25 January 2019 by jbchevrel
In a fairly risk-on session, European CDS tightened, led by high-betas, among which metal & mining companies. GLENLN (-9bp), MTNA (-12bp) and AALLN (-7bp) outperformed both the iTraxx Main (-2bp) and its fair value (-2.6bp). That relative outperformance is not only due to high beta. Solid production results at AALLN, RIO and BHP have boosted sentiment towards the sector. A general bullish price action in metals space helped too. Both base (+0.5%/+3.0%) and precious metals (+1.5%/+3.0%) have been boiled by a weaker dollar (DXY -0.7%). This reflects a broad optimism ahead of next week’s US-China discussions (Jan 30-31) and FOMC meeting (Jan 29-30) where officials might discuss bringing forward the end of the balance sheet unwind (WSJ). An effective de-escalation in trade tensions, coupled with a more dovish Fed and Chinese stimulus are supportive of the sector. But, the medium-term outlook might not be that clear. Miners’ performance remains closely tied to global growth, especially EM growth, as those countries are the biggest consumers of metals (China). That said, if a global recession was to happen in 2020, companies over-weighting precious metals over industrial ones would probably outperform the sector, as gold prices would probably rise. Today ABX 5y CDS is tighter -2bp, close to the tightest level in a decade, in mid 70s. Appetite for M&A, reputational risk and transparency issues are other risks chronically on the cards, in the sector.