Daily Credit Summary: May 25 - No Ko Oh No

Commentary by www.creditresearch.com

Spreads closed modestly wider, at their best levels of the day, after opening dramatically lower as stocks outperformed close-to-close. Indices outperformed intrinsics as they followed the incredible (but relatively low volume) surge back to positive in the S&P Futures. Further geopolitical stress caused the overnight carry unwind that stressed risk assets but that reversed course from the open in the US and with EURJPY over 200pips higher on the US day, stocks and credit followed along.

It seems the missing rally monkey from yesterday found his footing today (Dow 10000 went and came again) but we note that ES_F VWAP closed 30pts below yesterday's closing VWAP - suggesting volume was definitely not on the side of aggressive buyers today. ES_F's miraculous recovery into the green today was tracked pretty closely by IG and HY which both tested yesterday's widest levels (from the wide side) as we closed with HY unch and IG marginally wider on the day. Asian and Aussie corporate risk underperformed (led by FINLs) as EM, Asian (led by North/South Korea worries), and CEEMEA sovereigns underperformed Western European (which also widened handily led by Italy and to a slightly lesser extent Spain today). Main and XOver ended at the tighter end of the range but significantly wider as did FINLs with Subs hugely underperforming Seniors (>90bps diff now). FINLs vs SovX seemed like some unwinds today as relative performance vs intrinsics signaled technicals at play - though both closed well wider on the day.

Intraday in the US, single-names notably underperformed and while the late day surge in risk assets was focused in the indices, the gaps we saw in some of the higher beta single-names and off-the-run indices were very dramatic in nature. Breadth was very negative in single-name CDS (though we suspect reracks tomorrow morning might take care of that) at around six wideners to every tightener but the increasing dispersion combined with cash underperformance of synthetics and skew compression in HY is not particularly bullish in our minds.

In an effort not to talk out of both sides of our mouth, we think the derisking regime remains in place and that liquidity indicators are flashing some definite warning lights that it appears many want to ignore until they punch then in the face. Today (and yesterday really) showed the kind of intraday volatility we have grown accustomed to in the last few weeks but that time is being compressed even more, with jumps (up or down) much quicker.

It should be noted that FINLs while off their worst of the day, closed notably wider and higher beta (CDO-referenced names) were seriously gapped out (as of-the-runs underperformed). Lower rate names notably underperformed higher-rated names with AA to A names seeing the best of a bad day with IG cash underperforming synthetic by 3bps and HY cash underperforming by well over 10bps. Certainly seems like the long unwinds into hedge lifts thesis that we have been discussing is playing out but a few days trend will provide some confirmation.

Summary

All-in-all a miraculous day (once again) but with geo-political risk revving up in Asia, liquidity remaining a threat in Europe, and contagion ever-darkening the horizon, the significance of the cash market's weakness/thinness (and concessions) and gappiness in single-name CDS leave us comfortable long risk here for now (625bps or 670bps for nervous-nellies in HY are decent stops and 115.5 and 122.5bps in IG). We almost reached out target for HY-IG today and would perhaps bring up the stop on that to 500bps differential (in line with 625bps stop on HY).

Let's take a breath and re-assess - HY and IG at multi-month wides (OCT09 and JUL09 respectively), short-end of the credit curve underperforming, cash underperforming synthetics, new issue concessions high, HY deals failing, close to close widening today in risk premia everywhere (except stocks...), carry pairs actually weaker on the day, US and EU FINLs wider on the day, sovereign risk rising globally, funding markets stressed, and CP rates starting to crack. Short-term bounces will always happen and we must be prepared for them but rising dispersion in single-names is where we will be spending the bulk of our time (as per today's MFCI strategy article) as an elevated volatility and discrimination-driven dispersion is just what we need to benefit as credit fundamentals re-appear from beneath the liquidity Tarp (pun intended).

Index/Intrinsics Changes
CDR LQD 50 NAIG +3.71bps to 113.81 (31 wider - 12 tighter <> 36 steeper - 11 flatter).

CDR Counterparty Risk Index rose 10.36bps (6.33%) to 173.92bps (13 wider - 1 tighter).

CDR Government Risk Index rose 11.81bps (11.71%) to 112.67bps..

CDX14 IG +1bps to 126 ($-0.04 to $98.87) (FV +4.61bps to 128.67) (82 wider - 30 tighter <> 94 steeper - 27 flatter) - Trend Wider.

CDX14 HVOL +5bps to 195 (FV +11.86bps to 0) (26 wider - 2 tighter <> 20 steeper - 10 flatter) - Trend Wider.

CDX14 ExHVOL -0.26bps to 104.21 (FV +2.41bps to 105.77) (56 wider - 39 tighter <> 21 steeper - 74 flatter).

CDX14 HY (30% recovery) Px $0 to $92.875 / +0.1bps to 690.6 (FV +39.88bps to 656.82) (99 wider - 1 tighter <> 35 steeper - 65 flatter) - Trend Wider.

