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Love It Or Hate It

19 July 2017 by lberuti

If you ask any credit traders what has been the most salient feature of the market since the beginning of the year, the unanimous answer will be “no volatility”. But while traders are moaning about a market that has not experienced any rough patch in over a year - the most recent credit wobble followed the run up to the French elections and lasted less a week while the previous one goes back to the US elections and lasted a day -, others are relishing this environment. Investment bankers had a very good run advising on mergers and advising on bond and equity sales. And so had wealth management units at the different investment banks. Bank of America, Wells Fargo, JPMorgan announced record profits from wealth and asset management when they reported earnings during the last week, while they all suffered steep drop in revenue from trading bonds. Today, Morgan Stanley reported earnings that were symptomatic on that trend. Despite a 4% drop in fixed Income revenue, a 29% jump in wealth management profit helped it top estimates.

Imagine If Stocks Were Up

18 July 2017 by lberuti

When volumes are light and volatility is subdued, credit derivatives indices – and all Credit Default Swaps actually – tend to outperform. Indeed, investors hate to pay carry in a zero-interest-rate-no-default-world when there is no marked-to-market to protect. This theme clearly played out today. Despite European equities down roughly 1% and US equities in the red as well, credit indices closed tighter across the board – the odd one out was CDXHY which was 1bp wider at 324bps -. Concerns regarding the lack of progress of the US Republican healthcare bill which does not bode well for Tax or other fiscal reforms gripped stocks, but there was no one - yet - to buy CDS just because stocks were down. Disappointing results from ERICB ( Telefonaktiebolaget LM Ericsson ) – which sent its stock down almost 16% and its 5-year risk premium 12bps wider at 138bps – failed to trigger weakness in the telco sector – or any other sector! – and iTraxx Main protection was sold aggressively as soon as it approached 54bps, as some people are managing gamma negative option positions expiring tomorrow.

New perspective for VUE

17 July 2017 by pdonnat

The cinema operator VUE was part of the iTraxx Crossover index over the last 3 years from the time it was bought by the Ontario Municipal Employees Retirement System, the Canadian pension fund. It was reported over the weekend that the pension fund is considering a sale or an IPO for VUE. The CDS tightened by 50bps today, closing at 192bps. Even if the company were bought by another private equity fund, the CDS would likely become an orphan as the issuer - VUE INTERNATIONAL BIDCO PLC - would be dissolved. However, the deal is far from being a done deal. Cinema attendance is quiet challenging. The all-time high in the UK was in 1946 with 1,635M admissions. Cinema admissions have been around 170M per year recently. Not all venues will be converted into gamers’ arenas like the one VUE converted in London. At least we know that the Ontario municipal pensioners have little appetite for gamers and that they see limited perspective on the VUE business model transformation.
Meanwhile, the credit market was gently enjoying a quiet session with little activity reported across the board.

Head Off for Bastille Day

14 July 2017 by pdonnat

The over performance of European credit over its US equivalent was heading off its path today. The iTraxx Europe index is closing a touch wider while its US equivalent is closing stronger. The traded volumes reported on the various SDR were very low. The European credit indices coming off into the close was due to the lacklustre activity but it was also due to some iTraxx financial index consolidation. At 50bps, the risk reward on European banks and insurance companies could see more profit taking going forward. However, the single names did not follow through, hardly moving wider.
The squeeze in CDS can be stopped by the cash supply. The concession to CDS that Hema BV gave today was more than 200bps pushing the CDS 40bps wider. More issuance and refinancing could bring the CDS market more in line with the price of risks.