Daily Credit Summary: May 21 - Where's The Rally Monkey?

Commentary courtesy of www.creditresearch.com

Spreads closed the day weaker after clinging to gains until mid-afternoon and outperforming stocks. A slow-and steady decline in FINLs finally cracked the low activity rally in risk assets but we note IG underperformed HY as stocks sold off helped by the EUR stalling. Cash underperformed synthetic single-name credit once again but the late-day rush for protection suggests investors once again covering with macro overlays - not a good sign for bonds.

The early action felt much more like short-covering than rerisking and activity was low until the latter part of the day's sell-off with IG and HY closing at their wides (and stocks at overnight futures lows).

Futures were down overnight, but managed to rally back on news out of China that reflation of their bubble is back on and the Shanghai was up over 3% as tightening chatter was removed. Europe closed off its best levels in Main and XOver (with Main wider and XOver slightly tighter but FINLs and SovX were wider with Sub FINLs bearing the burnt of it today). ES_F pulled back almost 20pts from its pre-open lows into the middle of the day but after 15 attempts at cracking the 1085ish level since Friday lunchtime, what little volume there was finally lost the edge and rolled over.

It appeared early on that a lot of technical pressure from index skews and cash-CDS hedges was affecting index movement with all but HY seeing skews narrow today (and we humbly suggest some of the HY outperformance today was HY-IG profit-taking and single-name flattening). Of course IG's underperformance is as much contagiously driven by FINLs underperformance (which obviously HY lacks) as the growing concerns over a housing double-dip that inventory data seemed to suggest idiosyncratically today, but the late day demand for protection was not a good sign top-down.

The afternoon sell-off did not appear to have any major trigger catalyst but rather was the slow and steady decline in financials (e.g. GS!), lack of follow-through buying in EUR or EURJPY, and the retreat of short-coverers. Our discussion previously on gamma and OPEX last week suggests that the latter day push wider in a hurry today is now of much more note than last week's moves and with HY inching back wider (from tighter all day) at the close, the regime remains one of derisking. On a beta-basis, IG and stocks were in sync today but HY outperformed by around 15-20bps (unusually) but we suspect this will reverse soon enough.

Trying to be as succinct as possible, we feel that the rapid rise in spreads a the close today combined with cash market weakness indicates a much less sanguine view of credit markets than we have seen in the last few months. Value buyers do not appear to be jumping into this one after being hurt trying this earlier in the year already and our discussions on macro hedges and cash selling remain our thesis du jour (or number of jours).

Today's unch status for IG and HY cash spreads (FINRA-BLP data) and IG/HY CDS underperformance suggests more frantic macro hedging into strength as markets slid in a hurry today. Indices underperformed intrinsics for the same reason as liquidity was focused on the indices. The ratchet in index overlay, cash/single-name CDS unwind, hedge unwind is much more self-sustaining given the cash markets liquidity and we have all witnessed the speed and devastation of CDS-Cash basis decompression before.

3s5s flattened in general across single-names and LBO-screened credits outperformed as CDO-referenced credits notably underperformed led by the ever-weakening monolines which face ongoing coin tosses over legitimacy of insurance cover. Energy and Finance underperformed (the former led by RIG and MEE) while the latter saw most names wider though the majors came off their wides in 5Y as 3s5s flattened/inverted further - fitting the stock weakness better.

IG and HY were pushing wider still after-hours (with IG offered 126.25bps (+6bps on the day) and HY +5bps) but perhaps the most critical aspect of today was England beating Mexico in a World Cup friendly soccer match 3-1!

Index/Intrinsics Changes
CDR LQD 50 NAIG -1.37bps to 109.4 (8 wider - 36 tighter <> 28 steeper - 22 flatter).

CDR Counterparty Risk Index fell 1.22bps (-0.74%) to 163.07bps (5 wider - 9 tighter).

CDR Government Risk Index rose 1.07bps (1.07%) to 100.86bps..

CDX14 IG +4.25bps to 124 ($-0.18 to $98.95) (FV -1bps to 123.37) (26 wider - 91 tighter <> 62 steeper - 63 flatter) - Trend Wider.

CDX14 HVOL +1.31bps to 193 (FV -0.86bps to 0) (9 wider - 19 tighter <> 18 steeper - 12 flatter) - Trend Wider.

CDX14 ExHVOL +5.18bps to 102.21 (FV -1.04bps to 102.49) (17 wider - 78 tighter <> 51 steeper - 44 flatter).

CDX14 HY (30% recovery) Px $-0.19 to $93 / +5.4bps to 687.1 (FV -16.78bps to 620.82) (17 wider - 81 tighter <> 69 steeper - 31 flatter) - Trend Wider.

LCDX14 (70% recovery) Px $-0.25 to $93.88 / +7.72bps to 423 - Trend Wider.

MCDX14 +1.5bps to 169.5bps. - No Trend.

ITRX13 Main +0.44bps to 120.44bps (FV-1.82bps to 123.23bps).

ITRX13 Xover -6.5bps to 585.5bps (FV-22.18bps to 580.77bps).

ITRX13 FINLs +1.5bps to 164bps (FV-1.69bps to 165.05bps).

