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Better Of Without It

24 November 2017 by lberuti

The week developed in understandably low volumes given the US holidays, but energy got some decent airtime in Europe. On the one hand, CNALN’s ( Centrica Plc ) risk premium was sent to its widest levels since June after it warned on profits on Thursday. On the other hand, the bearish momemtun on EDF’s ( Electricite de France SA ) 5-year CDS appeared to stall a little bit. Mr Hulot, the French minister for the ecological transition, wondered whether the structure of EDF was the best possible to face the challenges of the 21st century. Investors interpreted it as a sign that the French government could be considering spinning off the nuclear activities – which are potentially a source of large liability - into a standalone unit. The operation would be reminiscent of the move undertaken by RWE in 2016. At the time, the German electricity company, facing the programmed exit of nuclear energy in its country, decided to create a new quoted entity, Innogy, to take care of electricity distribution and renewable energies.

Life Outside CrossOver

21 November 2017 by lberuti

It was another firm session as the Thanksgiving rally continues. The wides of 55bps on iTraxx Main and 258bps on iTraxx Crossover seem now a distant memory. But if protection felt well offered on credit indices, there are still individual names on which the investors community is still skewed towards buying protection. If these names are index members, and more specifically members of iTraxx Crossover (ITXEX), then arbitrageurs who use the strength of the index to sell single name CDS are a source of protection. They have helped cap the widening, and names like Altice, SFR, Matalan, CareUK, Loxam are all trading off their recent widest levels. The situation is slightly different for names that for any reason have been dropped from indices. It is the case for RALFP ( Rallye SA ) which exited ITXEX since COFP ( Casino Guichard Perrachon SA ) entered it. RALFP is on a widening trend, and there is nothing to stop it at the moment. Its risk premium has been catching up with the move in Casino’s stock price which currently sits below €48. RALFP’s 5-year CDS lives its own life outside ITXEX and could experience more pain going forward as year-end amplifies liquidity issues.

Time For Carry Hunting?

20 November 2017 by lberuti

If today’s session is any guide, the most interesting thing to get your teeth stuck into this week is likely to be the turkey on Thanksgiving next Thursday. Credit indices tried to open wider on the back of the difficulties Mrs Merkel is experiencing to form a government in Germany. But as the euro early weakness was rapidly corrected, credit was prompt to rally as well and indices were soon back to where they were trading on Friday. They eventually spent most of the session in a narrow trading range, a tad below Friday’s closing levels. It looks as if ALTICE’s management managed to stop the rot for the time being, while ASTIM (Astialdi) also stabilised. It allowed the market to cool off following the turbulences triggered by companies earning last week. Coupled with a shortened week in the US, it was enough to bring volatility sellers to the market and option premia cheapened. It looks quite likely that the next few sessions will see an emphasis on strategies providing enhanced carry between now and the end of the year.

That Means Stress

17 November 2017 by lberuti

This week marked the return of volatility in the credit market, at least on a micro point of view. Indices had their up and downs but the moves were always contained. Peak to trough variations of 15bps – and we have to look at intraday prints to get a double-digit number as daily closes always seem to attract contravariant investors who bring daily moves in check – at best qualify for tempest in a teacup. The real action took place at the single names level, especially in the European high- yield universe. A few corporates have consistently been the focal point of the credit market. ASTIM (Astaldi), ALTICE, SFR, BOPRLN (Boporan) experienced roller coaster rides and they are all closing the week at their recent widest levels. Investors have real concerns about them, and there was a genuine appetite for protection on these names during both the up and downs of the market as a whole. So much so that for the first time in while, the basis of iTraxx Crossover (ITXEX), the index to which they all belong, stayed negative – ie the quoted risk premium of ITXEX was tighter than the sum of the risk premia of its constituents – throughout the whole period. It is what you would expect when ITXEX tightens - indices tend to react faster than single names -, but it is quite unusual when it widens. It is a sign of genuine stress.