Commentary courtesy of www.creditresearch.com
Spreads widened significantly with indices and intrinsics tracking each other consistently wider, though underperforming stocks top-down (beta adjusted) as equity markets continue to play catch up to credit market's APR-to-MAY warning signs. This certainly did not have the feel of panic in credit as volumes ticked up a little but remain summertime-muted (or perhaps bids and offers just could not find agreement) even as stocks' volumes jumped significantly.
Overnight dysphoria via a real SNAFU in Chinese LEI revisions was not helped by weak Spanish retail sales (and housing) seemingly confirming the impact of austerity already and then investors saw a huge drop in Consumer Confidence in the US which was only weaseled out of by arguing that its correlation with spending was minimal (seems like it was a big positive all the time it went up?). Deep in that data was a very interesting item, coinciding wonderfully with TSLA's IPO, of the lowest expectations of new car buying since records began (still TSLA took off after an initial stagger) - we can only imagine that Elon and his coworkers must be a little disappointed they missed out on raising more money and no wonder so many supposed world-class investors were buying the IPO with it closing at $24 from a $17 settle and $19 open - well done underwriters.
Enough about that tom-foolery, critically the S&P closed below its 2010 intraday lows (in SPY but not quite in SPX) and closed at its lowest close since 10/30/09! Not a pretty sight for all the recovery hopes and while Chinese GDP is still set to grow (apparently) by 9%, the fact that the SCOMP closed below 2009 lows (and the BRICs were all notably wider in today's CDS trading) suggests the bulls in US equities might rethink what is priced into their valuations for year-end.
Today's action in CDS land was negative pretty much across the board with breadth extremely negative as only a handful of single-names managed to eke out gains as there was a quite evident up-in-quality shift. HY names handily underperformed IG names on the day. High beta IG names also underperformed significantly as off-the-run indices underperformed on-the-run once again and the Top 100 CDO referenced names significantly underperformed the broad market.
Finance, Leisure, and Comsumer Cyclicals were hit notably hard today with Homebuilders taking the top spot in laggards in the latter sector (as the rise in prices in Case-Shiller was tax-credit driven and discounted heavily by the two professors). Utes, Healthcare, and Consumer NonCyclicals saw the best performance of the day but were all wider as systemically investors were derisking much more than the last two weeks or so.
European financials were hit hard but while German bank stress tests were leaked (and proved irrelevant to the market) and Spanish banks were sold pretty hard, it was the insurers and reinsurers that suffered the most once again (on a relative basis) as they also did in the US suggesting the same stress is being priced into these names - that of major concerns over portfolio asset values going forward.
The consistency of HY index and intrinsics moves today was unusual and suggests a much less nuanced and more sentiment driven selling than in recent weeks. Intrinsics were weaker pretty much non-stop today - leaking all day - while HY seemed to ratchet wider in spread though not diving as dramatically as stocks. On a beta-adjusted basis, IG actually underperformed HY today relative to stocks which suggests much more interest in IG as a hedge vehicle than HY for now (obviously a lot cheaper) and with the rolling beta now up to almost carry-neutrality with HY, perhaps it is time for hedgers to look again at HY shorts (especially for its closer basis - though vol is painful obviously). HY-IG back up to 525bps here.
An interesting context that is worth looking at is that IG and HY closed very close to the same closing levels of 6/14 but the S&P is 48pts lower and VIX is 5-6pts higher from the same close. This apparently large outperformance of credit over stocks may make some stand up and notice, calling stocks sell-off overdone, but taking a little further back glance at the data (and judging our bottom-up and top-down looks at RV between credit, equity, and vol), we see that this is much more like equities catching up to the significant underperformance of credit relative to stocks during APR/MAY - leaving us closer to fairly valued across the three asset classes than in recent weeks.
