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Daily Credit Summary: May 27 - Month-End Munificence
Commentary courtesy of www.creditresearch.com
Spreads closed smartly tighter today with HY outperforming IG and equity slightly outperforming credit today (on a beta-adjusted basis). An opening gap tighter followed by a slow leak to close at the day's best levels with the best close-to-close gains since 5/10 even with disappointing macro data.
The ebulience over the Chinese SAFE comments denying concerns over their EUR holdings was enough to justify covering in the EUR from yesterday but our view is that a great deal of today's moves (which were dominated by early gaps and little follow through in single-name credit) was profit-taking / rebalancing after a month of tremendous gains on short credit positions (see below).
Market sentiment remains extreme as an understatement and while today was a wild day (albeit with somewhat orderly compression in spreads as the day wore on) we stayed above some interesting levels in credit. Looking at last night's close, we were in the very close ballpark of the 5/20 closing levels and today's rally took us back near to the 5/19 closing levels. Importantly, we did not break those closing levels and IG is slightly weaker than HY relatively speaking. The S&P closed last night slightly below the 5/20 closing swing lows and closed today quite notably below the 5/19 closing levels. While it is very short-termist, it appears that today's move (compared to the last week or so) indicates some credit outperformance of stocks which we believe was exaggerated today by month-end clean up (see below).
HY saw some late day gappiness as we took the 95 handle, inching back into the middle of the flash crash day's range. We have discussed how cheap HY has been trading relative to intrinsics and suspect that some of today's exaggerated moves were on the back of index arb compression with intrinsics back and holding 600bps, the skew compressed 25-30bps today and while 3Y was less liquid, there was a very significant flattening in the HY curve (and smashing outperformance of off-the-runs in HY) that suggests some significant pressure in rolls today.
IG9 underperformed IG14 and the index, intrinsics, and the majority of single-names saw 3s5s flattening. We wonder if (along with our thoughts on month-end below) whether this is unwinds of legacy steepeners and roll trades.
Breadth was stupendously positive with only a handful of credits wider close-to-close as FINLs outperformed non-FINLs, high beta outperformed low beta by a decent margin and indices outperformed intrinsics once again. TMT was the best performing (and as the highest beta this makes sense) sector in IG followed closely by ENRG as the Gulf-related names crashed tighter. We recommended HAL this morning and the level of compression we saw today suggests adding to the short at these levels - we feel uncertainty remains extremely high in the oil spill region and our view of the fundamentals remains the same (and we note stops are tight here so downside is much more limited than potential upside here).
CONSumer credits underperformed (but were tighter on average) which seemed much more a story of lower beta names being left behind in the flush tighter today. IG exFINLs tightened 6bps to 105bps today almost perfectly in line with Main ExFINLs at 106bps.
Support in IG based on pivots is around 107bps (with 114.5bps as next up and 124bps as a weekly pivot). In HY, 622bps is the next support with 676 as a weekly pivot.
Some Monthly Math
May 2010 was an amazing month in credit. To the close last night, IG saw its largest monthly widening in absolute spreads (+34.5bps) since our records began in late 2004 and at 37.5% in spread widening terms, the biggest deterioration close-to-close on a month since FEB08 (which interestingly was very similar in that it widened from 97bps to 130bps). HY also widened around 38% in percentage spread terms on the month (to last night's close) or around 189bps. This was the biggest move since FEB09 in absolute terms and biggest percentage widening since AUG07.
Our point with all this histrionics is that it is only modestly surprising to see the market rallying today as we head into a long weekend with a half-day tomorrow and month-end. Such a huge month would warrant either a significant amount of profit-taking on any short gains - if nothing else to prudently book some gains and reassess, or just to rebalance weightings among some of the bigger funds.
A quick look at the month's performance shows that the correlation between month-to-date underperformance and today's outperformance is extremely high. Systemically the r^2 is well above 60% across our universe with almost 93% of names pairwise directionally correlated. In thin markets, going into a long weekend and given the month-end, the gaps we saw in many names were incredible and we humbly suggest will be filled sooner (rather than later) as the realities of today's macro disappointments sinks in over the weekend.
There were some standouts today with the gulf headlines as a big driver with APC, RIG, and HAL all screaming tighter - which again given the uncertainty there of the top-kill seems to have dramatically exaggerated a thin market's month-end covering. Interestingly the Utes underperformed today (and really dominated the handful of credits that showed MTD underperformance and today underperformance. This somewhat suggests (dare we say it) that month-end redemptions may be leading to managers covering everything to get to some sense of balance but it is as likely driven by the jump in oil prices.
As we closed still significantly tighter on the day, May remains a significantly weak month in credit land history. IG still worst absolute widening since DEC08 and HY worst since MAR09 as we see HY fund outflows to go with the equity fund outflows.
Index/Intrinsics Changes
CDR LQD 50 NAIG -7.15bps to 103.42 (0 wider - 48 tighter <> 39 steeper - 11 flatter).
CDR Counterparty Risk Index fell 10.52bps (-6.26%) to 157.71bps (0 wider - 14 tighter).
CDR Government Risk Index fell 2.14bps (-1.89%) to 111.11bps..
CDX14 IG -10.5bps to 116 ($0.45 to $99.3) (FV -7.65bps to 117.49) (4 wider - 121 tighter <> 88 steeper - 37 flatter) - No Trend.
CDX14 HVOL -2.23bps to 180 (FV -13.61bps to 0) (0 wider - 30 tighter <> 25 steeper - 5 flatter) - Trend Tighter.
CDX14 ExHVOL -13.11bps to 95.79 (FV -5.83bps to 96.63) (4 wider - 91 tighter <> 32 steeper - 63 flatter).
