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Neither A Hawk Nor A Dove… An Owl

12 December 2019 by lberuti

Despite some substantial moves affecting the risk premia of some companies – we had the opportunity to highlight a few of them in recent comments, and today SPLS (Staples Inc.) was another example as it widened roughly 40bps following the release of their results -, this week was always supposed to be all about macro events. Yesterday, the Fed held its last FOMC of the year and left its key rates unchanged. It confirmed yet again that monetary policy is on hold, and that the bar for rate hikes has been raised significantly over the past year. The tone of the press conference suggested that the Fed’s reaction function was changing, to be far less concerned with upside inflation risk and it removed the prospect of rate hikes should the labour market continue to tighten. Today marked the policy-decision debut of Mrs Lagarde at the helm of the ECB. Her conference suggested that bond investors may still have support from the European institution for now – Mrs Lagarde said she was neither a policy hawk nor a dove, but rather an owl, who will use her wisdom to create the broadest possible consensus to heal a recent rift in the Governing Council -, as she unveiled updated economic forecasts that showed a muted outlook. But neither of these two Central Bank meetings triggered any market reaction. They were greeted with polite indifference, and we had to wait for a tweet of President Trump to spark some action, when he said 'GETTING VERY CLOSE TO A BIG DEAL WITH CHINA. THEY WANT IT, AND SO DO WE' and sent credit indices tighter, very close to the bottom of their recent range (and effectively at their tightest levels of the year if you adjust for effect of the rolls). We will have to wait until tomorrow to see if the next big event brings market to life, once we know the results of the British general election.

Boparan Is Flying

11 December 2019 by lberuti

BOPRLN (Boparan Finance Plc) is the parent company for 2 Sisters Group (2SFG). The group processes chicken and supplies poultry and prepared meals to supermarkets. It produces roughly one third of all the poultry products consumed in the UK. A couple of years ago, it went in the spotlight for all the wrong reasons after ITV News and the Guardian published a report claiming to have uncovered a series of safety breaches at the poultry plants of 2SFG. The resulting investigation by the Food Standard Agency highlighted “several process weaknesses and regulatory failures”, and eventually led to the appointment of Andrew McInnes as managing director of the poultry division. Early November, an internal memo informed employees that he was leaving the company after only a year in the job. That sparked concerns among investors who, in a knee jerk reaction, pushed BOPRLN’s 5-year risk premium to a local high. Today the company reported 1Q results in line with previous guidance (like-for-like Ebitda up 42.4% to GBP22.5m in 1Q compared to the same period in 2018 ; sales down 4.4% but up 0.6% on like-for-like basis) followed by positive commentaries during the management call regarding margins of the poultry business in the coming year. It confirmed the recent positive trajectory of BOPRLN’s risk premium, as it closed almost 4pts upfront tighter at 28pts + 500bps running.

Montagne Russe

10 December 2019 by lberuti

Investors who own debt of ATLIM ( Atlantia SpA ) have been taken on a wild ride over the last 18 months. Their roller coaster began with the collapse of the Morandi motorway bridge in Genoa in August 2018. It eventually led to talks of stripping the main Italian toll-road operator of its lucrative contracts. ATLIM’s position looked even weaker when another bridge, this time in the norther Italian coastal region of Liguria, fell in November, even though for reasons – a mudslide caused by heavy rain - the company argued were beyond its control. But there was another twist today with Cassa Depositi e Prestiti (CDP) possibly entering the fray. CDP is an Italian public institution “using the country’s savings to promote growth and jobs, supporting innovation and the competitiveness of businesses, as well as infrastructure”. The potential arrival of such a “partner” is not necessarily what investors like most, but as it represents a credible alternative to the revocation of the toll-road contract, the news was greeted with a 3% raise of the ATLIM’s stock and a 35bps tightening of its 5-year risk premium to 240bps, which remains close to the high end of its range though.

Waiting For Boris (To Deliver)

09 December 2019 by lberuti

Over the last few weeks, risky assets (FX, equities, credit,…) have all been pointing in the same direction : the Conservative Party will win comfortably the forthcoming general elections – given the recent polls conducted as recently as this week-end which gave the Tories a 10pts lead over Labour with 44% of the votes, in front of distant Lib Dems at 11%, it is difficult to argue about that – and Boris Johnson will be able to navigate smoothly the exit of the UK from the EU. If a Brexit deal looks more than probable by the end of January, the negotiations that will follow and will govern the future relationships between the parties look anything but plain sailing. There are many outcomes which would not be materially different from a hard Brexit, given the very limited amount of time that will be left before the end of the transition period in December 2020. If it is true that the rally among credit risk premia has been broad-based since the beginning of October – iTraxx Main and iTraxx Crossover went respectively from a wide of 59bps and 258bps to 47.5bps and 221bps at the close tonight -, UK names have outperformed their peers in every sector, notably among financials as per the above grapple. There is not much room for disappointment of any kind at current levels, and it is not a big stretch of the imagination to think of a bumpier road ahead.