Credit Market Daily #6

30-Aug-2022

Welcome back after the Bank Holiday Break – we hope you had a good one.

In credit, our expectation is that there could be some softness, with the UK back and playing catch up with risk assets which were softer across the board and investors digest Central Bank messaging.

No real surprises from ourside as to the outcome.

Euro HY ETFs were down around 0.78% yesterday. In terms of Benchmarks the € index ended Friday flat and the £ GBP index was down 0.71%. $ Cash saw the benchmark down 0.54% yesterday and ETF down 0.38%.

The CDX $HY CDS index spread widened from 469 on thursday, to 498 Fri and 514. Xover looks to be opening 2bps wider at 562.

Jackson Hole did not dissapoint and in 9 little minutes Powell did his best to put the expecations of a Fed Pivot to rest (near/ medium term at least).

His speech here for those interested. The tweet from Callum Thomas below is an accurate and short summary of J-Hole speech.

The tweet quote from Sven Henrich points to the credibility gap that the Fed has hither to been facing – Neel Kashkari openly saying he was not pleased with market’s reaction to the last set of Fed minutes. The Fed is not here to support markets.

Finally, this article by Mohammed El Erian speaks of the missed opportunity for Powell to deal with the Fed’s image as a central bank that has been caught napping and its policy discounted by the markets.

In sum, near term we will continue to have hawkish headlines – whether the market will undergo a long term perception change is yet to be seen.

“this may well be the least credible Fed in the markets’ estimation since the 1970s. Its quarterly forecasts have been repeatedly dismissed as fantasy and its communication is seen as lacking the consistency needed for effective policy guidance”

Mohammed El Erian, Financial Times Aug-27th

If that wasn’t enough the ECB’s Isabel Schanbel also gave markets a Hawkish reminder that tighter monetary policy will be needed also in Europe and that price stability is at the heart of what Cebtral Banks want to achieve.

Her speech, here. She ended her speech saying that Central banks would need to act to prevent the “Great Moderation” of the last 2 decades becoming the “Great Volatility” a period of painful, but temporary interruptions.

Unsurprisingly – stocks in Europe and the US were weak on Friday and Monday. The S&P 500 was down 4%, the dow Jones -3.6% and the Nasdaq down -4.9% cumulatively post Jackson Hole to Yesterday’s close. In Europe The Dax declined -61bps, the CAC 40 -83bps, the Euro stoxx 50 -91bps and the Eurostoxx 600 -81bps yesterday.

At time of writing (c. 8.30 am GMT) Futures have the FTSE 100 +59bps the Dax around +55bps. US futures are up around +60bps.

Shorts Increased

One final word on equities. This article “Investors Ramp Up Bets Against Stock Market as Summer Rally Fizzles” from the Wall Street Journal is interesting in that Institutional money is and has been bearish – increasing its shorts to levels not seen in 2 Years. (See chart below)

The article posits that retail / individuals may have had a more positive outlook and as the marginal sellers, could be the factor that ends this bear market rally for good if their sentment sours also.

However – it is important to remember a net short positon also makes it harder to sell off as shorts are covered:

This kid is so sharp… pic.twitter.com/9R9W09ySSl

— Shrubbery Capital 🔥🌳🇺🇦 (@agnostoxxx) August 26, 2022

Mamma Mia

Leaving Equities behind, rates, unsurprisingly rose post Jackson Hole with a focus on the front end as curves continued to flatten around the globe.

In Europe the gap between Italian and German government debt continues to grow as the cost of living crisis/ energy crisis continues to highlight the econmic differences between the EU’s strongest and weakest members.

This will likely be excacerbated with the increased need for states to support their businesses and consumers. Let’s not forget that Italy goes to the polls at the end of the month (25th Sep) which will also heighten uncertainty.

So not only will Europe have to prove their metal in tackling inflation but it looks like their anti-fragmentation tool will be tested also.

CPIs and Non Farm Payrolls in Focus

This weeks economic data – German CPI, European and US manufacturing PMIs is relatively light.

Friday’s US Non Farm Payroll report being held up as the most likely to move markets as investors watch for signs of softness that may give the Fed pause for thought.

Next week will kick off the next round of central bank meetings with the ECB conveneing on Sep 8th, BOE on the 15th and Fed on the 21st.

Energy Crisis – Shell’s Warning, Uniper’s plea

In terms of headlines that caught our eye over the long weekend – the FT reported that the EU is preparing emergency measures to curb energy prices by severing the linkage to gas prices. German power prices broke through €1,000 per MW/hr yesterday.

This comes as Shell’s CEO warns that the current energy crisis is likely to last more than one winter and European leaders need to forget about Russian gas as a source of fuel. He sees more rationing and increased pressure on increasing efficiencies and build out of alternative energy.

“My advice to the European governments and policymakers is you have to think without [Russian gas], and if you think without it we will manage,” he said. “There is enough energy in this planet to do without it.”

Ben van Beurden, via FT, Aug 29th

Finally Uniper and Wein Energy have asked for additonal state support with the rapid increase in prices impacting short term liquidity and operations. By example Uniper was the largest buyer of Russian gas and now is buring some €100mm per day as it has to buy gas elsewhere.

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