Daily Credit Summary - February 15: Europe Edition

Commentary courtesy of www.creditresearch.com

Spreads in Europe widened today amid low volumes as the US, parts of Asia, and some of the Greeks took the day off. Breadth was notably negative at almost three wideners to every tightener financials underperformed non-financials on average, and the continued flattening in Financials curves is increasingly pricing in traumatic times ahead in the short-term.

Sovereign risk moves were generally small today in CDS-land with bond spreads underperforming CDS in all the major European nations. Dubai staggered back to its wides (widest since MAR09) as investors snarled at the 40% haircut being offered. SovX widened less than 2bps (with ITRX FINLs underperforming) as France, Portugal, Norway, Sweden, and Holland managed small tightenings (helping SovX intrinsics compress marginally and narrow the skew). Dubai was the worst performer of the day followed by Latvia, Qatar, Ireland, Turkey, and Ukraine.

ITRX Sen-Sub decompressed marginally as FINLs Senior underperformed its intrinsics and narrowed the skew (index is rich) back to within 5bps. As an FYI, ITRX FINLs have now decompressed from SovX for five days in a row and we suspect that the technicals from unwinding steepeners and Senior-Sub decompression is beating out SovX-Senior decompression currently and also that ITRX FINLs now trade back above 15bps wider than ITRX ExFINLs (105bps vs 90bps) though the latter's curve is notably steeper).

Most notably however, was the seeming lack of conviction among protection sellers (albeit on a quiet day) as talk was that dealers are still stuck longer than they'd like. XOver managed to take and hold above 500bps (507bps is the widest since 12/3/2009) and move the XOver-Main differential to 415bps (its widest since early DEC09 also). It appears the normal pattern of IG underperformance leading HY underperformance in a cyclical downturn (upturn in spreads) is playing out.

The initial widening of Main spreads (thanks to contagious systemic sovereign risk drivers and financials) relative to XOver seems to have stalled now and risk is being aggressively repriced down the quality spectrum. It is perhaps worth bearing in mind that Main started trading at 84.5bps (10bps richer than current) and XOver at 605bps (100bps cheaper than current) and if the flow technicals start to unwind (which we sense they are given the slowing in new issuance), then decompression remains very much on the table.

Market Summary

Spreads are wider across the board in Europe today as all the indices deteriorated. Indices typically underperformed single-names with skews mostly narrower as Main underperformed but narrowed the skew, HiVol outperformed but widened the skew, LoVol intrinsics beat and narrowed the skew, XOver intrinsics beat and the skew tightened.

Volatility (VDAX-New) is up 0.15pts to 25.11%, with 10Y Bunds selling off (yield rising) 1.21bps to 3.2% as the Dollar strengthened with DXY falling 0.05 to 80.365, Oil falling $0.13 to $74, and Gold increasing $7.72 to $1101.1 as the BBG European 500 rallies (169.59 0.34%) outperforming ITRX Main credits on a beta-adjusted basis (92bps 2.07%) while Main outperforms XOver credits.

Dispersion rose +1.3bps in Main, which is reflective of a largely idiosyncratic change in spreads, as dispersion shifted significantly differently to the index, with 30% of Main credits shifting by more than 3bps and 21% of the ITRX universe (less than the 5 day average of 30%). The number of names wider than the index decreased by 2 to 57 as higher beta credits (1.14%) underperformed lower beta credits (1.14%).

Among the European credits, financials are underperforming non-financials with ITRX FINLs +3.18% to 105.5bps and Main ex-FINLs +1.76% to 88.63bps. ITRX Main ex-FINLs (outperforming FINLs) widened 1.53bps to 88.63bps (with ITRX FINLs -trending wider- weaker by 3.25 to 105.5bps) and is currently trading in the middle of the week's range at 65.38%, between 90.88 to 84.38bps, and is trading sideways.

Main LoVOL (Sideways Trading) is currently trading in the middle of the week's range at 51.62%, between 80.42 to 74.33bps. ExHVOL outperformed LoVOL as the differential compressed to -3.43bps from 45.94bps, and remains below the short-term average of -1.21bps.

The Main exFINLS to IG ExHVOL differential decompressed to 14.59bps from 13.68bps, but remains above the short-term average of 11.94bps (and the US is shut). The XOver-Main differential decompressed to 415bps from 404.87bps, but remains above the short-term average of 397bps, with the Xover/Main ratio rising to 5.51x, above its 5-day mean of 5.4x.

Australia is underperforming both Europe and Asia with the latter outperforming the former. iTraxx Asia ex-Japan spreads improved 0bps (No Recent Trend) is currently trading tight to its week's range at 116.95bps, between 125 to 114.5bps. iTraxx Australia spreads deteriorated 4.18bps (No Recent Trend) is currently trading in the middle of the week's range at 103bps, between 114 to 97bps.