DXY strengthened 1.21% to 86.4.

Oil fell $0.04 to $70.

Gold rose $14.81 to $1191.91.

VIX fell 1.78pts to 38.32%.

10Y US Treasury yields fell 4.1bps to 3.2%.

S&P500 Futures lost 1.51% to 1068.2.

Movers in Detail
Spreads were broadly wider in the US as all the indices deteriorated. IG trades 29.2bps wide (cheap) to its 50d moving average, which is a Z-Score of 2.3s.d.. At 124bps, IG has closed tighter on 226 days in the last 360 trading days (JAN09). The last five days have seen IG flat to its 50d moving average. HY trades 52.5bps wide (cheap) to its 50d moving average, which is a Z-Score of 2.9s.d. and at 683.36bps, HY has closed tighter on 165 days in the last 360 trading days (JAN09).

Indices typically underperformed single-names with skews widening in general as IG's skew widened as it underperformed, HVOL underperformed but widened the skew, ExHVOL intrinsics beat and narrowed the skew, HY's skew widened as it underperformed.

2.4% of names in IG moved more than their historical vol would imply as higher vol names outperformed lower vol names by -1.35% to -1.08%. IG's vol is around 291.42% per 1 day period, with average IG single-name vol around 7.29%.The names having the largest impact on IG are RR Donnelley & Sons Company (-63.5bps) pushing IG 0.49bps tighter, and Transocean Ltd. (+32.5bps) adding 0.25bps to IG. HVOL is more sensitive with GATX Corporation pushing it 0.33bps tighter, and American International Group, Inc. contributing 0.86bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Sempra Energy (-7.5bps) pushing the index 0.08bps tighter, and Transocean Ltd. (+32.5bps) adding 0.32bps to ExHVOL.

The price of investment grade credit fell 0.18% to around 98.95% of par, while the price of high yield credits fell 0.06% to around 93.13% of par. ABX market prices are lower by 0.01% of par or in absolute terms, 1.18%. Volatility (VIX) is down -1.78pts to 38.32%, with 10Y TSY rallying (yield falling) 4.6bps to 3.2% and the 2s10s curve flattened by 1.3bps, as the cost of protection on US Treasuries fell 2.5bps to 39bps. 2Y swap spreads widened 9.8bps to 51.57bps, as the TED Spread widened by 1.5bps to 0.36% and Libor-OIS deteriorated 1.4bps to 28.4bps.

The Dollar strengthened with DXY rising 1.24% to 86.426, Oil rising $0.01 to $70.05 (outperforming the dollar as the value of Oil (rebased to the value of gold) fell by 1.24% today (a 1.25% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $14.95 to $1192.05 as the S&P is down (1068.1 -1.52%) underperforming IG credits (124bps -0.18%) while IG, which opened wider at 121.25bps, underperforms HY credits. IG13 and XOver13 are +4.25bps and -6.25bps respectively while ITRX13 is +0.5bps to 120.5bps.

Dispersion rose +2bps 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 increasing more than expected today indicating a less systemic and more idiosyncratic spread widening/tightening at the tails.

42% of IG credits are shifting by more than 3bps and 56% of the CDX universe are also shifting significantly (less than the 5 day average of 62%). The number of names wider than the index decreased by 2 to 49 as the day's range fell to 8bps (one-week average 11bps), between low bid at 116.5 and high offer at 124.5 and higher beta credits (-1%) underperformed lower beta credits (-1.7%).

In IG, tighteners outpaced wideners by around 3-to-1, with 29 credits wider. By sector, CONS saw 16% names wider, ENRGs 24% names wider, FINLs 63% names wider, INDUs 19% names wider, and TMTs 8% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG exFINLs) with the former trading at 109.59bps and the latter at 111.61bps.

Cross Market, we are seeing the HY-XOver spread decompressing to 97.61bps from 89.64bps, but remains above the short-term average of 77.08bps, with the HY/XOver ratio rising to 1.17x, above its 5-day mean of 1.14x. The IG-Main spread decompressed to 3.5bps from -0.25bps, but remains above the short-term average of -0.84bps, with the IG/Main ratio rising to 1.03x, above its 5-day mean of 0.99x. Among the HY names, we see higher risk names (>500bps) outperforming lower risk (<500bps) names. In the IG names, we see higher beta names underperforming lower beta names.

In the US, non-financials outperformed financials as IG ExFINLs are tighter by 2bps to 111.6bps, with 79 of the 106 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 1.22bps to 163.07bps, with Banks (worst) wider by 1.88bps to 141.92bps, Finance names (best) tighter by 0.77bps to 398.45bps, and Brokers wider by 2.17bps to 213.5bps. Monolines are trading wider on average by 145.84bps (4.68%) to 3362.35bps.

In IG, FINLs underperformed non-FINLs (1.84% wider to 1.8% tighter respectively), with the former (IG FINLs) wider by 3.5bps to 192.4bps, with 4 of the 19 names tighter. The IG CDS market (as per CDX) is 20.9bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (103.13bps), with the bond ETFs outperforming the IG CDS market by around 6.74bps.