The roll makes some comparisons tricky but top-down we still expect HY to underperform IG relative to stock and vol as we would have expected a 40pt decompression in HY over the month of June (given moves in IG/Stock/Vol) but we are closer to unch (maybe a 20-25bps markdown from the roll would adjust for that). Bottom line on this is that the two markets are more in line than recent weeks (and Dave will be discussing this in more detail in tomorrow's Equity Strategy piece) but given the flattening in the credit curves at the short-end, we suspect this is more than a relative-value move and more systemic. The underperformance of bonds is also a tell-tale sign as that trend (selling into any broader strength) has been one we have been pointing to (especially in HY) for a month or more now.
It remains to be seen whether quarter-end window dressing is hindering performance as was suggested internally maybe managers don't want to appear too overweight tech at quarter-end with the kind of strains the global economy is showing. The main items this week are tomorrow jobless claims data (and we note the govt did not extend the unemployment benefits of 1.2mm people today) and the payroll print on what will be a crazy Friday before the long weekend (but have no fear as Ben and Bama tell us that the economy is strengthening so all is well).
The Spanish deserved their victory over the Portuguese today but we feel very sorry for the Japanese who lost on penalties. The USA was the only group leader to not make it into the quarter-finals sadly.
Items that caught our eye today
Greece compressed in 5Y and was discussed by a few clients - this was unusual given the decompression in pretty much every other sovereign name. We suspect this was much more technical driven thanks to significant underperformance in the short-end (i.e. 1-3Y significant inversion) as it looks increasingly likely that Greece will default sooner rather than later - the basis at the short-end is as wide as it has ever been - once again due to the CTD option in the CDS combined with ECB bailouts helping GGBs at the short-end.
BRICs were wider today - notably so - with China adding 6bps to 92bps - we have been harping on China CDS as a more liquid play on CNY revaluation and possible liquidity issues (se 1M Interbank repo in China).
Asian SovX was also weak today with one of its biggest down days since inception as Korea, Malaysia, and Thailand were laggards - we can only assume China concerns were systemic drivers.
Aussie banks, which we suggested as decent shorts well over a month ago, underperformed overnight as the CDR Aussie index rose around 3.6%.
TSY complex rally was impressive with some key technical level breaking - 10Y 3%, 30Y 4%, 3Y 1% and 2s10s flattening further.
AUDJPY has dropped over 350pips from yesterday's high to today's low and ES_F tracked it tick for pip today and overnight. The chatter than the LTRO was both a liquidity provider and a carry funder seems to be supported by the significant unwinds we are seeing in these major carry crosses - EURJPY also fell significantly as Swissy remained the safe haven play (though DXY got some action on the day.
ECB term deposit failed today with only around 60% bid-to-cover - not a good sign for the cash-hoarding liquidity starved European banks - especially going into the LTRO roll - if there is any transparency at all, we will get some good indications of who needs liquidity support very soon.
Expectations that countries embracing austerity should be rewarded by the market are misplaced as it is a little late for all that now and systemic repricing of sovereign risk is evident everywhere. While the WE SovX moved notably wider (despite 40% of the PIIGS being engaged in an epic struggle of diving and face-grabbing in South Africa today) with Italy underperforming, CEEMEA underperformed further - now above 250bps, but EM was the worst performer - adding 17.5bps as oil prices fell notably (remember the high dependence between oil/commodity prices and EM sovereign risk that we indicated a few months back?) - tough to know how to play this but EM - (N x SovX) vs Oil was a play we looked at earlier in the year and will be happy to discuss with clients.
While EU FINLs were weaker today, there was no large underperformance with ExFINLs +8.75bps and FINLs +9.25bps. This points to an interesting disruption to the triangle of SovX, FINLs, and ExFINLs with SovX either extremely cheap or FINLs notably rich relative to ExFINLs. This could be a signal of a regime shift in European credit though as non-FINLs start to really feel the bite of the austerity programs and underperform but we suggest that even if this were the case, the FINLs should underperform in a vicious circle manner and that the roll may have impacted this relationship a little as RV moved into this triangle.
ITRX FINLs Sen-Sub decompressed back to 90bps today (10bps this week).
US FINLs deteriorated to their widest in over two weeks with significant 3s5s flattening continuing - though most managing to avoid inversion at the short-end for now.
