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Retailers Shining

20 August 2019 by jbchevrel

The US clothing retailer targeting middle income earners Kohl’s (KSS 158 – BBB/BBB/Baa2) saw its 5y CDS tighten by 15bp at the open before reverting to -4.3bp, remaining the 6th widest constituent in the CDX IG s32 -- tighter than Encana (ECACN 167 - BBB/BBB/Ba1), wider than DXC Technology (CSC 146 – BBB+/Baa2). The stock went from +6% to -6%. KSS reported comparable sales down -2.9% vs an average estimate of -2.4% although within the quarter, the CEO noted that comp sales reverted into growth territory over the 2nd half of Q2 (+1%) and added that this positive trend extended through now, ahead of the school comeback. That was the 3rd consecutive quarter of decline for top line. Adjusted EPS came a tad above what the consensus had expected and if the stock enjoyed some outperformance in pre-market (+6%), it reverted down, this time underperforming the broader US benchmark (-6%). EPS guidance has been maintained at [$5.15,$5.45]. KSS remains in a sector seen as pressured going forward by AMZN, but the steps taken (accepting returns for AMZN customers at all stores since July) are likely to support the business. In Europe, Casino (COFP) was among outperformers in the CrossOver s31, tighter by c50bp on the day, after it announced it plans a fresh round of asset disposals (real estate + unprofitable shops, potentially the discount chain Leader Price) that would raise an additional c€2B, which one can reasonably think that the proceeds will be used to reduce debt. Last round was of comparable size. This is to put in regard with net debt c€5B as of H1-19. Timing-wise, completion is due by the end of Q1-21. Strategy-wise, COFP said it would skew its strategy toward more profitable e-commerce and premium segment (Monoprix). Elsewhere, it was a session that saw risk revert after a strong run (Main +1.8 Xover +5 CDXIG +0.6 CDXHY +4.1).

Squeeze

19 August 2019 by jbchevrel

Today was a reasonably risk-on session (Main & CDX IG -3 Xover -12 CDX HY -9) as reported improvement in US-China talks and German fiscal back door added to confidence in central banks. Reuters had reported this weekend that German MOF said they have fiscal strength to counter any downturn 'with full force' and suggested that the German government could spend c€50B extra to support the economy. That sent DAX +1.3% and FTSE MIB +1.9%. Asian CDS indices went tighter about 2bp across the board, and local stocks recovered across the board. China's PBoC announced key interest rate reforms over the weekend which are also likely to reduce interest rates used in most loans to the real economy. President Trump suggested that trade talks with China are ongoing but not anywhere close to a conclusion. In Europe, most names are tighter (only 3 constituents of the Main are wider, and by less than a basis point), DB, Italian & UK banks being one notable pocket of out performance. While this may be flow-driven, the biggest UK story over the weekend was the leak of the government's assessment of no-deal impact suggesting many risks of shortages (food, medicine in particular). The government then accused ex-ministers of the leak which they denied. Miners and other ‘wide’ high-betas were also well offered (retailers and autos in the CDX IG). The only notable laggard today is EM (CDX +7) due to Argentina only, which widened back to low 50s in upfront 500-coupon terms. Other CDX EM single names are little changed, from -5 (Turkey) to unchanged. Looking to the sessions ahead, we will get euro area ‘flash’ PMIs on Thursday, minutes from FED and ECB on Wednesday and Thursday, and central bank speakers including Fed Chair Powell at the Fed’s Jackson Hole Symposium on Friday.

Lull vs Recovery

16 August 2019 by jbchevrel

Argentina risk stabilized in the second half of this week, in the CDS market with the 5y k500 CDS now ~44% so ~-2% tighter on the day and ~-10% tighter from the peak. The curve steepened back also with 1s5s now ~17% and 3s5s now ~5%. Liquidity has now notably improved. The recovery there was a combination of things. Reasons include 1/ Macri's guidance regarding his good conversation with Fernandez 2/ speech by Alvarez Agis (part of Fernandez’s economic team) was market friendly, explaining why they are not going to default (this time…..) 3/ BCRA announced a new regulation (local banks now can have up to 5% of their capital in spot, the idea is to avoid from locals buying spot and selling futures or NDF to take advantage of the carry because Leliq rate is 75% while 1M is 150% 4/ Macri announced (Aug 14th) new economic policies (including freezing CPI-Indexed credits for 4 months, tax breaks, bonuses, higher minimum wages). Now, it remains to be seen whether those affect effective conditions between now and the vote on October 27th but the market reacted positively to it 5/ July CPI came better than expected at 2.2%. Although the new measures/releases/guidance might continue to support sentiment in the very short term, it seems that we would need a shift in investor sentiment regarding the chances that orthodox policies evaporate after the vote to see a re-pricing at the scale of that which followed last weekend’s primary election (Grapple blog as of Aug 12th). Along with that, Fitch just cut the sovereign to CCC from B.

‘Insurance Cut’

15 August 2019 by jbchevrel

At the risk of disappointing my readers, this isn’t about the Fed. AEGON sub cash fell up to 2c today. The main reason is that the insurance company’s Solvency II ratios fell aggressively due to ‘adverse market impacts’. AEGON 5.625 PERP c29 fell 2c indeed, its biggest drop since it was issued in last March. 4% T2 44 c24 fell 1c. The initial reaction of the market was thus very bearish although no big reaction in CDS space: snr CDS 5y +2 sub CDS 5y +4 while the stock was down -8%. AEGON’s Solvency II ratio in the NL fell to 152% from 181%, below the minimum >155% target. At a group level, Solvency II ratio came 197%, -14%but still closer to the high end of the [150%-200%] target range. Reasons for the drop include a tougher regulatory approach to capital requirements for illiquid assets, spreads tightening in bond markets and wider credit spreads on Dutch mortgages. On the latter, it is worth noting that mortgage spreads have kept widening since the end of the reporting period. Fair value losses amounted to c€400m. That included in the Netherlands c€460m, especially due to c€1.4B “strengthening of insurance provisions as result of shortfall in Liability Adequacy Test driven by credit spread movements”. Moreover, AEGON suffered FV losses in UK (c€75m) mainly due to equity hedges due to rising equity markets. Those were (only very) partially compensated by fair value gains of c€160m in the US. On top of that, at the second order, AEGON’s UK platform saw c€2.8B net outflows so far this year. This follows issues in 2018, lasting for several months. The extra cost to compensate clients on top of that was anecdotal (£3m). The interim dividend was raised 7% despite all that, funded by an extraordinary £100m dividend from the UK. At a group level, underlying PBT fell -5%y, ROE fell to 9.6% from 10.2%. Later on, the session was characterised by a tighter wider tighter move, mainly due to ECB’s Rehn. The Finnish GC member shook the market, commenting in an interview that the ECB should ‘over-deliver’ in September. This caused an immediate rally in CDS, stocks. In rates space, that pushed Bund yield below -70bp and September ECB OIS at -17bp. So now, even a 20bp cut is barely over-delivering... At the close, we are tighter in 5y CDS (snr -1 sub -4) and the stock is still down -8%. That stock drop is the steepest on an intraday basis since June 2016. The perps confirmed their loss, down about 2c on the euro.