Credit Market Daily #45

01-November-2022

Good Morning!

The BBC have announced that “Permacrisis”  is the Collins Dictionary word of the year, it means “An extended period of instability and insecurity, especially one resulting from a series of catastrophic events.”.

And was chosen as it “sums up 2022 well”. My personal preference would have been for “Omnishambles”.

Unfortunately, I think that the financial Permacrisis of ’22 will spill into ’23

What has changed?

• “Quelle Surprise” -Lagarde walks back dovishness
• Chinese Whispers – Zero Covid Policy to end??

Lagarde more Ostritch than Owl?

Record inflation has seen Lagarde walk back her Dovish Owl statements and any kind of “pivot/pause” that would be associated with it.

Her interview is here – the main takeaway is the below quote.

“Since July we have raised interest rates by 200 basis points – the fastest increase in the history of the euro. But we are not done yet. We will decide on future policy steps meeting by meeting, each time assessing how the outlook for the economy and inflation has evolved, also considering how the measures we have taken so far are working. The longer inflation stays at such high levels, the greater the risk that it spreads throughout the economy. Consumers and companies would then also start to expect higher inflation rates in future, and that is dangerous. That is something we must avoid. And this is why we are determined to do what is necessary to bring inflation back to our 2% target.”

Christine Lagarde, Interview with Delfi, 1-Nov-22

Given how quickly reality caught up with Lagarde in the form of European CPI’s, you would think that she is likely to come across more an Ostrich with head in sand than a sage owl looking to the horizons.

This is, perhaps, uncharitable as forecasting is a tough task and the ECB cannot shirk it. Unfortunately, the ECB’s track record is not as hot as the CPI:

Euro area headline inflation vs. ECB staff projections. pic.twitter.com/d341vUBwTD

— Frederik Ducrozet (@fwred) October 31, 2022

The meeting by meeting assessment remains in place, which ING point out, will likely increase market volatility.

ING think that the ECB will be loath to let real interest rates decline into negative territory, and given inflation think the ECB “pivot” a fantasy.

ING also points out that the ECB maybe a cautionary tale for the FED ‘s and BOE’s messaging

“There are still too many risks surrounding the inflation outlook with the latest data showing that the supply side shock continues to ripple through to broader price dynamics. The upshot being that a sustainable dovish rally in market rates will have to see evidence of declining inflation first. Until then Bund yields should remain anchored above 2%.”

ING, Rates Daily.

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Chinese Whispers – quickly denied

Chinese Equities enjoyed a melt-up – the CSI 200 +3.58% and the Hang Seng +5.23% on rumours that the China was ending its zero COVID policy.

These have been denied by the government.

Looking at the Chinese PMIs ,see tweet below from Pantheon Macro, a return to normality is definitely needed if growth is to recover.

True or False, a return to normalcy in China would likely add to inflationary woes rather than reduce them.

Today’s headlines should serve as a reminder that this remains one of the bigger Macro “known un-knowns”

I will wait for better macro talking heads to come up with the deeper insight – but for now , if true, I think this would complicate the inflationary outlook rather than ease it.

Credit

High Yield

European and Sterling High Yield indices outperformed broader equities and investment grade credit yesterday up +44bps and +35bps respectively.

US high yield was weaker inline with US equities which took a pause ahead of the FED down -42bps on the day.

In terms of spread performance the Euro, GBP and USD High Yield indices moved -14bps (Z+580bps), -13bps (Z+750bps) and +8bps (Z+479) respectively.

This suggests that there is some risk appetite in cash, although the Euro and GBP indices are also playing catch up with US’ prior moves.

The Xover index actually widened 7bps on the day, under-performing cash.

This morning on the back the China “news” and Fed “pause” hopes is -16bps tighter at 537bps.

Earnings, generally, remain supportive for risk assets.

I remain skeptical of this rally, but concede there are catalysts – more nuanced Central Bank messaging about the pace of hikes as well as the potential for the US treasury to implement yield curve control.

Rates are going higher, central banks see the recession risks and don’t care. They want inflation dead. Not only that QT is happening.

We have seen how a rally in risk assets is not what the central banks want.

The rally has legs, but I think it may get cut off at the knees.

Leaders and Laggers

Ocado’s bonds are up over 2 points on news that they have secured a deal with one of South Korea’s largest retail groups.

Investment Grade

Investment grade had a soft day yesterday driven by rates.

The European, Sterling and High Yield Indices were down -17bps, -49bps and -28bps respectively in total return terms.

Long duration , high rated and low coupon bonds underperforming.

In spread terms, the Euro, GBP and USD, investment grade indices were -2bps (z+220), +0ps (Z+228) and +0bps (Z+158).

In terms of new issuance the Honeywell (A2/A/A) priced €1bn of 12-year debt at MS +125, 25bps tighter than initial price talk.

Bloomberg report this morning that 80.9% of corporate (FIG and Non Financial) Issuance or 1,117 of tranches issued in ’22 are trading wider than launch.

The new Issuance premium is usually a great source of performance – clearly the later deals of ’22 are coming at much more attractive levels.

I will aim put together an analysis of performance this week.

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Rates

Rates in Europe and the UK were wider yesterday with the US tighter on FED pause hopes.

This morning, European and UK rates are rallying (-10bps across the curves) after the RBA announced a “dovish” hike (there’s that oxymoron again) of just 25bps.

This adds to the meme of a Central Bank’s “pausing”.

I can get my head round a natural slowing of hikes as growth slows, but have yet to see anything that would warrant a “pause”.

The 10-year Treasury, Gilt and Bund yield 395bps, 346bps and 205bps respectively.

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Equities

Equities are opening up strongly in Europe and the UK driven by hopium.

Let’s see where we are post FED/ BoE

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Today’s Events

Eco Data

UK manufacturing PMI came in at 46.2, vs 45.8 expected and 45.8 previously. UK housing hit the headlines down -0.9% MoM, the worst post the pandemic.

Today’s Reporting

Catalent

Cesar Entertainment

FMC

Gartner

Genworth

OI

UPC

Vodafone Ziggo

What Has Caught Our Eye

FT:”UK companies pay heavy price in creaking bond market”

This article from the FT looks at the recent Northumbrian Water GBP new issue which broke the drought in the sterling primary market last week.

The FT highlight the cost of getting a deal done something we regularly point to – with Northumbrian Water refinancing at a 6.585% coupon up from the 2.375% it secured in 2017.

Aside from the dearth of issuance – the piece also points to the flight to quality within the GBP corporate bond market with investors shying away from the High yield component of the market with a focus on quality.

Worth a read

“If the upshot of austerity is a longer recession in the UK, as a credit investor you want the quality debt, not high-yielding debt,” said Barnaby Martin, a credit strategist at Bank of America.

UK companies pay heavy price in creaking bond market, 1-Nov-22

Performance

High Yield

Investment Grade

Rates

Equities