Credit Market Daily #3

24-Aug-2022

Afternoon! We bring you this blog post later than usual – but with no less enthusiasm.

So – bit of a weird day yesterday – Crossover flat to smalls tighter -5bps. on the day and another c.7bps tighter as I write at 543.

Interestingly, European High Yield cash was overall softer with the European indices down 0.3pts, US down 0.2pts and GBP HY up 0.14pts. Ratings wise in higher duration BB underperformed their lower rated peers in Europe.

Equity is currently trading mixed -the market seems to be in a holding pattern again -and it is a relatively light day in terms of ECO data with Durable Goods Orders (0% vs. 0.8% expected) and pending home sales the highlight of the day.

This tweet from @FXHedgers caught my eye.

Yes yes – I know laying one chart on top of another isn’t scientific but the guys at Citibank hopefully know something about stocks. – targeting 3200 on the SPX or 22.5% down side:

CITI: S. KOREA'S STOCK MARKET LEADS S&P 500 BY 4 MONTHS, S. KOREAN STOCKS MAY TEST LOWS; S&P 500 TARGET 3200 $SPX pic.twitter.com/qMg480QuvV

— FXHedge (@Fxhedgers) August 24, 2022

Gas. Gas. Gas.

What really struck me yesterday and today was the increasing social unrest we are seeing on our TVs as people protest increasing prices e.g Bangladesh, Panama. People are demanding action and it will require a crisis level response.

This chart from @JavierBlas really drills home the challenge facing governments, energy companies and consumers in Europe:

MAP OF THE DAY: Day-ahead electricity prices in Europe are eye-watering, with lots of countries setting record highs for today. Notable to see the Nordics close to €400 per MWh, and Germany at €600. Before 2020, anything above €75-100 was considered expensive| #EnergyCrisis pic.twitter.com/RyTrbJ4Mxl

— Javier Blas (@JavierBlas) August 23, 2022

Scottish Power have suggested a £100bn plan to cap energy bills at current levels for 2 years. Ofgem is announcing its new price cap  £3,582 from £1,971. EDF’s CEO Philippe Commaret warned that half of the UK’s households may face living in fuel poverty by January.

“There’s a lot of different things they can do,” Walker said. “If they don’t, it will mean bankruptcy, job losses and further price rises for consumers.”

Richard Walker, ICELAND FOODS CEO, VIA CITY a.M.

Steering this back to credit Iceland Food’s CEO has been in the press highlighting the absence of a UK government support. Moody’s also announced that it was downgrading the companies Secured bonds from B2 to B3 based on the outlook over the next 12-18 months.

Duncan Weldon from the Value Add had an excellent post on what is going on in gas prices – his blog here. He says as an economist “We have reached the point when European gas pricing is conveying no more useful information.”. For him (and I) government intervention is inevitable:

“If energy prices stay at their current levels over the next couple of years, then government debt to GDP is heading for 120%. The only question is the route taken rather than the destination.”

Duncan weldon, Value add Blog

PMI’s tumble

Yesterday we said that PMIs would dominate and they certainly did not disappoint. In particular German PMIs stole the show with services and Manufacturing coming in at 48.2 and 47.6 in Europe. In the US the services PMI fell significantly to 44.1, and the Richmond Fed Manufacturing Index also took a dive to -8.

Its all beginning to look a bit recessionary.

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