.

In spread terms, Eur, GBP and USD High Yield index Z spread moved +11bps, +16bps &+11bps respectively.

In CDS Xover ended the day 12bps wider which in the context of yesterday’s moves in equities seemed relatively muted but in line with the move seen in cash indices.

Leaders and Laggers

In terms of movers on the day troubled real estate company Adler saw its bonds drop between c.-3.7 and -4.18 on news that it had written down the value of its Consus subsidiary after the rise in interest rates triggered a slowdown in the German real estate market.

In GBP HY yesterday’s losers gained back a little whilst Mortgage provider Together’s bonds declined on the back of the well-publicised pulling of deals across the industry driven by rates volatility limiting providers’ ability to price them as well as pressure building in the securitisation market.

Not sure it's appreciated how much the UK securitisation market was wrecked by the LDI shenanigans
— Owen Sanderson (@OwenPSanderson) September 29, 2022

Dignity bonds were lower ahead of results this morning (they were weak – see feed later today for a summary).

Finally, Co-Op group reported numbers and like Morrisons showed a decline in profitability with EBIT down -61% for H1 ’22 YoY to £18mm and EBITDA down -12% to £218m YoY.

The main drivers of the decline were a 44% increase in energy and food costs. Overall revenues were flat +0.5% YoY.

Investment Grade

Month to date European, Stirling and Dollar Investment Grade cash indices have returned -4.76%, -9.27% and -5.24% respectively.

We summarise IG’s month-to-date Z spread performance below.

Looking at Z spread performance Euro IG has widened 22bps on the month – the relative outperformer but actually sits much closer to its pandemic wides than its GBP and USD peers.

This is likely a reflection of the weaker economic outlook in Europe.

USD Investment Grade looks to have held in very well 57% off its pandemic wides – this probably reflects the US’s status as the cleanest dirty economic shirt in developed markets, but does make me wonder if some form of catch-up is due especially if Q3 earnings season starts to disappoint, especially with US HY spreads much closer to pandemic wides.

IG Index Spread Performance

Index	Current Spread (bps)	Pandemic Wides (bps)	% from Wides	Spread Change MTD (bps)
European Corp. Agg	223	254	12%	+22
Stirling Corp. Agg	233	284	21%	+28
Dollar Corp. Agg	165	386	57%	+24

Source; Bloomberg

In terms of performance on the day EUR, GBP, USD IG indices returned -15bps, -56bps and -71bps respectively.

In spread terms EUR, GBP, USD IG indices Z spreads moved +3bps,+1bps, and +7bps respectively.

CDS saw the Itraxx Main widen +3bps to 138.

Rates

Yesterday saw some giveback in rates.

Bunds steepened with the 2-year 4bps on the day and the 30-year 14bps wider.

In the UK gilts in the front end and belly widened by +12-14bps, whilst the 30yr widened by +3bps as the BoE’s auctions kept the long end in check.

In the US treasury curves flattened slightly with the 2 and 5-year rates +2bps and +1.5bps respectively.

10-Year Treasuries, Gilts and Bunds Yield 377bps, 413bps and 218bps respectively.

Equities

European stocks ended the day down between -1.5% and-1.9%.

The FTSE 100 ended the day down -1.77% and the broader FTSE 250 was down -3.06%, with consumer discretionary down -6.24%

In the US the S&P 500, Dow Jones and Nasdaq were down -2.11%,-1.54% and -2.84% respectively.

Asian stocks were mixed with the Nikkei down -1.84% and Chinese stocks flattish.

At the time of writing equity futures are up around 80bps in the US, with European equities open and up by a similar amount.

Stock volatility as measured by the VIX index has picked up with the index touching 34 on Wednesday, it currently sits at c.32 having started the month at 25.

This is roughly a 25% increase on the month and compares to a +17% increase for the US fixed income volatility index MOVE over the same period.

However -the Move index is much closer to its pandemic highs of 165 vs. its current value of 148. The Vix reached c.83 in the pandemic and 81 in the GFC.

Interested to hear people’s thoughts on the disparity.

Today’s Events

Eco Data

UK Nationwide House prices had their first MoM growth at 0%, French CPI surprised to the downside 5.6% vs. 6.0% expected.

Later we have UK mortgage Approvals, Eurozone CPI and in the US, the University of Michigan Sentiment index.

Today’s Reporting

Carnival

Dignity

Frigoglass

Naviera Armas

What Has Caught Our Eye

German Inflation Busting Minimum Wage

Bloomberg reports that Germany will be introducing a minimum wage from Oct 1st of €12 Euros per hour.

That is a 22% increase since the beginning of the year and 12% in real terms.

This will be inflationary and also a meaningful increase in costs for German employers at a time their margins are already being squeezed.

The charts below show the planned business responses – interestingly there is also a strong geographical impact whereby a larger proportion of German employers pay below the new €12 minimum. Employers are looking to pass on most of the cost increase via price hikes in their products.

The IFO Article can be found here

While 18.3 percent of the companies affected are planning to reduce their employees’ average working hours, 17.6 percent are considering cutbacks in additional wage components such as special payments, bonuses, and non-cash perks. What’s more, the companies affected are inclined to curb their investments as well as their training and qualification courses (21.3 percent and 11.1 percent) rather than expand them (4.7 and 5.0 percent).
IFO Business Survey, Sep-22

Credit Market Daily #27