Credit Market Daily #49

7th-Nov-2022

Good Afternoon!

This week we have a UK BRC retail sales Like for Likes, UK and German CPI.

The main show is going to be in the US with their CPI on Thurs and also the US Midterms.

Stocks in Asia continue to rally on expectations of China ending its Zero-Covid policy despite headlines to the contrary.

Essentially markets are up as investors try and get ahead of the curve as they expect this “known unknown” to crystallize soon, the second thing at work is short covering from extreme levels – something we have flagged as a key support of equity moves in the west.

This video covers this mornings moves and headlines over the weekend.

Away from Asia and potential volatility from the US this week we will likely continue to see downward pressure on the front end of Gilts as markets digest the BoE’s messaging.

Outside of Macro reporting season continues and this will provide its own source of volatility.

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Credit

High Yield

Faurecia, the Automotive parts manufacturer is in the market with a 3.5 Year Non call 2 Year sustainability linked €400m issue.

The deal is interesting as it is benchmark size and the duration much shorter than a normal 5 Year Non call 2 Year issue. The company is Ba2/BB/BB+ rated all negative outlook so relatively safe, albeit cyclical.

It will be interesting to see how it performs and whether we see the bond market open up.

High Yield outperformed on Friday Xover moving -18bps on the day to 533, and its is currently around 516 outperforming stocks and closing the basis with cash .

In cash the EUR, GBP and USD indices returned +27bps, +32bps and +11bps respectively on Friday.

Leaders and Laggers

Investment Grade

IG under-performed – driven by rates – with high rates, long duration continuing to lead the index lower.

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Rates

Rates continue to bear steepen in the UK and US, whilst Europe was generally wider across the curve.

The 10-Year Treasury, Gilt and Bund yield 413bps, 355bps and 227bps respectively

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Equities

Equities enjoyed a very strong day on Friday (see below) this morning equities are flattish +20bps to -20bps in Europe and the UK and I would expect them to be looking to the US for direction later today.

Given the Eco data this week and the US midterms I think the one thing we can agree on is increased volatility.

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Today’s Events

Today’s Reporting

Delek

Gestamp

Kosmos Energy

What Has Caught Our Eye

H.O.P.E and UK house prices dip

This heat map produced by Michael Kantro is US-centric but is a great illustration of how a recession moves through the economy and can be used as a template for elsewhere – I would love one for the UK and Europe.

Anyway – worth keeping an eye on.

#HOPE Update For November 2022 YTD
H) NAHB @ 38 (from peak of 84)
O) ISM NO @ 49 (from peak of 61)
P) 2023 EPS @ $234 (from peak of $251)
E) Claims remain low, employment slowing https://t.co/m2gCcVZSvp

— Kantro (@MichaelKantro) November 5, 2022

The Halifax House Price Index was out this morning and showed a decline in prices for the first time since Feb 2021. If your read the headlines you would think that prices have well and truly fallen off their perch e.g. the FT “UK house prices show steepest decline since February 2021“.

Don’t get me wrong – I think house prices have to suffer/ fall in ’23 and this may mark the inflection point, but the actual move -0.4% MoM still translates into a 8.3% gain YoY.

I think it safe to assume that any gains over the covid period should be given back given fiscal tightening. Th normalization of mortgage rates from recent highs is positive but it seems industry expects mortgage rates to remain elevated.

“Last week the Bank of England increased its policy rate to 3 per cent, the highest since 2008 and mortgage rates are rising along it. Markets are pricing in that rates will rise further to more than 4.5 per cent by next summer.

As a result, the real estate company Savills forecasts house prices will fall 10 per cent next year”.

Financial Times, 7th November

UK Terminal Rate expectations being lowered

I think we will see more of this “HSBC cuts UK terminal rate forecast to 3.75% from 4.25%“

“Whether or not the BoE is ultimately proved right, less tightening is likely in the near term,” HSBC analysts said in a note.

“Previously, the bank had forecast increases of 50bps in December, then a further 50bps in February and then 25bps in March, which would have taken Bank Rate to 4.25%.”

Reuters, 4th November

Tweets and Charts –

Performance

High Yield

Investment Grade

Rates

Equities