Daily Credit Summary: January 14 - Credit Weakness Is Equity Strength (As Is Everything Else)

Spreads were broadly wider in the US as all the indices deteriorated. IG trades 13bps tight (rich) to its 50d moving average, which is a Z-Score of -1.4s.d. At 80bps, IG has closed tighter on only 6 days in the last year. The last five days have seen IG flat to its 50d moving average.

Indices generally outperformed intrinsics with skews widening in general as IG's skew decompressed as the index beat intrinsics, HVOL outperformed but widened the skew, ExHVOL outperformed but narrowed the skew, HY outperformed but narrowed the skew.

17.6% of names in IG moved more than their historical vol would imply as higher vol names outperformed lower vol names by 2.07% to 3.37%. IG's vol is around 4.38% per 1 day period, which leaves 96 names higher vol and 29 lower vol than the index.

The names having the largest impact on IG are Motorola Inc. (-17bps) pushing IG 0.13bps tighter, and International Lease Finance Corp. (+24.22bps) adding 0.17bps to IG. HVOL is more sensitive with Motorola Inc. pushing it 0.56bps tighter, and International Lease Finance Corp. contributing 0.71bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Valero Energy Corp. (-2.67bps) pushing the index 0.03bps tighter, and UnitedHealth Group Inc (+13bps) adding 0.13bps to ExHVOL.

The price of investment grade credit fell 0.03% to around 100.86% of par, while the price of high yield credits fell 0.06% to around 100.5% of par. ABX market prices are higher (improving) by 0.2% of par or in absolute terms, 0.38%. Volatility (VIX) is down -0.18pts to 17.7%, with 10Y TSY rallying (yield falling) 5.7bps to 3.74% and the 2s10s curve flattened by 1.6bps, as the cost of protection on US Treasuries rose 3bps to 39bps. 2Y swap spreads widened 0.3bps to 26.69bps, as the TED Spread widened by 0.3bps to 0.21% and Libor-OIS deteriorated 0.5bps to 10.9bps.

The Dollar weakened with DXY falling 0.12% to 76.755, Oil falling $0.38 to $79.27 (underperforming the dollar as the value of Oil (rebased to the value of gold) fell by 0.91% today (a 0.6% drop in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $4.98 to $1143.18 as the S&P rallies (1145 0.3%) outperforming IG credits (80bps -0.03%) while IG, which opened wider at 79.75bps, outperforms HY credits. IG11 and XOver11 are +0.87bps and -7bps respectively while ITRX11 is +0.38bps to 70.63bps.

The majority of credit curves flattened as the vol term structure flattened with VIX/VIXV rising implying a more bullish/less volatile short-term outlook (normally indicative of short-term spread compression expectations), and additionally the ratio has dropped below 0.9x which is exceptionally bearish for stocks and spreads.

Dispersion rose +1.7bps in IG. Broad market dispersion is a little greater than historically expected given current spread levels, indicating more general discrimination among credits than on average over the past year, and dispersion decreasing more than expected today indicating a less systemic and more idiosyncratic narrowing of the distribution of spreads.

24% of IG credits are shifting by more than 3bps and 33% of the CDX universe are also shifting significantly (less than the 5 day average of 39%). The number of names wider than the index decreased by 1 to 47 as the day's range rose to 3bps (one-week average 3.15bps), between low bid at 79.5 and high offer at 82.5 and higher beta credits (2.42%) underperformed lower beta credits (2.32%).

In IG, wideners outpaced tighteners by around 6-to-1, with 95 credits wider. By sector, CONS saw 82% names wider, ENRGs 71% names wider, FINLs 74% names wider, INDUs 77% names wider, and TMTs 71% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG13 exFINLs) with the former trading at 70.73bps and the latter at 70.84bps.

Cross Market, we are seeing the HY-XOver spread decompressing to 85.38bps from 76.85bps, but remains below the short-term average of 86.2bps, with the HY/XOver ratio rising to 1.21x, below its 5-day mean of 1.22x. The IG-Main spread decompressed to 9.37bps from 9bps, but remains below the short-term average of 10.26bps, with the IG/Main ratio rising to 1.13x, below its 5-day mean of 1.15x.