APC and RIG were the biggest underperformers in IG14 today. While there was news on a stoppage of oil-skimming due to the weather, it was concerns over asset sales by the government which legged them out a bit. However, we suspect that the IG9 and CDO moves were as much to blame initially in this case.
CDR LQD 50 NAIG +3.99bps to 109.15 (49 wider - 1 tighter <> 21 steeper - 29 flatter).
CDR Counterparty Risk Index rose 7.86bps (5.01%) to 164.68bps (14 wider - 0 tighter).
CDR Government Risk Index rose 4.46bps (3.92%) to 118.46bps..
CDX14 IG +6.12bps to 122.5 ($-0.26 to $99.03) (FV +4.76bps to 127.58) (116 wider - 7 tighter <> 62 steeper - 62 flatter) - Trend Wider.
CDX14 HVOL +6.49bps to 176.96 (FV +8.09bps to 0) (29 wider - 1 tighter <> 16 steeper - 14 flatter) - No Trend.
CDX14 ExHVOL +6bps to 105.3 (FV +3.75bps to 108.17) (87 wider - 8 tighter <> 49 steeper - 46 flatter).
CDX14 HY (30% recovery) Px $-1.03 to $94.38 / +28bps to 647.2 (FV +27.36bps to 630.79) (99 wider - 1 tighter <> 18 steeper - 82 flatter) - Trend Wider.
LCDX14 (70% recovery) Px $-1 to $94.63 / +29.47bps to 399.07 - Trend Wider.
MCDX14 +2.33bps to 253bps. - Trend Wider.
ITRX13 Main +8.88bps to 133.38bps (FV+6.01bps to 134.13bps).
ITRX13 Xover +40bps to 584.25bps (FV+32.32bps to 573.64bps).
ITRX13 FINLs +9.25bps to 171.75bps (FV+8.33bps to 175.67bps).
DXY strengthened 0.56% to 86.13.
Oil fell $2.31 to $75.94.
Gold rose $2.05 to $1241.
VIX increased 5.13pts to 34.13%.
10Y US Treasury yields fell 7.2bps to 2.95%.
S&P500 Futures lost 3.46% to 1033.9.
Movers in Detail
Spreads were broadly wider in the US as all the indices deteriorated. IG trades 11bps wide (cheap) to its 50d moving average, which is a Z-Score of 0.8s.d.. At 122.5bps, IG has closed tighter on 239 days in the last 385 trading days (JAN09). The last five days have seen IG flat to its 50d moving average. HY trades 71.7bps wide (cheap) to its 50d moving average, which is a Z-Score of 0.7s.d. and at 648.36bps, HY has closed tighter on 148 days in the last 385 trading days (JAN09).
Indices typically underperformed single-names with skews mostly narrower as IG underperformed but narrowed the skew, HVOL outperformed but narrowed the skew, ExHVOL intrinsics beat and narrowed the skew, HY's skew widened as it underperformed.
Comparing the relative HY and IG moves to their 50-day rolling beta, we see that HY outperformed by around 2.3bps (or 8%). Interestingly, based on short-run empirical betas between IG, HY, and the S&P, stocks underperformed HY by an equivalent 25.4bps (~ 87%), and stocks underperformed IG by an equivalent 4.1bps (~ 67%) - (implying IG outperformed HY (on an equity-adjusted basis)).
The names having the largest impact on IG are Quest Diagnostics Incorporated (-2.5bps) pushing IG 0.02bps tighter, and Transocean Ltd. (+43.85bps) adding 0.29bps to IG. HVOL is more sensitive with Motorola Inc. pushing it 0.05bps tighter, and SLM Corp contributing 0.92bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Quest Diagnostics Incorporated (-2.5bps) pushing the index 0.03bps tighter, and Transocean Ltd. (+43.85bps) adding 0.38bps to ExHVOL.
