Credit Market Daily #9

02-Sep-22

Good Morning!

We did not get capitulation yesterday – Xover ended the day flat having opened wider and credit certainly outperfromed equity on the day and the European High Yield CDS index opens tighter at 576. Its Investment grade brother is opening 2 tighter at 118.

Capitulation is still on the cards IMHO but Non Farm Payrolls are giving people pause for thought and markets have had 3 straight days of declines so a pause is normal.

NFP expectations are for 294k for reference, materially lower and we rally, higher and we sell off.

European High Yield Cash Indices were down -0.70% yesterday, single Bs continued to underperfrom down -0.84%, BBs down -0.65%. Striling high yield was down c -0.45% on the day. US High Yield outperformed down -0.56% helped by equities which started the day down but ended the day mixed.

In Europe Equities ended the day lower than the soft morning session when we published CMD#8. The FTSE was down -1.86%, the Dax down -1.6% and Euro Stoxx 600 down -1.8% on the day. In the US the Dow Jones, S&P 500 and Nasdaq ended their day +0.46%,+0.3% and -0.26% respectively.

Overnight Asia is down the Hang Seng -0.8%, the CSI 300 down -0.48% and the Nikkei flat at -0.04%. At time of writing European Futures are up around 1% and the US is flat.

UK – Soft Pound, Fuel Poverty and A New Leader

The Pound’s decline is a refelction of the headwinds facing the UK and the FT reports this morning that it has had its worst decline against the Dollar since the Brexit referendum down 4.5% in August to $1.16.

We will have a new leader come Monday and the expectation is it is Liz Truss whose ticket will be won on fiscal promises that may prove a headache for the Bank of England who is trying to bring inflation down.

The single biggest and most important test the new encumbent faces is how to deal with energy costs. Indeed this widely publicised paper from the IMF shows that UK households are facing the highest burdens on household consumption:

The IMf has also published a Blog that shows that the UK in particular will see the poorest households impacted the most:

This is particularly relevant as the FT reports “UK fuel poverty to hit 12mn homes without ‘immediate’ action” – the point here is that the UK government will have to act quickly and strongly in order to provide economy wide support.

We suspect it may take a more time than markets like for a wholesale solution to be put forward but a Covid Crisis level of response will happen.

Chicken Soup

If you follow us on Twitter you will know that we flagged the news that CO2 gas was again in shortage and we would likely hear from chicken producer Boaparan at some point given the importance of CO2 in the slaughter.

#BOPRLN – Boparan Can't be liking this:

BBG:UK Risks More Food Havoc on CO2 Cuts From Fertilizer Closure pic.twitter.com/WECrJSn6Lg

— EuroHighYield (@EuroYield) August 25, 2022

This morning there is an article in the FT Where the Company’s founder warns against the rising cost of CO2 – with one supplier having raised prices “up to 20 times current levels” costing the company an additonal £1mm per week.

This increase along with the cost of energy makes it clear that prices are having to go up.

Indeed Iceland Foods reported results yesterday (you can read @slogger’s summary here) and one of the main takeaways was that the company had managed to pass on cost inflation whilst maintaining its relative pricing positon within the market; basket sizes / spend remained relatively stable but the number of items in a basket lower.

The Wall Street Journal’s article on Campbell Soup’s profit decline goes someway to illustrate how food manufacturers / suppliers are fairing and ultimately points to retailers having to support their suppliers over the long term by absorbing some of their price rises.

However as Iceland and Campbell Soup can attest consumers are trading down and / or being much more selective about what items they spend their money on.

Bottom line is that food suppliers continue to feel the pinch and retailers are having to reposition to serve their customer base.

Italy – Germany Govt Spreads

Its not just the UK where political uncertainty is weighing on the cost of risk – the spread between Italian and German govenrment benchmarks continues to leak wider as we head towards the Italian election with the ecpectation of a coalition of the far right expected to win on the 25th of September.

Current spreads are heading for the 2018 wides.

This chart below shows the risk between Italian CDS contracts the 2014 contract protects against re-denomination risk and default risk, whilst the 2003 contract protects only against default risk.

The chart comes from the fantastic Macro Compass which I whole heartedly reccomend and is written by Alfonso Peccatiello.

Whilst I am not sure how liquid these CDS contracts are – it is interesting to see that the market is becoming a little more concerned about an “Ital-exit”.

The ECB’s Anti fragmentaion tool may well have its work cut out!

Reporting

CMA CGM

Credit

Equity

Rates

Today’s Eco Data