Credit Market Daily #5

26-Aug-2022

Morning! So, where are we?

Xover ended the day at 529 around 10bps tighter on the day and is trading around 533 at time of writing (all price levels c. 11.30 a.m) . Cash continued to eek out a small positive perfromance with thee Euro, GBP and USD High Yield Indices all up around 24-27 basis points yesterday.

In equity – a pretty decent rally in the US into the close with S&P up 1.41%, Nadsaq up 1.67%. Europe was less enthusiastic with the early rally petering out into the close. Japan’s Nikkei was up 0.57% overnight.

This morning Europe is continuing to hover around flat to small up – FTSE +0.09%, CAC 40 -0.2% and DAX -0.30%. US Futures are small down. Dow Jones, S&P 500 and Nasdaq at -0.24%, -0.37% and -0.54% respectively.

So overall we remain in the holding pattern we have been in most of the week with the market still acting like a Pushmi-Pullyu, struggling for meaningful direction ahead of today’s Jackson Hole.

Eco data wise it is a “sentimental” day with Consumer sentiment being reported in Germany, France , Italy and the US.

So far this morning we have had the Eurozone Report in.

German numbers at new all time lows. As in never been lower.

German Consumer Confidence – Nicht So Gut

The French and Italians reported consumer confidence which bounced off their respective lows – one swallow does not make a summer but it is good none the less.

French Consumer Confidence – Bouncing from the Bottom?

PCE – Fed’s preffered Inflation indicator at 13.00, J-Pow at 15.00 GMT

The other big ECO data point outside of Sentiment is the US personal Consumption Expenditures Price index. The Fed has stated that it is being more data dependent and this is its preffered inflation measure.

Markets will be watching to see if July’s lower CPI print did indeed signal a peaking in inflation. Powell is expected to sound a hawkish note so he has quite the balancing act to perform. Lower yields and higher equity markets actually increase the Fed’s headache as they affect looser conditions when the Fed is intent on tightening.

Powell’s messaging may well have to be blunt given market expectations of a Pivot.

You can see from the below chart that the Market implies that the FED (Gold Line) is expected to hike and then start cutting in May next year.

At the same time the UK and Europe are expected to be raising rates – no pivot insight for them.

IG Credit Fundamentals Start to Soften

If you are familiar with our HY survey we run in partnership with Bloomberg intelligence then you will know Bloomberg Intelligence’s Chief European Credit Strategist Mahesh Bhimalingam. If you don’t know him and you have access to a Bloomberg Terminal then we reccomend you take a look at his work.

Mahesh published a note resonated with yesterday’s CMD where I was looking at the ratings trend in European High Yield Credit, pointing out the negative trend in rating outlooks.

Mahesh’s note “IG Index 2Q Fundamentals: Deterioration Starts” – looks at the aggregate credit metrics of the European Investment grade universe post Q2 results and overall the picture is of leverage (Net Debt to EBITDA) increasing and interest coverage falling:

With corporate leverage and coverage posting drops and financials faring worse, we believe high grade fundamentals have peaked and deterioration has started, as inflation, war and central bank tightening hit metrics. Energy and natural gas valuations are generous vs. leverage and coverage; technology spreads are meager vs. metrics.

Mahesh Bhimalingham, Bloomberg Intelligence

Here are 3 charts from his piece. Note that for financials he warns that the move is optical due to a narrowing of group mean values.

Interest Coverage:

Leverage:

Relaive Value OAS vs. Leverage:

High Yield Companies are still reporting and we won’t have similar stats until the end of September, with Q4 reporting llikely to see more companies warning/ guiding about the negative impact of a softer economy.

UK Households

Whilst the cost of living crisis is everywhere I do feel it necessary to share this slide from Asda’s Q2 update that shows the squeeze UK households are facing. Their income tracker shows that disposable income has declined by c.16.5% YoY or £45 for the average family in the UK. You can get a brief summary of their results on the feed.

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