CDX14 HY (30% recovery) Px $+1.72 to $94.75 / -48.3bps to 638.6 (FV -25.39bps to 600.64) (4 wider - 93 tighter <> 83 steeper - 17 flatter) - Trend Tighter.
LCDX14 (70% recovery) Px $+1.13 to $94.94 / -34.43bps to 391.44 - Trend Tighter.
MCDX14 -3.5bps to 167bps. - No Trend.
ITRX13 Main -5.94bps to 117.5bps (FV-6.76bps to 118.86bps).
ITRX13 Xover -39bps to 561.5bps (FV-42.84bps to 549.49bps).
ITRX13 FINLs -4.37bps to 162.63bps (FV-5.27bps to 166.83bps).
DXY weakened 0.96% to 86.29.
Oil rose $3.27 to $74.78.
Gold rose $0.65 to $1212.45.
VIX fell 5.34pts to 29.68%.
10Y US Treasury yields rose 16.5bps to 3.36%.
S&P500 Futures gained 3.72% to 1100.7.
Single-Name Movers
Today's biggest absolute movers in IG were FirstEnergy Corp (+12.5bps), Constellation Energy Group Inc. (+8bps), and National Rural Utilities Cooperative Finance Corporation (+7bps) in the underperformers, and American International Group, Inc. (-67.5bps), Anadarko Petroleum Corp. (-62.5bps), and Transocean Ltd. (-45.25bps) in the outperformers. Today's biggest percentage movers in IG were FirstEnergy Corp (+5%), Constellation Energy Group Inc. (+3.27%), and National Rural Utilities Cooperative Finance Corporation (+3.22%) in the underperformers, and Anadarko Petroleum Corp. (-29.41%), Halliburton Company (-23.47%), and Transocean Ltd. (-16.07%) in the outperformers.
In Main, the biggest percentage movers were Henkel KGaA (+0.94%), Axa (+0.3%), and Banco Bilbao Vizcaya Argentaria SA (+0.11%) in the underperformers, and BP PLC (-18.47%), Xstrata Plc (-13.27%), and European Aeronautic Defence and Space Company EADS N.V. (-12.2%) in the outperformers.The largest absolute movers in Main were Henkel KGaA (+0.5bps), Axa (+0.4bps), and Banco Bilbao Vizcaya Argentaria SA (+0.25bps) in the underperformers, and Glencore International AG (-45bps), Xstrata Plc (-36.71bps), and ArcelorMittal (-35.82bps) in the outperformers.
The biggest percentage movers in XOver were Cognis GmbH (+1.16%), NXP b.v. (-1.72%), and FCE Bank PLC (-1.93%) in the underperformers, and BCM Ireland Finance Ltd (-33.49%), Havas SA (-12.61%), and Infineon Technologies AG (-11.13%) in the outperformers.The largest absolute movers in XOver were Cognis GmbH (+2.13bps), Gecina SA (-10bps), and FCE Bank PLC (-12.5bps) in the underperformers, and BCM Ireland Finance Ltd (-1084.04bps), ONO Finance, PLC (-127.6bps), and Seat Pagine Gialle SpA (-75.63bps) in the outperformers.
In the names of the HY index, today's biggest percentage movers were Smithfield Foods Inc (+2.16%), Aramark Corporation (+1.12%), and Pride International Inc. (+1.06%) in the underperformers, and Cooper Tire & Rubber Company (-12%), Mirant North America LLC (-11.52%), and TRW Automotive Inc (-11.21%) in the outperformers. The largest absolute movers in HY were Smithfield Foods Inc (+15.04bps), Aramark Corporation (+7.71bps), and Pride International Inc. (+3bps) in the underperformers, and K Hovnanian Enterprises, Inc. (-120.35bps), McClatchy Co./The (-118.06bps), and Clear Channel Communications Inc (-107.48bps) in the outperformers.
The CDR Counterparty Risk Index Series 2 (of brokers and banks) fell -10.52bps (or -6.26%) to 157.71bps. Credit Suisse Group (-2bps) is the worst (absolute) performer among the banks/brokers of the CDR Counterparty Index, whilst Credit Suisse Group (-1.41%) is the worst (relative) performer. Goldman Sachs Group Inc (-26bps) is the best (absolute) performer among the banks/brokers of the CDR Counterparty Index, and Goldman Sachs Group Inc (-13.3%) is the best (relative) performer.
The CDR Aussie Index fell -3.39bps (or -2.91%) to 113.29bps. Macquarie Bank Limited (5.39bps) is the worst (absolute) performer, whilst Macquarie Bank Limited (3.09%) is the worst (relative) performer. Commonwealth Bank of Australia (-9.7bps) is the best (absolute) performer, and CSR Limited (-7.88%) is the best (relative) performer.
The CDR Asian Index fell -4.31bps (or -3.27%) to 127.37bps. Kobe Steel Ltd (6.27bps) is the worst (absolute) performer, whilst Kobe Steel Ltd (4.98%) is the worst (relative) performer. Promise Co Ltd (-30.59bps) is the best (absolute) performer, and Sumitomo Corp (-20.58%) is the best (relative) performer.
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the lack of comments in the credit thread is interesting.
Did your comment just bounce off the canyon walls only to echo into the depths of infinity?
Does a comment get read by others if only one person posts?
I guess yield spreads are as exciting and juicy as slideshows on toe fungus.
Would have made a more interesting story tomorrow than today.
i mean in general...over the course of an entire year..not just today..."thread"
Just posted a EURO monthly chart ...
http://stockmarket618.wordpress.com
http://www.zerohedge.com/forum/latest-market-outlook-1
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