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No Smoke Without Fire

12 November 2018 by jbchevrel

Today British American Tobacco Plc (BATSLN) has widened by c25bp, taking its 5y CDS spread from c75bp to c100bp. At first sight it looks like a big move on such a tight name. It happened after a senior US Food and Drug Administration (FDA) official said the agency is looking at restricting menthol in cigarettes. The regulator hopes to hit youth smoking by banning/restricting flavors in cigarettes. BATSLN was impacted because it produces Newport, the best-selling brand of menthol cigarettes in the US. Menthol cigarettes represent approximately ¼ of BATSLN profit, making it the most vulnerable group to that potential regulatory move. That explains the +25bp on the CDS / -11% on the stock. The higher leverage (now ~3.7x) since the 2017 merger (with RAI – Reynolds American Inc) adds to valid reasons why investors are more cautious on the name, going forward. Elsewhere it was a reasonably active session despite the US being out on Veterans Day. A typical risk-off day which saw CDS indices widen, stocks fall, govies richen and the US dollar rise vs all other G10s.

Oil Down, Drillers Tighter?

08 November 2018 by jbchevrel

Anadarko Petroleum Corp (APC) is tighter -21bp since Tuesday’s close and its stock is up 7%. The 5y CDS is now back to 100bp, 16th widest CDXIG name, vs 7th earlier this week. That price action is common to Colorado oil drillers and came after 57% of Colorado’s voters rejected the so-called ‘Prop 112’ plan to limit drilling there. If it had gone through, it would have forced O&Gs to relocate away from residential and environmentally sensitive zones (which ½ CO is). Last summer, CO overtook CA as the 5th largest US state producer, behind TX, ND, NM, and OK. Ironically enough, this outperformance comes at a time when crude prices are pressured down. Indeed, focus seems to have shifted quickly to growing stockpiles in the US, away from supply concerns (Iran and, to a lesser extent, LatAm). WTI is down more than 20% in just slightly more than a month, making this downward move the sharpest since 2014, the year OPEC (led by Saudis) decided to not cap production to defend its market share. At the peak of oil crisis, in early 2016, APC 5y CDS was trading in the 500bp area.

No Retroactive Punishment

07 November 2018 by lberuti

A couple of weeks ago, Spanish banks experienced a few torrid sessions after a ruling said that they should be retroactively liable over four years for mortgage stamp duty payments. The decision would have cost them €5Bln. Overnight, it was announced that the Supreme Court had reversed the decision, and that home buyers would not be reimbursed their taxes and should actually keep footing the bill in the future. Investors’ reaction was very positive and protection for Spanish banks went bidless. But soon after, in response to the popular and political outrage that followed the decision, the government said that Spain will change its mortgage law, and that it will make banks pay the tax from the moment it publishes a decree on the matter. That somewhat dampened investors’ mood. Profit takers that had held long risk positions emerged to take chips off the table, and risk premia eventually stabilised. It is widely expected that banks will just raise fees or adjust mortgage interest to neutralise the measure, which means we are roughly back to where we were mid October.

Mid-Term Pause

06 November 2018 by lberuti

The election cycle in the US means we are never too far away from either a presidential or a mid-term election. Preparation also seems to go on for an age, such that it is a wonder politicians actually have any time left to govern, and the fervour generated at political rallies is something quite impressive. But, as far as they are concerned, during the few sessions heading into mid-term election day, markets have been focusing elsewhere. Despite the uncertainty surrounding the outcome of the vote – will the Republicans retain the senate? will the Democrats regain control of the House -, markets have in general been focusing elsewhere and were busy erasing most of the risk premia widening that we experienced since the beginning of October. Today was no different and all credit indices put in a decent performance, but volumes were thin and stood at roughly half what they usually are. Investors still assume the probability of a sharp sell-off is restricted, but they also suspect the outcome of the US mid-term elections is likely to provide some noise. They decided against going all in… yet.