In the US, non-financials outperformed financials as IG ExFINLs are wider by 1.6bps to 70.8bps, with 12 of the 106 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 4.99bps to 87.91bps, with Brokers (worst) wider by 5.33bps to 106.17bps, Finance names (best) wider by 11.54bps to 399.34bps, and Banks wider by 4bps to 93.67bps. Monolines are trading wider on average by 245.27bps (7.09%) to 2733.25bps.

In IG, FINLs outperformed non-FINLs (2.22% wider to 2.27% wider respectively), with the former (IG FINLs) wider by 3.1bps to 143.4bps, with 3 of the 19 names tighter. The IG CDS market (as per CDX) is 11.5bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (68.52bps), with the bond ETFs underperforming the IG CDS market by around 1.22bps.

In Europe, ITRX Main ex-FINLs (outperforming FINLs) widened 0.04bps to 70.73bps (with ITRX FINLs -trending wider- weaker by 1.75 to 70.25bps) and is currently trading at the wides of the week's range at 100%, between 70.73 to 65.75bps, and is trending wider. Main LoVOL (trend wider) is currently trading at the wides of the week's range at 99.98%, between 61.83 to 56.64bps. ExHVOL underperformed LoVOL as the differential decompressed to 1.43bps from 0.79bps, but remains below the short-term average of 2.33bps. The Main exFINLS to IG ExHVOL differential compressed to 7.47bps from 8.41bps, but remains above the short-term average of 6.71bps.

The Emerging Market index is 1.4% riskier (3.2bps wider) to 232.7bps. EM12 (Trend Wider) is currently trading at the wides of the week's range at 100.42%, between 232.7 to 222.2bps. The HY-EM spread compressed to 254.63bps from 256.35bps, and remains below the short-term average of 255.24bps, with the HY/EM ratio falling to 2.09x, below its 5-day mean of 2.12x.

Commentary compliments of www.creditresearch.com

Index/Intrinsics Changes

CDR LQD 50 NAIG +2.16bps to 72.97 (39 wider - 5 tighter <> 28 steeper - 21 flatter).
CDX13 IG +0.38bps to 79.625 ($-0.01 to $100.87) (FV +1.71bps to 81.62) (93 wider - 15 tighter <> 59 steeper - 63 flatter) - No Trend.
CDX13 HVOL 0bps to 133 (FV +2.55bps to 142.85) (22 wider - 5 tighter <> 12 steeper - 17 flatter) - Trend Wider.
CDX13 ExHVOL +0.49bps to 62.77 (FV +1.45bps to 62.69) (71 wider - 24 tighter <> 48 steeper - 47 flatter).
CDX13 HY (30% recovery) Px $-0.06 to $100.5 / +1.5bps to 487.4 (FV +2.47bps to 480.58) (63 wider - 23 tighter <> 52 steeper - 47 flatter) - Trend Wider.
ITRX12 Main +0.38bps to 70.63 (FV +2.11bps to 72.4) (113 wider - 8 tighter <> 83 steeper - 41 flatter) - Trend Wider
ITRX12 HiVol +0.5bps to 98.5 (FV +2.03bps to 102.66) (27 wider - 3 tighter <> 20 steeper - 10 flatter) - Trend Wider
ITRX12 LoVol +0.34bps to 61.83 (FV +2.14bps to 62.96) (86 wider - 9 tighter <> 32 steeper - 63 flatter) - Trend Wider
ITRX12 XOver -7bps to 402 (FV -0.13bps to 432.72) (30 wider - 12 tighter <> 18 steeper - 27 flatter) - Trend Wider
LCDX12 (65% recovery) Px $-0.06 to $105.44 / +1.62bps to 384 - Trend Wider.
MCDX12 +3bps to 152bps. - Trend Wider.
CDR Counterparty Risk Index rose 5.12bps (6.18%) to 88.04bps (14 wider - 0 tighter).
CDR Government Risk Index rose 1.53bps (2.19%) to 71.57bps..
DXY weakened 0.12% to 76.76.
Oil fell $0.38 to $79.27.
Gold rose $4.98 to $1143.18.
VIX fell 0.22pts to 17.7%.
10Y US Treasury yields fell 5.7bps to 3.74%.
S&P500 Futures gained 0.3% to 1145.

