Credit Market Daily #7

31-Aug-2022

Good Morning!

Yesterday did indeed prove weak as inflationary pressures remained in the fore – “Jackson Hole Indigestion” continued as the markets swallowed the weekend’s hawkish messaging.

In Credit we ended the day 21bps wider in Xover – this is c. 75c lower in price terms. Cash indices in Europe were down -0.58% with rate sensitive BBs down -0.64% vs. -0.46% and -0.42% for single Bs and CCC’s respectively.

The GBP High yield index was down a whopping -1.5% on the day and USD high yield was down -0.67%.

Interestingly Investment Grade credit as measured by the Itraxx Main index has under performed its high yield sibling , Xover.

The Xover: Main ratio has steadily declined over the last 10 days from above 5x to around 4.91x yesterday. We plan on adding IG cash indices in the coming weeks.

In equity Asia is down overnight with the Nikkei -0.47% and Hang seng -0.395 as I type. Europe was net negative yesterday with the FTSE 100 down -88bps whilst the rest of Europe was down around 70bps in the boarder indices. The DAX outperfromed up 53bps on the day.

In the US the DIJA S&P 500 and NASDAQ were down -0.96%,-1.10% and -1.12% respectively.

Xover is currently 590 ish at time of writing, another 10 wider – 600 here we come?

VIX vs. Move

The VIX volatility index -measuring the expected volatility of the S&P 500 has been steadily increading from the lows of 19.5 as of 12th august and hit 26 as of the 30th.

Pundits are keeping an eye on the “fear Index” – it peaked at 35 in the March rout. The MOVE index is the yield curve weighted normalised volatility on 1 month treasury options. (Why oh Why can we not get similar indices for Europe?).

And the MOVE index has been heading up, pretty much relentlesly since the beginning of 2021 if you ever want a gauge of where we are headed rates wise then MOVE is the index for you.

So – Stock vol is waking up having subsided earlier in the year; rates vol looks to have been on a one way ticket higher and whilst it has declined c.4% over the last 4 days.

So the questions I have is: Will rates Vol go higher or will we find a plateau?

Given Central Banks are in the driving seat (Fiscal will have its moment) and every economic data point is being parsed in the context of CB’s reaction function it certainly feels like that MOVE may have a bit higher to go? Would love to hear people’s thoughts.

Eco Data – Supports Tightening?

Eco data yesterday continued continued to support a Hawkish stance. German CPI returned to recent highs. In the US the Conference board consumer confidence showed a rebound from recent lows and the JOLTS job openings surprised to the upside and was held out by many to signal the Job market remains tight.

However – this morning we have had French YoY CPI come in at 6.5% vs 6.7% expected, MoM still remains elevated at 0.4% up from 0.3% the month prior but below survey of 0.6%.

July EU CPI came in at 9% vs. 8.2% expected and 8.4% prior.

The Wall street Journal reported yesterday that inflation expectations have taken a leg lower in the US and Christophe Barruad also flagged that the YoY peak in US CPI may be behind us.

As we continue through the year and YoY comparisons will decline the focus should be on the trend in MoM inflation that we pay attention to.

So it looks as though the Fed, at least (for now) has clawed back some credibility.

Rates: Yields Higher

This is a snapshot of global rates at time of writing (10.30 ish) as you can see and consistent with MOVE global yields are all moving higher post Jackson Hole. We have a Central Bank meeting a week, starting next week, ECB, BOE, and FED.

The ECB meeting is expected to see a 50bp move, with a 75bp move being predicted by some.

World Rates:

Not only are rates higher curves are getting flatter as recessionary risks continue to be priced in. The Gilt 2s10s curve is now trading at -17bps, having been at -19bps (the 2yr Yield is greater than the 10Yr). This for context is some way off the -109 seen in ’00 and the -44 seen in ’07.

GBP 2s10s:

China Stalling/ Property Bust

Chinese Real estate developer Country Garden reported half year results and described the Chinese property market as “sliding rapidly into a severe depression” the Walls Street Journal also points out that China’s property woes are spilling over into banks which are having to book impairments on their loans.

This article from Foreign Affairs “Beijing’s Debts Come Due How a Burst Real-Estate Bubble Threatens China’s Economy” is worth a read.

The author points to Government intervention as likely preventing a 2008-esque meltdown, but does highlight that China may struggle to pivot away from Property as its growth engine.

This morning China’s manufacturing PMI came in Sub 50 at 49.4, Non Manufacturing at 52.6 – I have yet to get my head around just how disinflationary slowing China will be if I am honest but I recognise that it important.

Michael Kao on twitter yesterday flagged a decline in Chinese demand for Russian oil driven by weaker growth, and Mohamed El Erian’s take on the PMI below:

Reporting

Apcoa

Balta

CanPack

Cerba

Ithica Energy

Lecta

Lowen

Loxam

Miller Homes

Motor Oil

Peach Properties

Pfleiderer

PVH

Q-Park

Syngenta

Credit

Equity

Rates