Daily Credit Summary: June 1 - The Good, Bad, Ugly, Uglier And The Ugliest
Commentary courtesy of www.creditresearch.com
Spreads closed significantly wider as a late-day downdraft swept risk assets to the worst levels of the day. Credit underperformed stocks (on a beta-adjusted basis) for most of the day with single-names underperforming indices as breadth remained very negative (even before the late-day dump).
FINLs, though weaker across the board, played second fiddle to ENRG names' dramatic underperformance as markets tried all day to soak up everything from apparently good macro data to very ugly event risk. Synthetic underperformed cash bonds today, we suspect on the back of the need for quick cover as we sold off fast, but importantly there seemed no renewed demand for risk assets (as June rebalancing was lack-luster).
The fact that stocks swung back and forth around VWAP all day (while credit remained wider consistently underperforming) suggests that some rebalancing orders were in the market (though clearly not in size) and after testing VWAP the fourth time, derisking won. By the close, with ES_F down around 19pts, we note that equity basically caught up to credit with its beta-adjusted moves slightly underperforming HY and slightly outperforming IG (as we see idiosyncratic issues in oil-land taking care of IG's weakness).
The late-day dump caught HY more aggressively (as we have come to expect) and shifted the index from out- to under-performing intrinsics while IG remained outperforming of intrinsics all day. IG skew is practically zero here while today's late day move edged HY slightly cheaper to intrinsics (around 50bps skew). The intrinsics-underperformance/narrowing-the-skew theme was evident in Main, XOver, and IG today (and HY till the very end). We do continue to find the relative steepness of HY 3s5s compared to XOver 3s5s astounding and while clearly there are idiosycratic risk differences, with 3Y intrinsics almost identical for both (around 490bps), we wonder what this is saying about roll risk in Europe versus USA risky credits. IG closed almost perfectly in line with Main at 122.5 as Main ExFINLs widened 3bps to 109.75bps and IG ExFINLs widened more dramatically to 109.5bps (a 6bps gain).
High beta underperformed low beta as ENRG dramatically underperformed all other sectors. FINLs were the second worst (notably worse than the other sectors but obviously eclipsed by the crunch in HAL, APC, and RIG). Insurers underperformed but the selling was widespread with all the majors notably wider (as more chatter on new FASB MtM rules continues and the comments on EUR bank loan losses was hardly helpful now was it?). ITRX Sen-Sub decompressed 7bps today (with Subs>250 again) as our Counterparty Risk Index added 8.5-10bps across the curve with liquidity focused in 5Y (now at 163bps) making curve judgment tough. EUR banks underperformed US banks - compressing the differential to its narrowest in well over a year.
Interestingly, the broad universe of credits that we cover underperformed both the Top CDO-referenced names (even as IG9 underperformed for much of the day - suggesting perhaps some more macro than idiosyncratic hedging at the correlation desks) and the Top LBO names (despite Mediacom news and RSH rumors). DO (one of our LBO-potential screen names) was one of the worst performers among the LBO names followed by Mediacom (on a DV01-adjusted basis) with RSH close behind (now at 271bps - not far from the 300bps we saw Pactiv jump to (but wider than Pactiv now?)).
While much of the broad underperformance was driven by the very sizable jumps in RIG, HAL, and APC which were the worst performers (on a DV01-weighted basis) of all credits today, there was evident weakness across most names (not just reracking in our opinion). Breadth was 10-1 in favor of wideners and there was little obvious theme across credit ratings - all systemically wider.
All-in-all a very weak close to a worrisome day (especially given month-start rebalancing hopes). Even the positive ECO prints were questionable on the basis of regime-change a month ago and anything more recent was showing a disappointing trajectory. Weakness was evident across all sectors and industries in credit but the stress in the ENRG space are clearly particularly notable (especially given their somewhat safe-haven status that may have hurt so many recently). Levels to consider in IG are 109.5bps as next support with 118.75bps as a decent short-term pivot. HY held above its pivot of 645bps today with next stop 587bps (large range due to recent vol) and a target of 702bps in the short-term.
Movers in Detail
Spreads were broadly wider in the US as all the indices deteriorated. IG trades 24.5bps wide (cheap) to its 50d moving average, which is a Z-Score of 1.7s.d.. At 122.5bps, IG has closed tighter on 227 days in the last 365 trading days (JAN09). The last five days have seen IG flat to its 50d moving average. HY trades 66.4bps wide (cheap) to its 50d moving average, which is a Z-Score of 1.8s.d. and at 662.47bps, HY has closed tighter on 154 days in the last 365 trading days (JAN09).