The price of investment grade credit fell 0.26% to around 99.03% of par, while the price of high yield credits fell 1.07% to around 94.34% of par. ABX market prices are lower by 0.4% of par or in absolute terms, 1.41%. Volatility (VIX) is up 5.13pts to 34.13%, with 10Y TSY rallying (yield falling) 7.2bps to 2.95% and the 2s10s curve flattened by 4bps, as the cost of protection on US Treasuries rose 1bps to 40bps. 2Y swap spreads widened 0.9bps to 36.13bps, as the TED Spread tightened by 0.3bps to 0.4% and Libor-OIS improved 2bps to 31.7bps.
The Dollar strengthened with DXY rising 0.56% to 86.132, Oil falling $2.31 to $75.94 (underperforming the dollar as the value of Oil (rebased to the value of gold) fell by 3.11% today (a 2.39% drop in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $2.05 to $1241 as the S&P is down (1033.9 -3.46%) underperforming IG credits (122.5bps -0.26%) while IG, which opened wider at 119.5bps, outperforms HY credits. IG13 and XOver13 are +8.25bps and +37.75bps respectively while ITRX13 is +8.88bps to 133.38bps.
Dispersion rose +5.5bps 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.
60% of IG credits are shifting by more than 3bps and 67% of the CDX universe are also shifting significantly (more than the 5 day average of 52%). The number of names wider than the index decreased by 1 to 50 as the day's range fell to 4.25bps (one-week average 5.35bps), between low bid at 119 and high offer at 123.25 and higher beta credits (3.82%) underperformed lower beta credits (3.42%).
In IG, wideners outpaced tighteners by around 14-to-1, with 114 credits wider. By sector, CONS saw 89% names wider, ENRGs 94% names wider, FINLs 95% names wider, INDUs 89% names wider, and TMTs 92% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG exFINLs) with the former trading at 123.79bps and the latter at 116.75bps.
Cross Market, we are seeing the HY-XOver spread compressing to 66.36bps from 74.92bps, and remains below the short-term average of 69.96bps, with the HY/XOver ratio falling to 1.11x, below its 5-day mean of 1.13x. The IG-Main spread compressed to -10.88bps from -8.12bps, and remains below the short-term average of -9.1bps, with the IG/Main ratio falling to 0.92x, below its 5-day mean of 0.93x. Among the HY names, we see higher risk names (>500bps) underperforming lower risk (<500bps) names. In the IG names, we see higher beta names outperforming lower beta names.
In the US, non-financials outperformed financials as IG ExFINLs are wider by 4.3bps to 116.8bps, with 6 of the 106 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 7.76bps to 164.58bps, with Banks (worst) wider by 6.21bps to 135.71bps, Finance names (best) wider by 19.54bps to 402.92bps, and Brokers wider by 9.25bps to 219.17bps. Monolines are trading wider on average by 144.98bps (4.72%) to 2887.39bps.
In IG, FINLs underperformed non-FINLs (4.31% wider to 3.81% wider respectively), with the former (IG FINLs) wider by 7.9bps to 190.1bps, with 1 of the 19 names tighter. The IG CDS market (as per CDX) is 11.3bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (111.15bps), with the bond ETFs outperforming the IG CDS market by around 1.1bps.
In Europe, ITRX Main ex-FINLs (underperforming FINLs) widened 8.79bps to 123.79bps (with ITRX FINLs -trending wider- weaker by 9.25 to 171.75bps) and is currently trading at the wides of the week's range at 100%, between 123.79 to 109.33bps, and is trending wider. Main LoVOL (sideways trading) is currently trading at the wides of the week's range at 99.96%, between 112.82 to 101.34bps. ExHVOL outperformed LoVOL as the differential compressed to -7.51bps from -6.41bps, but remains above the short-term average of -9.08bps. The Main exFINLS to IG ExHVOL differential decompressed to 18.49bps from 15.7bps, and remains above the short-term average of 17.68bps.
The Emerging Market index is 7.1% riskier (18.3bps wider) to 277.6bps. EM (Trend Wider) is currently trading at the wides of the week's range at 99.82%, between 277.6 to 259.3bps. The HY-EM spread decompressed to 370.79bps from 359.92bps, but remains above the short-term average of 354.45bps, with the HY/EM ratio falling to 2.34x, above its 5-day mean of 2.33x.
