Welcome back at the weekly recap, as usual at the end of the week. As always if you like my job/analysis please subscribe below and share it and I remember you that I am also on twitter at @Credit_Junk. And now let’s see what happened this week.
MACRO/NARRATIVE: After a long weekend of reading CS news, Sunday evening news broke that UBS would buy CS for $3.2bln, a $100bln liquidity guarantee from SNB and legal protection on the already existing entity. It was the largest bank bailout since 2008, but one that came at a cost equivalent to a 17bln writedown for the Swiss bank's AT1 holders.
But most of the attention was on Wednesday's FED meeting. Below is a brief summary by points (piece in italic are my comments)
FED hiked 25bp, expecting higher rates due to inflation that remain high but adding that “ongoing interest rate increases may not be appropriate” (it sounds dovish for a reason)
Despite the “US Banking System” that remains solid, FOMC consider pausing in light of the bank stress that may create tight credit conditions, impact on jobs, GDP and inflation (estimates are that could have an impact of 25/50bp);
DOTS for 2023 are stable at 5.1% while that one for 2024 were increased from 4.1% to 4.3% (look at dispersion and market pricing here despite Powell said that rates cuts are not appropriate);
FOMC revised GDP estimates for 2023 from 0.5% to 0.4%
During the week we had also Yellen’s congressional testimony adding to volatility with the first day saying not considering broad increase in deposit insurance, to correct the second day saying that they are considering any solution to defend the deposits of the Americans. It is possible to have a full guarantee when deposits represent 70% of US GDP?
And finally today we had the preliminary March PMI for Eurozone. There is the usual growth driven by services, with some positive coming from mederation of inflationary pressure and job growth accelleration. Manufacturing continue to remain weak with softening new orders and current output driven only by past backlogs.
MARKETS: the core of the problems is clearly banks related. It’s not for others that I want to start from there.
EQUITY: Below AT1, US Regional banks and European banks. All continued to go down this week (from 2% to 5% at least).
The problem with banks is that, as Powell said, there is the risk that this crisis or stress (as you want to call it) will impact credit conditions and willingess to lend. Below I plotted in orange Senior Loan officer survey tightening standard (I inverted it, so negative value means tight credit conditions). It’s not a coincidence that this drives credit impulse and LEI (a mix of 10 leading indicators).
Passing at “intermarket analysis” it is interesting to look how US situations is slightly better than that for Europe. Various metrics as Semi vs SPY, Cycl vs Defensive, Discretionary vs Staples are not bad, only Financials vs Utilities. In Europe the Cyclical to Defensive paints a worse situation.
This could be easily explained looking at the extreme positioning long Eurozone short US equity yet. We can arrive at the same conclusion looking at COT positioning on EUR, a long that is now “consensus”.
Remaing in Europe and on credit (we’ll return on it in a moment) below the IG/Govt ratio indicates more pressure ahead for Stoxx Europe. Credit is underperforming govies and credit “always” (at least in 90% of cases) equity.
BONDS: This week bond yield decreased 12bp in US (with US 10Y down to 3.25%) and 5bp in Germany (with 10Y Bund now again at 2%). Market started to look at the end of hiking cycle (especially in the US) and started to put in place some late cycle trade as steepening, with short term yield falling more than long end.
I use the below chart to look at the main drivers of bund yield and all pointed to lower yield: surprise index topped 2 months ago (growth), breakeven swap 5y falled due to low energy prices (inflation), 1y1y Eonia repriced (ECB Policy) and SXXP (Risk Sentiment) falled.
From a technical point of view the price action on bund (RX1 below) is interesting. Despite the long term trend is down (MA 200 days), the momentum is good (with MACD cross) and trender in green. Also the price failing the selling signal of the average of bollinger line and bouncing, is a good indicator of investors positioned short or less happy to take new short position.
I said credit market undeperformed govies this week, but the spreads overall this week were quite with IG tightening (investors returned to buy duration) and HY almost flat. Implied spread was slightly worst with some widening priced but the technicals are supportive, with a totally lack of supply (bad for next year).
From a rating point of view better rating overperformed the lower one (BB total return was 0.48%; B +0.53% and CCC -0.85%).
MICRO:
The best performers of the week are:
IHOVER (IHO Verwaltungs):The company announced the issuance of a new PIK, with use of proceed for partial redemption of the existing callable 2025;
INWIM (Inwit): The bond was supported by the duration, rating and a report of Reuters affirming the PV Ardian is exploring a takeover bid for the company;
The worst performer is:
COFP(Casino): the company was downgrade by Moody’s to Caa1 with negative outlook due to market share losses in France, negative FCF and margin compression. Today the company announced tender offer for the 2024 notes issued by Quatrim.
For today it’s all. If you liked reading it and want to support my job, please share this piece to friends and colleague and subscribe to the newsletter using the link below.
Have a great weekend,
Credit_Junk
Weekly Market Review - 24 Mar
Thanks for the weekly update - what is used for the IG/Gov ratio?