Index Internals
Within the 240 name CDX Index Universe, sentiment is significantly bearish, with  167 (70%) wideners to 38 (16%) tighteners and 116 (49%) steepeners to 118 (50%) flatteners (4.4 wideners for every tightener). Among this universe, there are 2 credits with a bullish trend, and 52 with a bearish trend (based on the previous five days trading action).

The market's general sentiment is evident as we note that 174 credits are at the widest in their 5-day range currently, and 6 are at their tightest. Notably, from the 240 name index universe, there are 27 (~11%) credits that have inverted curves, with an average inversion of 35% of 5Y CDS.

Within the IG universe, dispersion overall has risen 1.6bps to 82.9bps, as the wings of the distribution (10-90%) increased more than the centre (25-75%) of the distribution. The distribution shifted non-linearly as the 25th percentile increased the most (1bps /2.2%) to 46.5bps, and the 50th percentile increased the least (0bps /0%) to 62.5bps.

Breakeven analysis shows that the IG13 5s10s steepener, at 18.31bps carry, covers 6.94bps of flattening/inversion or 0.4 defaults over the next year. The indices themselves have very different breakevens with ITRX8 covering 3.4 defaults over its remaining life, and one year's carry covers 20.18bps widening (35%) or 1.2 defaults. XOver8=> 8.9 contract defaults, with 158.24bps widening (38%) or 3.4 defaults covered by one-year carry. ITRX12=> 6.7 contract defaults, with 15.4bps widening (22%) or 1.5 defaults covered by one-year carry. XOver12=> 13.5 contract defaults, with 99.82bps widening (25%) or 3.4 defaults covered by one-year carry. IG9 5Y=> 5.7 contract defaults, with 36.03bps widening (36%) or 2 defaults covered by one-year carry. IG9 7Y=> 10 contract defaults, with 25.38bps widening (23%) or 2.3 defaults covered by one-year carry. IG9 10Y=> 15.5 contract defaults, with 18.52bps widening (16%) or 2.4 defaults covered by one-year carry. IG13 5Y=> 7.4 contract defaults, with 17.81bps widening (22%) or 1.7 defaults covered by one-year carry. IG13 7Y=> 11.3 contract defaults, with 15.74bps widening (17%) or 1.9 defaults covered by one-year carry. IG13 10Y=> 16.6 contract defaults, with 13.66bps widening (13%) or 2.2 defaults covered by one-year carry. ExHVOL13=> 4.5 contract defaults, with 13.95bps widening (22%) or 1 defaults covered by one-year carry. HVOL13=> 3.1 contract defaults, with 32.77bps widening (23%) or 0.7 defaults covered by one-year carry. HY13=> 27 contract defaults, with 124.32bps widening (26%) or 6.9 defaults covered by one-year carry. LCDX12=> 36.2 contract defaults, with 115.14bps widening (30%) or 10.9 defaults covered by one-year carry.

IG Sector Moves and Betas
In IG, CONS (the worst sector) under-performed IG, moving (on average) 2.2bps (3.46%) wider to an average of 68.4bps. INDU (the second weakest sector) under-performed IG, moving (on average) 1.2bps (2.35%) wider to an average of 65.1bps. FINL (the median sector) under-performed IG, moving (on average) 3.3bps (2.34%) wider to an average of 150.9bps. TMT (the second best sector) under-performed IG, moving (on average) 0.5bps (1.15%) wider to an average of 78.6bps. ENRG (the best sector) under-performed IG, moving (on average) 0.7bps (1.13%) wider to an average of 69.3bps.

From the top-down, index capital structure changes shifted divergent as equity beats credit. The sectors were mixed with CONS (both weaker with credit outperforming equity), ENRG (both weaker with credit outperforming equity), FINL (divergent as equity beats credit), INDU (both weaker with credit outperforming equity), and TMT (both weaker with credit outperforming equity).