The biggest absolute movers in IG were Transocean Ltd. (+43.85bps), SLM Corp (+28.75bps), and Anadarko Petroleum Corp. (+28.54bps) in the underperformers, and Quest Diagnostics Incorporated (-2.5bps), Motorola Inc. (-1.75bps), and AT&T Mobility LLC (-0.75bps) in the outperformers. The biggest percentage movers in IG were Kinder Morgan Energy Partners LP (+9.01%), Halliburton Company (+8.54%), and Loews Corporation (+8%) in the underperformers, and Motorola Inc. (-1.95%), AT&T Mobility LLC (-1.68%), and Quest Diagnostics Incorporated (-1.52%) in the outperformers.
In Main, the biggest percentage movers were Tesco Plc (+11.39%), Portugal Telecom International Finance B.V. (+11.3%), and Allianz SE (+9.77%) in the underperformers, and Deutsche Post AG (-1.25%), Cadbury Holdings Limited (+0.36%), and SABMiller plc (+0.46%) in the outperformers.The largest absolute movers in Main were ArcelorMittal (+24.5bps), Hellenic Telecommunications Organization SA (+22.49bps), and Enel SpA (+21.33bps) in the underperformers, and Deutsche Post AG (-0.84bps), Cadbury Holdings Limited (+0.08bps), and SABMiller plc (+0.41bps) in the outperformers.
The biggest percentage movers in XOver were BCM Ireland Finance Ltd (+18.06%), Ladbrokes plc (+9.61%), and Havas SA (+9.57%) in the underperformers, and Cognis GmbH (-2.97%), Societe Air France (+2.02%), and Fiat SpA (+2.97%) in the outperformers.The largest absolute movers in XOver were BCM Ireland Finance Ltd (+676.92bps), Seat Pagine Gialle SpA (+149.25bps), and NXP b.v. (+87.17bps) in the underperformers, and Cognis GmbH (-1.93bps), Volvo AB (+7.75bps), and Societe Air France (+10bps) in the outperformers.
In the names of the HY index, the biggest percentage movers were Brunswick Corp. (+9.62%), Intelsat S.A. (+9.02%), and Beazer Homes USA Inc (+8.52%) in the underperformers, and Smithfield Foods Inc (-1.35%), RadioShack Corp (+0.31%), and Levi Strauss & Company (+1.25%) in the outperformers. The largest absolute movers in HY were Energy Future Holdings Corp. (+112.92bps), K Hovnanian Enterprises, Inc. (+101.76bps), and Level 3 Communications Inc. (+98.99bps) in the underperformers, and Smithfield Foods Inc (-9.46bps), RadioShack Corp (+1bps), and Temple-Inland Inc. (+2.5bps) in the outperformers.
The CDR Counterparty Risk Index Series 2 (of brokers and banks) rose 7.86bps (or 5.01%) to 164.68bps. Morgan Stanley (15.25bps) is the worst (absolute) performer among the banks/brokers of the CDR Counterparty Index, whilst Dresdner Bank AG (9.46%) is the worst (relative) performer. HSBC Bank PLC (3.07bps) is the best (absolute) performer among the banks/brokers of the CDR Counterparty Index, and Merrill Lynch & Co., Inc. (2.8%) is the best (relative) performer.
The CDR Aussie Index rose 4.18bps (or 3.6%) to 120.01bps. Macquarie Bank Limited (12.64bps) is the worst (absolute) performer, whilst Commonwealth Bank of Australia (7.47%) is the worst (relative) performer. Telecom Corporation of New Zealand Limited (-1.43bps) is the best (absolute) performer, and Telecom Corporation of New Zealand Limited (-2.13%) is the best (relative) performer.
The CDR Asian Index rose 0.77bps (or 0.61%) to 127.99bps. Reliance Industries Ltd. (24.27bps) is the worst (absolute) performer, whilst Reliance Industries Ltd. (14.64%) is the worst (relative) performer. SK Telecom Co Ltd (-11.82bps) is the best (absolute) performer, and SK Telecom Co Ltd (-10.18%) is the best (relative) performer.