In Europe, ITRX Main ex-FINLs (outperforming FINLs) widened 0.21bps to 109.59bps (with ITRX FINLs -trending wider- weaker by 1.63 to 164.13bps) and is currently trading in the middle of the week's range at 54.52%, between 116.13 to 101.75bps, and is trending wider. Main LoVOL (sideways trading) is currently trading in the middle of the week's range at 28.96%, between 105.66 to 95.21bps. ExHVOL underperformed LoVOL as the differential decompressed to 3.97bps from -0.7bps, and remains above the short-term average of -0.66bps. The Main exFINLS to IG ExHVOL differential compressed to 7.38bps from 12.35bps, and remains below the short-term average of 9.73bps.

The Emerging Market index is 0.4% less risky (1.3bps tighter) to 308bps. EM (Trend Wider) is currently trading at the wides of the week's range at 84.18%, between 318.1 to 254.2bps. The HY-EM spread decompressed to 375.37bps from 372.31bps, but remains above the short-term average of 356.82bps, with the HY/EM ratio rising to 2.22x, below its 5-day mean of 2.23x.

Single-Name Movers

Today's biggest absolute movers in IG were American International Group, Inc. (+29.5bps), Transocean Ltd. (+27.5bps), and SLM Corp (+20bps) in the wideners, and GATX Corporation (-10bps), RR Donnelley & Sons Company (-9bps), and Sempra Energy (-8bps) in the tighteners. Today's biggest percentage movers in IG were Transocean Ltd. (+12.94%), Marsh & McLennan Companies, Inc. (+6.9%), and American International Group, Inc. (+5.96%) in the wideners, and Duke Energy Carolinas, LLC (-7.42%), Devon Energy Corporation (-6.58%), and Sempra Energy (-6.5%) in the tighteners.

In Main, the biggest percentage movers were Alstom (+10.51%), Hellenic Telecommunications Organization SA (+9.09%), and Solvay SA (+7.32%) in the wideners, and L'Air Liquide S.A. (-7.83%), British Telecommunications PLC (-7.41%), and Energie Baden-Wuerttemberg AG (-7.34%) in the tighteners.The largest absolute movers in Main were Hellenic Telecommunications Organization SA (+25bps), Glencore International AG (+23bps), and Alstom (+14.5bps) in the wideners, and ArcelorMittal (-21.25bps), EDP-Energias de Portugal, S.A. (-17.05bps), and Portugal Telecom International Finance B.V. (-12.5bps) in the tighteners.

The biggest percentage movers in XOver were FCE Bank PLC (+1.51%), Cable & Wireless Plc (+0.98%), and Fiat SpA (+0.5%) in the wideners, and Thomson S.A. (-9.65%), BCM Ireland Finance Ltd (-9.03%), and Stora Enso Oyj (-8.04%) in the tighteners.The largest absolute movers in XOver were FCE Bank PLC (+9.36bps), Cable & Wireless Plc (+4.11bps), and Fiat SpA (+2.5bps) in the wideners, and BCM Ireland Finance Ltd (-323.3bps), NXP b.v. (-105.76bps), and Seat Pagine Gialle SpA (-79.54bps) in the tighteners.

In the names of the HY index, today's biggest percentage movers were Massey Energy Company (+11.72%), Iron Mountain Incorporated (+2.84%), and AMR Corp (+2.23%) in the wideners, and Dean Foods Co. (-41.61%), ArvinMeritor Inc (-10.17%), and Domtar Corporation (-9.43%) in the tighteners. The largest absolute movers in HY were Massey Energy Company (+82.59bps), AMR Corp (+34.71bps), and Level 3 Communications Inc. (+31.28bps) in the wideners, and Dean Foods Co. (-542.38bps), ArvinMeritor Inc (-85.54bps), and Boyd Gaming Corporation (-70.1bps) in the tighteners.

The CDR Counterparty Risk Index Series 2 (of brokers and banks) fell -1.22bps (or -0.74%) to 163.07bps. Morgan Stanley (7.5bps) is the worst (absolute) performer among the banks/brokers of the CDR Counterparty Index, whilst Bank of America Corp. (3.44%) is the worst (relative) performer. Credit Suisse Group (-8bps) is the best (absolute) performer among the banks/brokers of the CDR Counterparty Index, and Credit Suisse Group (-5.71%) is the best (relative) performer.

The CDR Aussie Index rose 2.94bps (or 2.72%) to 111.26bps. QBE Insurance Group Limited (14.32bps) is the worst (absolute) performer, whilst QBE Insurance Group Limited (10.04%) is the worst (relative) performer. Amcor Limited (-4.5bps) is the best (absolute) performer, and Amcor Limited (-5.62%) is the best (relative) performer.

The CDR Asian Index rose 2.21bps (or 1.81%) to 124.35bps. Korea Electric Power Corporation (34.12bps) is the worst (absolute) performer, whilst Korea Electric Power Corporation (38.84%) is the worst (relative) performer. Mitsubishi Corp (-4.71bps) is the best (absolute) performer, and Mitsubishi Corp (-7.25%) is the best (relative) performer.


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