CDX-based regression betas indicate that INDU (1.2x) have the highest beta and ENRG (0.73x) the lowest, with TMT (1.1x), CONS (0.94x), and FINL (0.93x) in between. Comparing the regression betas to current level betas we see that INDU (0.28x rich) is the richest sector, while FINL (-0.87x cheap) is the cheapest, with CONS (0.17x rich), ENRG (0.1x rich), and TMT (0.08x rich) trading more in line.

Focusing on intra-sector movements within IG, we notice dispersion increasing the most in CONS which shifted 2.76% to 28.9bps,  and the least in TMT which shifted -3.03% to 36bps,

Index Relative-Value and Key Levels
Across index credit quality, we saw HVOL move against its lack of trend relative to IG from a ratio of 1.68x to 1.67x, and HVOL also moved closer to IG and further from IG as it trades against its lack of trend now at 39.6% of the XO-IG difference, down from 40.4%. ExHVOL13 is currently trading at the wides of the week's range at 99.99%, between 62.77 to 59.87bps.HY shifted tighter relative to IG, with its trend tighter, now at 6.12x, down from 6.13x yesterday. The HY-LCDX spread compressed to 103.38bps from 103.47bps, but remains above the short-term average of 102.55bps, with the HY/LCDX ratio falling to 1.27x, below its 5-day mean of 1.27x. The IG-MCDX differential compressed to -72.38bps from -69.75bps, but remains below the short-term average of -64.36bps, with the IG/MCDX ratio falling to 0.52x, below its 5-day mean of 0.55x. The HY-IG differential decompressed to 407.75bps from 406.6bps, but remains above the short-term average of 405.12bps, with the HY/IG ratio falling to 6.12x, below its 5-day mean of 6.18x.

IG is tighter than its opening levels whilst HY is wider with HY's range of 25.37bps above the week's average range multiple of 6.86x IG's range, at 8.46x. HY13 is currently trading in the middle of the week's range at 55.39%, between 506.35 to 463.82bps. IG13 is currently trading in the middle of the week's range at 61.67%, between 82.5 to 75bps.

Our pivot point analysis suggests intraday support at 77.79bps in IG, and breaking support at 77.89bps or resistance at 80.89bps as significant, with the index trend bearish (based on pivot point moving average changes), shifting wider by 0.57bps per day over the last few days. On a short-term basis (based on the last 5 days trading), we see 78.75bps as a critical pivot point with 82.5bps, 84.75bps, and 87bps as important resistance levels, and 76.5bps, 72.75bps, and 70.5bps as important support levels. The short-term 'protection' relative strength indicator on IG moved slightly more oversold but remains stable at 53.2%.

Our pivot point analysis suggests intraday resistance at 480.03bps in HY, and breaking support at 475.22bps or resistance at 494.1bps as significant, with the index trend bearish (based on pivot point moving average changes), shifting wider by 0.96bps per day over the last few days. On a short-term basis (based on the last 5 days trading), we see 483.85bps as a critical pivot point for HY with 503.88bps, 519.9bps, and 535.92bps as important resistance levels, and 467.83bps, 447.8bps, and 431.78bps as important support levels.On a short-term basis (based on the last 5 days trading), we see 483.85bps as a critical pivot point for HY with 503.88bps, 519.9bps, and 535.92bps as important resistance levels, and 467.83bps, 447.8bps, and 431.78bps as important support levels.

Single-Name Movers
Today's biggest absolute movers in IG were International Lease Finance Corp. (+24.22bps), Metlife, Inc. (+15bps), and UnitedHealth Group Inc (+13bps) in the wideners, and Motorola Inc. (-17bps), Alcoa Inc. (-7.5bps), and Valero Energy Corp. (-2.67bps) in the tighteners. Today's biggest percentage movers in IG were UnitedHealth Group Inc (+12.38%), Johnson Controls Inc (+11.11%), and McKesson Corporation (+9.46%) in the wideners, and Motorola Inc. (-10.43%), Alcoa Inc. (-4.41%), and ConocoPhillips (-4.34%) in the tighteners.

