- EU Bank Risks ‘Rapidly’ Growing, Andersson Says (Bloomberg)
- Inside the Fed Fight Over Bond Buys (Hilsenrath)
- France ready to give banks public capital (FT)
- Berlusconi Will Defend Government in Parliament as Confidence Vote Looms (Bloomberg)
- Germany urges treaty to strengthen bloc (FT)
- China's Appetite for Commodities Wanes (WSJ)
- China Exports Slow on ‘Severe Challenges’ (Bloomberg)
- Fed’s Plosser: Operation Twist is fiscal policy (Reuters)
- Reid, McConnell Push Revised Debt Measure as Obama Seeks to Avoid Default (Bloomberg)
- Fallback plan gains momentum in debt talks (RTRS)... aka the "change nothing" plan, and raise debt ceiling by $2.5 trillion
- China house price inflation slows in June (FT)
- Riksbank Members Fear Greek Failure Could Spark Real Crisis (Market News)
- European Stocks Retreat for Third Day After Bank Stress Tests (Bloomberg)
- ECB would reject defaulted Greek bonds as collateral (RTRS)
- Greek debt cut won't solve problem - ECB's Weidmann (RTRS)
- An Arrest and Scotland Yard Resignation Roil Britain (NYT)
- Japan set to ban Fukushima cattle shipments after radioactive meat scare (Guardian)
- Spain and Italy top results in stress tests (FT)
HY credit deteriorated for the fifth day in a row (and 10 of last 12) as breadth was weak in equity and credit. Shifts in equity vol and context-based preferences for IG credit over stocks and HY credit suggest concerns are very warranted as macro data seems to confirm what credit has been hinting at for weeks.
While stocks seemed in a world of their own today relative to Treasuries, FX carry, PMs, oil, and even the USD, they managed to make solid gains amid above average volume following a series of dismal macro prints this morning. Credit outperformed but we outline why the velocity of moves may slow a little here.
Only a very few names managed gains in both equity and credit today (an interesting bunch - MAR, TOL, HOT, DHI, PEP, and SVU) as homebuilders were interestingly near the tope on the list of better performers in credit (which we suspect was related to the underperformance of the CMBX and ABX tranche markets as well as the higher beta exposure in some of the credit indices). Every sector was in agreement between credit and equity with a deteriorating move today as we note financials, leisure, and media were the worst beta-adjusted in credit relative to stocks on the day. Capital Goods, Utilities, and Consumer Noncyclicals performed the relative worst in stocks versus credit. The up-in-quality theme in credit is increasingly leaking into vol as we saw much less impact higher in vols in better-rated credits than in lower-rated credits. This was also the picture in credit though we did see the very highest rated names underperforming (financials?). This picture was somewhat different in equity-land where BB-rated and below names saw their stocks drop far less than A- rated and above names - once again we think this is to do with both financials dominating performance as well as the typical ratings/momentum correlation unwind.
The same theme of the last few days remains in place with vol and CDS being derisked for lower quality names and relatively rerisked for higher quality names. Stocks were a much more mixed bag today with crossover names outperforming the high and low quality names on average. Financials (monolines aside) were the only sector in which equity and credit deteriorated together on average while equity outperformed credit in all the others (aside from Telecoms which saw slightly more spread compression than the equity moves would have assumed).
Contextually, today was interesting bottom-up with only 53% of names agreeing in terms of direction for credit and equity risk (dominated by 50% agreement that conditions deteriorated). 27% saw credit widen as equity rallied while 20% saw credit compress as equities sold off but at the sector level the picture was much more stable with most agreeing systemically worse today. Leisure, healthcare, and Consumer Cyclicals were the only divergent sectors with credit underperformance as equity managed gains (only just in the latter we note). While we saw a clear up-in-quality shift in single-name credit today ( a theme we have been suggesting recently), that was not the story in equities where higher quality names (BBB and above) actually underperformed on average those in the spec grade cohorts. Vol movements were in line with CDS once again with vol rising less for the better quality names and rising dramatically more for the lower quality names (with a particular emphasis on the crossover names in fact).
- Ireland downgraded to BBB+ by Fitch, outlook stable, market yawns
- Asian stocks, Aussie gain on jobs growth, better-than-forecast Japan GDP.
- Bank of Korea leaves benchmark interest rate unchanged at 2.5%.
- EU fines Taiwanese, SKorean LCD panel makers €649M on price fixing charges.
- India's inflation holds above 'tolerance level,' Indian Central Bank Chief says.
- Japan’s Q3 GDP grew at an annualized 4.5% - faster than the 3.9% reported last month.
- Greek loan repayment extension possible in early 2011.
- More than half of Americans want Fed reined In or abolished: Bloomberg survey.