Index/Intrinsics Changes
ITRX12 Main +1.87bps to 92 (FV +1.22bps to 95.3) (88 wider - 31 tighter <> 76 steeper - 49 flatter) - No Trend
ITRX12 HiVol +2.25bps to 138 (FV +2.95bps to 138.93) (24 wider - 6 tighter <> 17 steeper - 13 flatter) - Trend Wider
ITRX12 LoVol +1.75bps to 77.47 (FV +0.69bps to 81.76) (64 wider - 31 tighter <> 36 steeper - 59 flatter) - Sideways Trading
ITRX12 XOver +12bps to 507 (FV +2.01bps to 538.11) (33 wider - 9 tighter <> 18 steeper - 27 flatter) - Trend Wider

Index Internals
Within the 175 name iTraxx Index Universe, sentiment is significantly bearish, with 121 (69%) wideners to 40 (23%) tighteners and 94 (54%) steepeners to 76 (43%) flatteners (3 wideners for every tightener). Among this universe, there are 1 credits with a bullish trend, and 1 with a bearish trend (based on the previous five days trading action). The market's general sentiment is evident as we note that 64 credits are at the widest in their 5-day range currently, and 17 are at their tightest.

Notably, from the 240 name index universe, there are only 9 (~4%) credits that have inverted curves, with an average inversion of 8% of 5Y CDS.

Within the ITRX universe, dispersion overall has risen 1.3bps to 42.1bps, as the wings of the distribution (10-90%) decreased less than the centre (25-75%) of the distribution. The distribution shifted non-linearly as the 10th percentile increased the most (0.9bps /1.62%) to 53.9bps, and the 25th percentile increased the least (0.3bps /0.5%) to 63.5bps.

Main Sector Moves and Betas
In Main, CONS (the worst sector today) under-performed Main, moving (on average) 2bps (2.35%) wider to an average of 89.1bps. INDU (the second weakest sector today) under-performed Main, moving (on average) 2.1bps (2.07%) wider to an average of 105.9bps. ENRG credits (the median sector) improved more than Main, shifting (on average) 0.5bps (0.68%) worse to an average of 76.9bps. The second best sector so far is FINL as they outdid Main, trading (on average) 0.6bps (0.5%) wider to an average of 110.3bps. Out-performing Main today, TMT (the best sector today) moved (on average) 0.2bps (0.2%) wider to an average of 92bps.

ITRX-based regression betas indicate that FINL (0.98x) have the highest beta and ENRG (0.53x) the lowest, with CONS (0.75x), INDU (0.69x), and TMT (0.68x) in between. Comparing the regression betas to current level betas we see that CONS (0.08x rich) is the richest sector, while INDU (-0.16x cheap) is the cheapest, with FINL (0.04x rich), ENRG (0.03x rich), and TMT (-0.01x cheap) trading more in line.

Focusing on intra-sector movements within ITRX12, we notice dispersion increasing the most in CONS which shifted 4.23% to 40.4bps, and the least in TMT which shifted 0.96% to 35.1bps.

Index Relative-Value and Key Levels
Across index credit quality, we saw HiVOL move against its trend wider relative to Main from a ratio of 1.51x to 1.5x, and HiVOL also moved closer to IG and further from Main as it trades against its lack of trend now at 11.1% of the XOver-Main difference, down from 11.3%. XOver shifted wider relative to IG, with its trend wider, now at 5.51x, up from 5.49x yesterday.

Single-Name Movers
Today's biggest absolute movers in Main were ArcelorMittal (+11.23bps), Volvo AB (+10.39bps), and Glencore International AG (+10bps) in the wideners, and Alstom (-2.29bps), Aviva Plc (-2.1bps), and Hannover Rueckversicherung AG (-2bps) in the tighteners. Today's biggest percentage movers in Main were Gas Natural SDG SA (+6.1%), Metro AG (+5.52%), and Volvo AB (+5.24%) in the wideners, and TeliaSonera AB (-3.37%), Hannover Rueckversicherung AG (-2.65%), and Compass Group Plc (-2.4%) in the tighteners.

In the names of the XOver index, today's biggest percentage movers were ThyssenKrupp AG (+6.27%), Valeo SA (+5%), and HeidelbergCement AG (+4.66%) in the wideners, and M-real Oyj (-3.37%), Seat Pagine Gialle SpA (-2.44%), and BCM Ireland Finance Ltd (-2.32%) in the tighteners. The largest absolute movers in XOver were Grohe Holding GmbH (+20.22bps), ThyssenKrupp AG (+18.3bps), and HeidelbergCement AG (+17.38bps) in the wideners, and Seat Pagine Gialle SpA (-48.83bps), M-real Oyj (-33.28bps), and BCM Ireland Finance Ltd (-28.32bps) in the tighteners.

Comments

[DRju]

Whta ever happened to common sense

We are making the same mistakes: http://www.marketwatch.com/story/time-for-fed-to....

[Tom123456]

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[Tom123456]

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