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At the tights: UK Update

25 November 2020 by jbchevrel

RBS Group Sub 5-year CDS, along with other UK domestic banks' HoldCo sub CDS (Barclays Lloyds), is close to the 100bp handle and post-GFC tight (~90bp). This is despite the economic outlook in the UK. Government forecasts point toward the deepest recession since the Great Frost of 1709. The UK economy will have contracted -11.3% this year. This drop can be closed by 2022. But the actual GDP gap, at horizon 2025 (compared to what was expected pre-COVID) is estimated at -3%, if UK/EU agree on a Brexit deal. The OBR (BR standing for Budget Responsibility) warned that the GDP impact of the COVID crisis would be -5% instead of 3% in the long run, in case of No-Deal. But the market does not seem to give much credit to that very scenario. The Jobs market will be crucial as the UK’s economy dominated by Services and Consumption. On that chapter, the Unemployment Rate is expected to rise from here (4.8% -SEP) to reach 7.5% next year. Apparently, that could even go to 8.5% under a no-deal path, but again, the market does not seem to give much credit to that scenario. What is the Fiscal Cost? The UK is forecast to borrow £394BN this year (19% of GDP - highest recorded level in peacetime). Among other Fiscal Stimulus highlights are (1) Defense: £24BN plan over 4y (2) Infrastructure: £100BN plan over 5y. No doubt: more borrowing will be needed. The UK government is now planning to issue a record £486BN worth of bonds, this fiscal year. The irony is that today’s headlines make Chancellor Sunak look like a fiscal hawk because of (A) Overseas aid spending cut to 0.5%, from 0.7% (B) Pay rises for public sector workers in non-health roles are being paused.

Energy CDS ‘Squeeze’ Update

24 November 2020 by jbchevrel

(It’s worth zooming on the top-left part of the chart, to cancel the effect of RIG and NBR.) Oil prices soared today, and WTI is now $45/bbl. The last time WTI Crude traded at $45 per barrel was eight months ago, in early March this year, just before Saudi Arabia and Russia disagreed on how to manage oil over-supply. In the light of depressed demand due to the first national lockdowns in spring (including China’s…). Yesterday, the University of Oxford and AstraZeneca said that interim trial data from their Phase 3 trials show their vaccine is effective at preventing COVID and offers a high level of protection. This adds to the similar findings of Pfizer/BioNTech and Moderna earlier this month. In CDS index space, that resulted into a continued outperformance of CDX IG s34 and older series vs s35. This is as some of the Fallen Angels are both higher-beta and sensitive to oil, thus have seen their premium tighten aggressively today. Occidental Petroleum Corp CDS is tighter -91bp today. Apache Corp CDS is tighter -39bp today. Other Fallen Angels are generally high-beta too and pushed this roll move, as well. Macy’s CDS is tighter by 107bp today, CCL -31bp, RCL -49bp and Nordstrom -33bp. The NAV of IG34 has outperformed IG35’s by close to 2bp today as a result. Another technical sign that the energy market is recovering is that ICE Brent time spread has edged back into backwardation configuration (last seen in late June). OPEC+ will likely welcome a tightening in the forward curve, sign that demand is picking up and that output cuts are less/no longer needed. On that note, there is a OPEC+ meeting in a week’s time, and is at stake whether they delay easing cuts from 7.7mb/d to 5.8mb/d on January 1, 2021. At this stage, it does appear that market participants are expecting a rollover.

Out Of The Woods?

23 November 2020 by jbchevrel

Today Turkey CDS retraced +10bp wider, closing at 390bp. That is a consolidation, more than anything else, as Turkey 5y CDS had closed at 560bp earlier this month (11/2). That previous tightening had come mainly after Berat Albayrak, the son-in-law of Turkish President Erdogan, unexpectedly resigned as the country’s Economy & Finance minister (MoF), one day after the CBRT (central bank) governor was fired. Murat Uysal was replaced by Erdogan with the former Minister of Finance Naci Agbal, seen as a move toward economic orthodoxy. The official reason for Albayrak’s departure was an unspecified health issue and the willingness to spend more time with his family. On the central bank side of the equation, confidence temporarily returned after Turkey’s central bank raised its one-week repo rate by 475 basis points to 15%. That took place last Thursday and sets rates closer to where the Taylor rule puts them. This event was met with further strength on the lira and the CDS, such that the recent tight on a close to close basis was last Thursday at 368bp. Friday and today, we have seen some consolidation of this move, ending +22bp wider than Thursday’s tight. And despite the global risk-on tightening move that we are currently experiencing in CDS world. Today’s widening (+10bp) looks subdued compared to the FX move. Indeed, the lira was down 4% earlier today and is now down -5% vs the aftermath of Turkey’s central bank on Thursday. Beyond economic (monetary and fiscal) policies, much of what’s to be worried about Turkey is geopolitics. Recent spats vs France, Russia and less recently the US had weighed on sentiment. Today, the German navy was forced to abandon its search of a Turkish cargo ship suspected of delivering weapons to Libya after Turkey raised objections. The German crew was acting on the orders of Operation Irini, the EU’s mission to enforce the UN Security Council arms embargo against Libya. The lira move has probably been exacerbated by the low liquidity and the opportunity for locals to pile up some dollars at a lower price, to hedge against future Turkish inflation.

Stairway To.. Heaven (?)

20 November 2020 by jbchevrel

FirstEnergy Corp. (FE) operates as a public utility holding company generating and distributing electricity. It also offers exploration, production, and distribution of natural gas. FE CDS is a constituent of CDX IG index since series s04. In July 2020, the FE CDS premium tripled in one day from about 20bp (In 2019 FE increased Cash Reserves +60%=+$250M, stable cash flow, reasonable dividend) to 60bp. FE said it received subpoenas in connection with the investigation surrounding Ohio House Bill 6. There were accusations of bribery involved in the passage of the bill, with some suggesting illicit payments may have gone as high as $60M. Then, this autumn, FE fired CEO Jones and other senior executives (senior VP of product development, marketing, and branding & senior VP of external affairs) after a board review set up in the wake of a federal corruption scandal found they violated the company’s policies and its code of conduct. The FE CDS came from 70bp to about 100bp, on that. Today Fitch Ratings downgraded the LT IDR of FE to BB+ from BBB-. This rating action reflects recent disclosure of a $4.3M payment from FE to an individual who is now a government official involved in regulating FE's Ohio-based utility distribution subsidiaries. Fitch believes the disclosure significantly deepens regulatory, political, legal and liquidity risks already heightened by investigations underway at the Department of Justice (DOJ) and SEC. The $4.3M payment was made in early 2019. The FE CDS came from about 100bp to 132bp, on that last development. For reference, at the moment the CDX IG fair spread is 57bp, BBB’s is 67bp, BB’s is 193bp and CDX HY’s is 338bp. FE CDS has widened by ‘plateaux’ since this summer.