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Headwind For The European Automotive Sector

22 June 2018 by lberuti

Until very recently, many thought that trade war issues would fade away. But over the last few days, the first measures and countermeasures effectively kicked in, and some could prove extremely disruptive to car-makers for their production set-up and for their profit margins. BMW and Mercedes have both made the US their global SUV manufacturing hub, and they will be among the main casualties of the tariffs imposed by China on American exports. So much so that it prompted DAIGR’s ( Daimler AG ) warning this week that its 2018 profit will drop because of fewer Mercedes-Benz SUV exports from its Alabama factory. It was one of the first big industrial businesses in Europe to cite and quantify the most recent escalation in trade rhetoric as a headwind in its trading update. If President Trump goes ahead with the 20% tariff he threatened to impose on all European car imports this afternoon, the recent underperformance of Autos’ risk premia in Europe could have more legs.

R.I.P. iTraxx Main Series 9

20 June 2018 by lberuti

Today was option expiry day. June is traditionally a busy one as this maturity – with March, September and December – is one that is actively quoted throughout the preceding 7 or 8 months. If this one felt really quiet, it was enough to pin the market on the 4 most liquid benchmarks. iTraxx Main (ITXEB), iTraxx Crossover, CDX IG and CDX HY spent the session wrapped around 67.5bps, 300bps, 62.5bps and 106.75 (or 339bps) respectively, which are all option strikes. That said, there was not too much delta overflow post 4pm - which is the actual deadline to exercise a credit index option on expiry day – which means options’ rehedging might not have been the only factor. Between the risk caused by a trade war and an hawkish Fed on one hand, and a very dovish Draghi and a decent confidence in credit evidenced by the 22Bln order book for the 5Bln deal announced by Bayer on the other hand, the market may just be finely poised. That subdued activity – you can see the volumes traded if you visit OTC Streaming - was the opportunity for those who have been in the CDS market for a few years to spare a thought for iTraxx Main Series 9, which saw its last remaining maturity mature today. Arbitragers now fighting to capture a few cents will remember fondly the 3.8% discount at which this index was trading compared to its fair value at the height of the Great Financial Crisis.

Rolling Black Outs

19 June 2018 by lberuti

Eskom Holdings SOC Ltd generates, transmits and distributes electricity to industrial, mining, commercial, agricultural and residential customers, and to municipalities throughout South Africa. The utility, which controls almost all the country’s electricity, has been entangled in a dispute over pay with its workers for some time and power generation has been disrupted since industrial action started on June 13. The disruption is in part the result of road closures which have prevented coal deliveries to storage facilities. Amid allegations of intimidation and sabotage at some power stations, Eskom had to introduce rolling black outs, as the dispute coincides with rising consumption during South Africa’s winter. Today, the company eventually tabled a deal offering a 4.7% increase and a four-year agreement linked to inflation in order to resolve the conflict. But, according to the company, bringing full stability back to the grid will only be achieved with the return of employees and a return to normal will take about 10 days. Since the beginning of the stand-off, investors have pushed Eskom’s 5-year risk premium 100bps wider at 513bps.

Series 29 Is Not The Only One

18 June 2018 by lberuti

A new week started with a new round of things to worry. iTraxx Main (ITXEB) and iTraxx Crossover (ITXEX) were pushed 2bps wider at 68bps and 4bps wider at 299bps at the close respectively, even though they finished the day slightly off their widest levels. In Europe, investors are worried about a potential breakdown within Mrs Merkel’s coalition with the CSU around immigration policies. She bought some time after she accepted a 2-week deadline which allows her to kick the can down the road a bit. Nevertheless, the remote possibility of this kicking off reintroduced an element of “European tail” in the equation. Also, everybody is waiting for the next blow in the US-China trade war. Options probably played their part in keeping the market in check, as the next expiry is due on Wednesday. Not because of any major pin in sight on ITXEB or ITXEX series 29, but rather because of positions on ITXEB series 28 with a 60 strike which triggered some rehedging as soon as this level was broken.