LCDX14 (70% recovery) Px $-0.12 to $93.69 / +3.72bps to 428.82 - Trend Wider.

MCDX14 +5bps to 174.5bps. - Trend Wider.

ITRX13 Main +8.06bps to 128.5bps (FV+10.17bps to 133.16bps).

ITRX13 Xover +41bps to 626.5bps (FV+44.12bps to 620.23bps).

ITRX13 FINLs +9bps to 173.25bps (FV+16.43bps to 181.38bps).

DXY strengthened 0.39% to 86.54.

Oil fell $0.65 to $69.56.

Gold rose $8.5 to $1200.15.

VIX fell 3.71pts to 34.61%.

10Y US Treasury yields fell 3.8bps to 3.16%.

S&P500 Futures gained 0.5% to 1076.4.

Single-Name Movers
Today's biggest absolute movers in IG were American International Group, Inc. (+82.5bps), SLM Corp (+51.25bps), and XL Capital Limited (+48.75bps) in the underperformers, and Computer Sciences Corp. (-12bps), Motorola Inc. (-6.25bps), and Boston Properties L.P. (-5bps) in the outperformers. Today's biggest percentage movers in IG were XL Capital Limited (+24.53%), American Express Company (+15.94%), and American International Group, Inc. (+15.71%) in the underperformers, and Computer Sciences Corp. (-8.57%), Black & Decker Corporation (-5.06%), and Motorola Inc. (-4.81%) in the outperformers.

In Main, the biggest percentage movers were Glencore International AG (+20.25%), European Aeronautic Defence and Space Company EADS N.V. (+17.33%), and Holcim Ltd (+16.12%) in the underperformers, and Deutsche Post AG (-5.7%), Cadbury Holdings Limited (-0.87%), and Hellenic Telecommunications Organization SA (-0.85%) in the outperformers.The largest absolute movers in Main were Glencore International AG (+101.25bps), ArcelorMittal (+45bps), and Banco Espirito Santo SA (+38.75bps) in the underperformers, and Deutsche Post AG (-3.93bps), Hellenic Telecommunications Organization SA (-2.5bps), and Cadbury Holdings Limited (-0.25bps) in the outperformers.

The biggest percentage movers in XOver were CIR S.p.A. (+16.25%), Rhodia SA (+13.37%), and Nordic Telephone Company Holding ApS (+12.7%) in the underperformers, and Stora Enso Oyj (+3.15%), Alcatel-Lucent (+3.69%), and Nielsen Company/The (+4.24%) in the outperformers.The largest absolute movers in XOver were BCM Ireland Finance Ltd (+380.52bps), Seat Pagine Gialle SpA (+210.67bps), and NXP b.v. (+131.99bps) in the underperformers, and Valeo SA (+10bps), Stora Enso Oyj (+11bps), and Volvo AB (+12.5bps) in the outperformers.

In the names of the HY index, today's biggest percentage movers were Massey Energy Company (+19.86%), CSC Holdings, Inc. (+12.64%), and First Data Corp (+11.46%) in the underperformers, and Sprint Nextel Corporation (-1.22%), RadioShack Corp (+1.15%), and Windstream Corporation (+1.66%) in the outperformers. The largest absolute movers in HY were Energy Future Holdings Corp. (+239.94bps), Realogy Corporation (+158.21bps), and First Data Corp (+146.29bps) in the underperformers, and Sprint Nextel Corporation (-5.5bps), RadioShack Corp (+2.5bps), and Bombardier Inc. (+5bps) in the outperformers.

The CDR Counterparty Risk Index Series 2 (of brokers and banks) rose 10.36bps (or 6.33%) to 173.92bps. Royal Bank of Scotland Group Plc (22.5bps) is the worst (absolute) performer among the banks/brokers of the CDR Counterparty Index, whilst BNP Paribas (11.97%) is the worst (relative) performer. Bank of America Corp. (-1bps) is the best (absolute) performer among the banks/brokers of the CDR Counterparty Index, and Bank of America Corp. (-0.6%) is the best (relative) performer.

The CDR Aussie Index rose 4.77bps (or 4.28%) to 116.24bps. Westpac Banking Corporation (12.58bps) is the worst (absolute) performer, whilst Westpac Banking Corporation (10.18%) is the worst (relative) performer. Macquarie Bank Limited (-7.5bps) is the best (absolute) performer, and Macquarie Bank Limited (-4.11%) is the best (relative) performer.

he CDR Asian Index rose 9.13bps (or 7.33%) to 133.59bps. Acom Co Ltd (79.82bps) is the worst (absolute) performer, whilst Kookmin Bank (20.58%) is the worst (relative) performer. Panasonic Corporation (-1.2bps) is the best (absolute) performer, and Panasonic Corporation (-2.86%) is the best (relative) performer.