In the more financial-heavy CDR NAIG LQD 50 index, sentiment is very bearish with 39 wider to 5 tighter, and 28 steeper to 21 flatter as 0 of the 50 credits have inverted curves. The biggest absolute movers were Citigroup Inc (+9.5bps), Bank of America Corp. (+9bps), and Morgan Stanley (+6.5bps) in the wideners, and McDonald's Corporation (-2bps), Kohl's Corporation (-1.5bps), and News America Inc (-1.25bps) in the tighteners. The biggest percentage movers in the CDR NAIG LQD 50 were Bank of America Corp. (+9.23%), Home Depot Inc. (+9.01%), and Conagra Foods Inc (+7.23%) in the wideners, and McDonald's Corporation (-4.94%), Kohl's Corporation (-2.21%), and News America Inc (-2.06%) in the tighteners.

Today's biggest absolute movers in Main were Royal Bank of Scotland Group Plc (+13bps), Banco Espirito Santo SA (+10bps), and TNT N.V. (+7.25bps) in the wideners, and Svenska Cellulosa AB SCA (-2bps), Suedzucker AG (-1.5bps), and Cadbury Holdings Limited (-0.5bps) in the tighteners. Today's biggest percentage movers in Main were Royal Bank of Scotland Group Plc (+11.87%), Muenchener Rueckversicherungs AG (+11.81%), and TNT N.V. (+11.46%) in the wideners, and Svenska Cellulosa AB SCA (-2.76%), Suedzucker AG (-1.83%), and Cadbury Holdings Limited (-0.69%) in the tighteners.

In the names of the XOver index, today's biggest percentage movers were Porsche Automobil Holding SE (+6.77%), International Power Plc (+6.59%), and UPM-Kymmene Oyj (+6.25%) in the wideners, and Seat Pagine Gialle SpA (-11.29%), M-real Oyj (-5.6%), and NXP b.v. (-3.6%) in the tighteners. The largest absolute movers in XOver were Norske Skogindustrier ASA (+29.47bps), Alcatel-Lucent (+24.5bps), and BCM Ireland Finance Ltd (+15.93bps) in the wideners, and Seat Pagine Gialle SpA (-146.96bps), M-real Oyj (-57.7bps), and NXP b.v. (-44.63bps) in the tighteners.

In the names of the HY index, today's biggest percentage movers were Cooper Tire & Rubber Company (+8.93%), Dynegy Holdings Inc. (+7.99%), and RadioShack Corp (+5.58%) in the wideners, and Residential Capital, LLC (-7.15%), Harrah's Operating Co Inc (-6.13%), and Domtar Corporation (-4.18%) in the tighteners. The largest absolute movers in HY were Dynegy Holdings Inc. (+56.1bps), American Axle & Manufacturing Inc (+27.09bps), and Energy Future Holdings Corp. (+26.8bps) in the wideners, and Harrah's Operating Co Inc (-67.62bps), Residential Capital, LLC (-49.53bps), and AMR Corp (-42.44bps) in the tighteners.

The CDR Counterparty Risk Index Series 2 (of brokers and banks) rose 5.12bps (or 6.18%) to 88.04bps. Royal Bank of Scotland Group Plc (13bps) is the worst (absolute) performer among the banks/brokers of the CDR Counterparty Index, whilst Royal Bank of Scotland Group Plc (11.87%) is the worst (relative) performer. HSBC Bank PLC (1bps) is the best (absolute) performer among the banks/brokers of the CDR Counterparty Index, and HSBC Bank PLC (1.74%) is the best (relative) performer.

The CDR Aussie Index fell -0.81bps (or -1.17%) to 68.87bps. Qantas Airways Ltd (0.17bps) is the worst (absolute) performer, whilst Crown Limited (0.15%) is the worst (relative) performer. Macquarie Bank Limited (-4.06bps) is the best (absolute) performer, and Amcor Limited (-3.95%) is the best (relative) performer.

The CDR Asian Index rose 0.08bps (or 0.09%) to 88.91bps. CNOOC Limited (7.5bps) is the worst (absolute) performer, whilst CNOOC Limited (12.4%) is the worst (relative) performer. SK Energy Co., Ltd. (-8bps) is the best (absolute) performer, and Bridgestone Corporation (-9.09%) is the best (relative) performer.