Our Experts Comment on The Grapples

See All Entries

From Bad To Worse?

24 July 2017 by lberuti

The news came out on Friday, but it took the week-end to sink with credit investors. VW ( Volkswagen AG ), DAIGR ( Daimler AG ), and BMW ( Bayerische Motoren Werke AG ) may have colluded for decades to agree on technical standards, thereby impeding competition. German car makers seemed to have just turned the corner after the diesel emissions scandal, but in the process VW annoyed the European Commission. It refused to compensate the more than 8mln European customers affected by its diesel emission cheating, whereas it spent more than $20Bln in the US to atone for its wrongdoing. Anti-competitive practises fall in a completely different category though. And Brussels has plenty of tools to punish guilty parties. While the scope of any wrongdoing and potential fines are still unclear, in theory it can impose penalty of up to 10% of revenues on cartel members. Recently Google was fined €2.4Bln for abusing market dominance, and last year truck-markers had to cough-up €2.9Bln for price fixing. The German trio potentially faces a combined €50Bln bill. In an otherwise unremarkable session, the 3 German car makers were among the 4 worst performers of iTraxx Main constituents. The risk premia of VW, DAIGR and BMW were respectively 10bps (at 70bps), 6bps (at 57bps) and 4.5bps (at 48.5bps) wider.

They Are On A Roll

21 July 2017 by lberuti

Since the beginning of the year, investment grade credits had an impressive run in the US. The risk premium of CDX IG, which references the most liquid US companies, went from 66bps to 57bps, even though its maturity has been extended by 6 months, which the market values currently at 8.5bps. The performance of the average risk premium is effectively 17.5bps, ie more than 25%. But that pales in comparison with the performance of iTraxx Main. The risk premium of the European benchmark went from 69bps to 52bps, going through a maturity extension worth 6.5bps. The tightening is an impressive 23.5bps, ie 34%. The difference between the US and European indices comes mainly from banks which are not included in CDX IG. On average, the 5-year risk premia of European Banks has been halved, trading from 95.5bps to 47.5bps. Among them, the worst performer is HBOS – which only tightened by 28% from 65bps to 46bps – and the bests in class are STANLN, BNP, SANTAN and INTNED – which tightened by roughly 60% to 42bps, 35bps, 47bps and 28bps respectively -. No wonder they seem to have reached some kind of floor.

It's Thursday, It's Mario Day

20 July 2017 by lberuti

People spent the morning waiting for Mr Draghi to speak assuming it would dictate the price action for the rest of the day. During the last couple of weeks, the Bank of Japan intervened in the market to cap yields and Mrs Yellen delivered a dovish testimony which triggered to the latest risky asset. So, unsurprisingly, the ECB president did not deviate much and did not deliver any upset. He said the ECB would take a decision in the autumn on any change in its language on bond purchases. Credit indices hardly moved during the press conference, and the only scare eventually came from the US. News that a probe into Mr Trump’s business transaction with Russian counterparties was extended took a small dent in the market. But, ultimately, neither credit nor equities can be said to have cared hugely about any of this. Valuations are stretched, but that by itself is not going to make the market turn.

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.