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Roasted 2.0

22 March 2019 by jbchevrel

Turkey went under pressure today with its currency depreciating about 6% vs USD intra day and its CDS closing more than 50bp wider. This is following a succession of developments. 1/ The main factor is speculation the CBT might be using reserves to support the currency before local elections on March 31. According to Bloomberg, the central bank’s weekly balance sheet reported that net international reserves fell -$6.3B in the two weeks through March 15 to $28B. That decline was unexpected and unexplained. 2/ The macro backdrop is that growth concerns cast doubts in EM sentiment, despite more dovish DM central banks’ stances. In particular, the US rates curve inverted between the 3m point and the 10y, for the first time since…2007! 3/ Comments by Erdogan criticizing Trump’s stance on Golan Heights could have been expected, realistically, but are still a sign of divergences between Turkey and the US, on the geopolitical front. 4/ With the elections approaching (Mar 31 / mayors and municipal councilors will be elected), demand for USD has picked up significantly from both local and offshore accounts. 5a/ Snowball effect: this PM, brokers including JP Morgan advised clients to go long $TRY targeting 5.90, although that’s now just 2.5% from us. They argued that political authorities will pay less attention to lira stability post Mar 31 elections, and that the pace of FX reserve consuming is unsustainable. 5b/ The rating agency Fitch added said that they expect Turkey to contract in 2019. In reaction to these market developments, the CBRT tightened supply by effectively suspending its 1-week 24% repo facility for an unknown period of time. A hike at this point in time would probably not please Erdogan much. CBT also argued that the drop in reserves was not due to an extraordinary situation, and that they remained committed to accumulating FX reserves. Adding to this, the Minister of Finance Albayrak said that Turkey will post a CAS in summer, that 2019 GDP growth would surpass the 2.3% expectation and that inflation would slow down back to single digits in Q3. Those ‘reassuring’ comments failed to stop the lira from weakening, post CDS effective close. The last time I entitled a comment about Turkey ‘Roasted’ was on August 10. For reference, back then, Turkey CDS was 40bp wider, TRY was 17% lower vs USD, TRY 1w repo rate was 625bp lower, 10y US yields were 40bp higher.

Deal Or No Deal

21 March 2019 by jbchevrel

Today PM May was in Brussels and formally requested a one-off 3-month Brexit delay. But EU leaders want a shorter cut-off than that. And they made it clear that this was contingent to May getting her deal passed in Parliament. This development, days before the March 29th deadline, got echo in the market. At a macro level, the spread iTraxx Main and CDX IG got back positive and wider, up 3.5bp today, going from -1bp to +2.5bp. The spread between their respective fair values also came back in positive territory (i.e. Europe wider), at +0.5bp. The single-name performance dispersion displayed demonstrates the UK risk underperformance further. Indeed, UK names widened the most (ITVLN +13 bank holdcos +10) in the iTraxx Main. In parallel, in other markets, Gilts rallied aggressively to 1.06% on the 10-year point, the lowest yield since Q3-2017, and in FX, the 1-month ATM GBP$ implied vol picked up to 13.5, a level last seen in December.

Roundup’s Round Two

20 March 2019 by jbchevrel

Bayer AG (BAYNGR) saw its 5y CDS (note that 5y now designates the June 2024, as opposed to the December 2023) widen by c25bp and its stock fall by c13%, after an overnight Monsanto-linked legal headwind. The San Francisco jury has ruled against BAYNGR, concluding that Roundup was a substantial factor in causing the plaintiff's cancer. This is not yet a finding of Bayer's liability. Liability and damages will now be decided in a 2nd trial phase beginning on Wednesday. This is the 2nd case for BAYNGR, having previously seen a Californian court award $289M against it, although this figure was later reduced to $78M on appeal. Dealers talk about a potential 1-notch downgrade across agencies. BAYNGR is currently BBB s/Baa1 n. The market wonders about the scope for a settlement tied to Glysophate trials. Settlements could in total exceed $5B. Some analysts believe that close to $20bn is priced in the shares, at this level. The series is poised to continue, as a 3rd glyphosate case in Missouri is due to start next week. The catalysts next in line will also include 1/ a St Louis case in early April 2/ news around disposals including Currenta and its Animal Health division. The latter could reportedly be worth $9B on its own.

Atlantic Spread

19 March 2019 by jbchevrel

The iTraxx Main (-1.7bp) outperformed its US counterpart, the CDX IG (-0.9bp) on the day, taking the ‘Atlantic spread’ back to less than a basis point, as we are the day before the roll. This cross-region spread was trading above 5bp a month ago. While the market might underestimate the probability of a technical No Deal Brexit at the end of this month, the momentum in Europe was particularly strong over the past 5 weeks, as evidenced in the rally in SXXP (+7.6% since Feb 13, vs ‘just’ +4.3% for S&P 500) and the compression of non-core EGBs vs Bunds (10y BTP -40bp vs. DBR). More recently in cash space, Europe also outperformed the US (QW5A -6bp since Mar 7, while IBOXIG is roughly unchanged). The main tail risk for that direction to hold would be a Brexit without a deal on March 29, although this event looks unlikely. The UK Parliament has voted against a no-deal Brexit, but the default option remains an exit without a deal. This is in the unlikely event where the EU does not agree to grant the UK an Article 50 extension after this deadline. Although some key EU countries have voiced that the extension would not come without a satisfactory reason from the UK, the market participants are largely expecting an unanimous agreement from the EU side at the end of this week to avoid a disorderly Brexit. German Chancellor Merkel repeated today that avoiding a no-deal Brexit was, for her, a priority. A headline also just popped, stating that the EU side was said to see mid-April as the deadline for the UK to decide on Brexit delay.