- China Overtakes Japan as World's Second-Biggest Economy (Bloomberg)
- US banks get securities buy-back window - $118bn of high-cost ‘Trups’ can be redeemed over 90 days (FT)
- Yield Curve as Harbinger (WSJ)
- It Takes a Tea Party to Start a Tax Revolution (Bloomberg)
- Evans-Pritchard: Ireland can withstand the euro's ordeal by fire, but can Southern Europe? (Telegraph)
- Workers Let Go by China’s Banks Putting Up Fight (NYT)
- Goldman Undercuts Rivals in GM IPO as It Loses Top Role (Bloomberg)
- Is This Normal? The uncertainty of our economic uncertainty (NYMag)
- Mark Zandi oped: The Tax Cut We Can Afford (NYT)
- Bank of England lowers UK's GDP growth outlook. Stirs speculation of more intervention.
- Buyers' Credit helped home prices rise in two-thirds of U.S. metropolitan areas in Q2.
- IEA warns of Gulf spill effect on new oil supplies.
- India looks to shake up its banks; Central bank reviews banking ownership rules.
- US trade gap swells to 21-month high; deficit with China more than half of total.
- Advance Auto beats by $0.13, posts Q2 EPS of $1.16. Revs up 7.2% at $1.42B. Plans $300M share repurchase program.
- AIG to sell 80% of its money-losing consumer-lending business to Fortress Investment.
- Asian stocks rise, default risk falls on US home, car sales; Yen weakens.
- China warns US over a decision to slap duties on imports of Chinese steel gratings.
- China plans to subsidize purchases of energy-efficient vehicles to help cut emissions.
- Chinese tech stocks rise most on govt plans to increase investment in these industries.
- European stocks climbed, following positive sessions on Wall Street and in Asia.
- May sales at store open a year or more expected to rise 2-2.5% YoY - ICSC.
- ARM, IBM and allies announce plans for software venture.
- Asian stock markets were mostly lower with the Japanese market somewhat volatile.
- Australia's economic growth slows in first quarter as businesses cut spending.
- Corn syrup producers acknowledge opponents are souring US market for common sweetener.
- EU antitrust regulators to probe Siemens and Areva nuclear non-compete deals.
- EU ministers affirming commitment to adding western Balkan countries to the Union.
- Japanese PM will quit in less than nine months after taking office, on US base row.
- Tobacco loophole in Obama's child health law costs US $250M as companies avoid huge tax hike.
Spreads ended the day modestly wider, underperforming stocks from Friday's close, as despite notable swings intraday, credit markets tracked equity markets almost perfectly, ending at the day's best levels. HY outperformed IG by the close (with its higher beta to stocks) but single-name breadth in credit was very negative.
Spreads rallied today after positive headlines in Europe and some spread-compressing single-name M&A activity in the US. HY14 closed at its best since inception, below 500bps, as IG closed only at last Tuesday's levels but notably IG outperformed intrinsics and HY underperformed intrinsics suggesting some possible HY-IG decompression was at play.
All-in-all, given the supposed clarification that we got from Europe, today's performance was notably dull with idiosyncratic moves dominating any systemic strength (which is not what many expected). Spreads opened tighter following last night's Greece news (see yesterday's note for our perspective) but it was clear that while the rally in EUR, compression in front-end bonds, and gap in 5Y CDS was exactly what we expected, much as we also expected, these improvements were less than many thought and did not last. 5Y CDS gapped 50bps or so tighter (back only to last Tuesday's levels) and even short-end bonds only managed 100bps compression and around 43bps in GGBs over Bunds (as we pointed out this was not unexpected and does nothing to solve longer-term instability).
Spreads were mixed in the US with IG worse, HVOL improving, ExHVOL weaker, and HY rallying. IG trades 10.9bps tight (rich) to its 50d moving average, which is a Z-Score of -1.4s.d.. At 84bps, IG has closed tighter on only 6 days in the last 326 trading days (JAN09). The last five days have seen IG flat to its 50d moving average. 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. 4.8% of names in IG moved more than their historical vol would imply as higher vol names underperformed lower vol names by 0.36% to -0.4%. IG's vol is around 4.38% per 1 day period, which leaves 95 names higher vol and 30 lower vol than the index. The names having the largest impact on IG are Altria Group Inc (-10.75bps) pushing IG 0.08bps tighter, and Universal Health Services Inc (+7.25bps) adding 0.06bps to IG. HVOL is more sensitive with International Paper Company pushing it 0.23bps tighter, and SLM Corp contributing 0.21bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Altria Group Inc (-10.75bps) pushing the index 0.11bps tighter, and Universal Health Services Inc (+7.25bps) adding 0.07bps to ExHVOL.