Indices generally outperformed intrinsics with skews mostly narrower as IG outperformed but narrowed the skew, HVOL outperformed but narrowed the skew, ExHVOL outperformed but narrowed the skew, HY's skew widened as it underperformed.
The price of investment grade credit fell 0.23% to around 99.02% of par, while the price of high yield credits fell 0.945% to around 93.88% of par. ABX market prices are lower by 0.01% of par or in absolute terms, 0.16%. Volatility (VIX) is up 3.47pts to 35.54%, with 10Y TSY rallying (yield falling) 3.3bps to 3.26% and the 2s10s curve flattened by 3.3bps, as the cost of protection on US Treasuries rose 2.75bps to 39.75bps. 2Y swap spreads widened 1.4bps to 46.38bps, as the TED Spread widened by 0.9bps to 0.39% and Libor-OIS deteriorated 0.8bps to 30.8bps.
The Dollar strengthened with DXY rising 0.02% to 86.798, Oil falling $1.81 to $72.16 (underperforming the dollar as the value of Oil (rebased to the value of gold) fell by 3.29% today (a 2.43% drop in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $10.62 to $1225 as the S&P is down (1069.4 -1.75%) underperforming IG credits (122.5bps -0.23%) while IG, which opened wider at 122.5bps, outperforms HY credits. IG13 and XOver13 are +5.65bps and +18.91bps respectively while ITRX13 is +4.94bps to 122.56bps.
Dispersion rose +7.3bps in IG. Broad market dispersion is less than historically expected given current spread levels, pointing to a more sanguine view of credits as investors discriminate less between names, with dispersion decreasing more than expected today indicating a less systemic and more idiosyncratic narrowing of the distribution of spreads.
49% of IG credits are shifting by more than 3bps and 64% of the CDX universe are also shifting significantly (more than the 5 day average of 61%). The number of names wider than the index increased by 1 to 45 as the day's range rose to 6.75bps (one-week average 8.75bps), between low bid at 116.75 and high offer at 123.5 and higher beta credits (4.04%) outperformed lower beta credits (5.22%).
In IG, wideners outpaced tighteners by around 8-to-1, with 111 credits wider. By sector, CONS saw 84% names wider, ENRGs 100% names wider, FINLs 100% names wider, INDUs 78% names wider, and TMTs 92% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG exFINLs) with the former trading at 109.7bps and the latter at 109.59bps.
Today's biggest absolute movers in IG were Transocean Ltd. (+184.39bps), Anadarko Petroleum Corp. (+172.94bps), and Halliburton Company (+50.82bps) in the underperformers, and Newell Rubbermaid Inc. (-5.08bps), Dow Chemical Company (-2.8bps), and Universal Health Services Inc (-2.46bps) in the outperformers. Today's biggest percentage movers in IG were Anadarko Petroleum Corp. (+105.09%), Transocean Ltd. (+72.85%), and Halliburton Company (+64.18%) in the underperformers, and Newell Rubbermaid Inc. (-3.77%), Dow Chemical Company (-1.83%), and Lowe`s Companies, Inc. (-1.5%) in the outperformers.
In the more financial-heavy CDR NAIG LQD 50 index, sentiment is very bearish with 48 wider to 2 tighter, and 36 steeper to 14 flatter as 6 of the 50 credits have inverted curves. The biggest absolute movers were Xerox Corp. (+17.81bps), Berkshire Hathaway Inc (+16.19bps), and General Electric Capital Corp (+15.58bps) in the underperformers, and VF Corporation (-4bps), Lowe`s Companies, Inc. (-0.95bps), and Burlington Northern Santa Fe, LLC (+0.24bps) in the outperformers. The biggest percentage movers in the CDR NAIG LQD 50 were Xerox Corp. (+13.47%), Berkshire Hathaway Inc (+8.81%), and Simon Property Group, L.P. (+8.76%) in the underperformers, and VF Corporation (-4.85%), Lowe`s Companies, Inc. (-1.5%), and Burlington Northern Santa Fe, LLC (+0.44%) in the outperformers.
In Main, the biggest percentage movers were BP PLC (+67.41%), Gas Natural SDG SA (+18.37%), and Total SA (+15.75%) in the underperformers, and Carrefour S.A. (-0.45%), Wolters Kluwer NV (-0.09%), and Svenska Cellulosa AB SCA (0%) in the outperformers.The largest absolute movers in Main were BP PLC (+68.04bps), Gas Natural SDG SA (+31.43bps), and Banco Espirito Santo SA (+29.17bps) in the underperformers, and Carrefour S.A. (-0.31bps), Wolters Kluwer NV (-0.05bps), and Svenska Cellulosa AB SCA (0bps) in the outperformers.
The biggest percentage movers in XOver were BCM Ireland Finance Ltd (+28.29%), Infineon Technologies AG (+12.8%), and Seat Pagine Gialle SpA (+10.54%) in the underperformers, and Wendel SA (+0.9%), Ineos Group Holdings plc (+1.37%), and Sol Melia SA (+1.67%) in the outperformers.The largest absolute movers in XOver were BCM Ireland Finance Ltd (+585.84bps), Seat Pagine Gialle SpA (+212.19bps), and ONO Finance, PLC (+113.49bps) in the underperformers, and Wendel SA (+4.03bps), Deutsche Lufthansa AG (+6.37bps), and GKN Holdings Plc (+10.99bps) in the outperformers.
In the names of the HY index, today's biggest percentage movers were RadioShack Corp (+17.44%), Pride International Inc. (+11.48%), and Tenet Healthcare Corporation (+10.66%) in the underperformers, and Residential Capital, LLC (-3.05%), CSC Holdings, Inc. (-1.1%), and Domtar Corporation (-0.52%) in the outperformers. The largest absolute movers in HY were Mediacom LLC (+77.92bps), Tenet Healthcare Corporation (+65bps), and Goodyear Tire & Rubber Co. (+61.44bps) in the underperformers, and Residential Capital, LLC (-15.41bps), Energy Future Holdings Corp. (-7.25bps), and CSC Holdings, Inc. (-5bps) in the outperformers.
The CDR Counterparty Risk Index Series 2 (of brokers and banks) rose 7.81bps (or 5.05%) to 162.36bps. Barclays Bank Plc (13.68bps) is the worst (absolute) performer among the banks/brokers of the CDR Counterparty Index, whilst HSBC Bank PLC (10.71%) is the worst (relative) performer. Merrill Lynch & Co., Inc. (3.72bps) is the best (absolute) performer among the banks/brokers of the CDR Counterparty Index, and Merrill Lynch & Co., Inc. (1.92%) is the best (relative) performer.
The CDR Aussie Index rose 5.48bps (or 5.05%) to 113.9bps. Macquarie Bank Limited (10.81bps) is the worst (absolute) performer, whilst Commonwealth Bank of Australia (8.06%) is the worst (relative) performer. QBE Insurance Group Limited (-2.19bps) is the best (absolute) performer, and SingTel Optus Pty Ltd (-1.79%) is the best (relative) performer.
The CDR Asian Index rose 2.94bps (or 2.4%) to 125.33bps. State Bank of India (18.26bps) is the worst (absolute) performer, whilst Temasek Holdings (15.91%) is the worst (relative) performer. Kobe Steel Ltd (-4.09bps) is the best (absolute) performer, and Kobe Steel Ltd (-3.17%) is the best (relative) performer.
CDR LQD 50 NAIG +4.1bps to 106.5 (48 wider - 2 tighter <> 36 steeper - 14 flatter).
CDR Counterparty Risk Index rose 7.81bps (5.05%) to 162.36bps (14 wider - 0 tighter).
CDR Government Risk Index rose 11.51bps (10.99%) to 116.18bps..
CDX14 IG +5.57bps to 122.5 ($-0.23 to $99.02) (FV +6.86bps to 122.56) (115 wider - 10 tighter <> 86 steeper - 39 flatter) - No Trend.
CDX14 HVOL +10.55bps to 185 (FV +8.49bps to 0) (29 wider - 1 tighter <> 19 steeper - 11 flatter) - Trend Tighter.
CDX14 ExHVOL +4bps to 102.76 (FV +6.37bps to 101.96) (86 wider - 9 tighter <> 28 steeper - 67 flatter).
CDX14 HY (30% recovery) Px $-0.95 to $93.88 / +26.2bps to 662.5 (FV +19.17bps to 608.67) (93 wider - 7 tighter <> 21 steeper - 79 flatter) - Trend Tighter.
LCDX14 (70% recovery) Px $-0.58 to $94.53 / +17.26bps to 403.45 - Trend Tighter.
MCDX14 +6bps to 172.5bps. - No Trend.
ITRX13 Main +4.88bps to 122.5bps (FV+7.27bps to 123.4bps).
ITRX13 Xover +18.66bps to 574bps (FV+34.58bps to 559.74bps).
ITRX13 FINLs +12.15bps to 173.75bps (FV+10.77bps to 174.18bps).
DXY strengthened 0.02% to 86.8.
Oil fell $1.81 to $72.16.
Gold rose $10.62 to $1225.
VIX increased 3.47pts to 35.54%.
10Y US Treasury yields fell 3.3bps to 3.26%.
S&P500 Futures lost 1.75% to 1069.4.