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Not A Surprise That They Liked

18 May 2018 by lberuti

Usually the direction of the price of oil is a good indicator of where the risk premium of GLENLN (Glencore Plc) is heading to. But today, despite a fairly stable commodity market, the 5-year CDS referencing GLENLN shot up after reports the Serious Fraud Office (SFO) is preparing to open a formal bribery investigation into the company and its work with Dan Gertler and the Democratic Republic of Congo (DRC). The Israeli businessman and DRC President Joseph Kabila have been implicated in previous British and American bribery investigations. The US imposed sanctions on Gertler as recently as December, saying he has used his friendship with Kabila to corruptly build his fortune. An SFO investigation would add to a growing list of legal challenges for GLENLN and was not priced by the market. There is no certainty to what it could bring, and uncertainty is exactly what investors loathe. GLENLN’s 5-year risk premium traded as wide as 150bps before closing at 138bps, 12bps wider on the day, while its share price lost 4.5%.

Mamma Mia

16 May 2018 by lberuti

A draft of the governing contract between M5S and the League was leaked last night. While it was later dismissed as a previous draft, fully superseded by now, it was dated 14th May and gave a taste of a number of key issues. The least that can be said is that market participants found it disturbing. It included controversial topics such as debt cancellation and a procedure to allow member states to leave the Euro. While apparently deleted in subsequent drafts, the mention of the creation of a mechanism for a potential Italexit gave the sense of a coalition ready to reignite the redenomination risk. On the debt, it was suggested that the ECB should cancel the Italian sovereign bonds it currently holds. The idea is that this debt is neutralised as the interests paid to the Central Bank are reverted to the Italian government, and as such the cancellation would have little impact at least until ECB’s policy of reinvestment holds. This idea – which Charles Ponzi once found quite interesting – suggests that the M5S-Lega coalition would consider the non-repayment of a debt to the ECB. It did not go down that well with markets when Greece floated a similar idea a few years ago… It sent the BTP-Bund spread flying – it closed 21bps wider – and put everything Italian under pressure. Of course, most of the pain in creditland was inflicted to financial institutions, and if you click on the Financial bubble in the above grapple, you will see that the 5-year risk premia of UCGIM (UniCredit SpA) – 7bps wider at 82bps – and ISPIM (Intesa Sanpaolo SpA) – 7.5bps wider at 86bps – were the clear underperformers of the day.

Did Options Pin The Market?

15 May 2018 by lberuti

The credit market had many reasons today to feel a bit uneasy. The USD showed no sign of weakness. That meant emerging markets were under constant pressure across the board and, combined with the renewed tensions in the Middle East, led to some very bearish price action: the Lebanese Republic’s 5-year risk premium shot up another 50bps and reached 625bps, Turkey’s closed 24bps wider at 261bps. But in all fairness all CDX EM constituents were affected. The US interest rates kept creeping higher, and the 10Y not only traded back up above 3% but also breached the 3.05% level which was deemed to be the next level to watch. And indeed credit indices did drift a tad wider, but the move was really contained – iTraxx Main (ITXEB) widened 1bp and iTraxx Crossover 2bps -. The market felt really reticent to move any further ahead of the option expiry which takes place tomorrow. There is allegedly a big pin – ie a strike with an important option open interest - on the 55bps strike on ITXEB, and effectively sellers of protection were plenty as soon as it traded above that level.

From Dull To Duller

14 May 2018 by lberuti

Last week was understandably quiet. Almost every single day, some part of Europe was closed because of bank a holiday. There was some hope that today would mark the return of some form of activity, but in the synthetic credit market, trading ranges were tight once again and volumes were equally low – you can find them at OTC Streaming -. If you had told people a few weeks ago that by mid-May Argentina’s risk premium would have doubled and that a coalition of far right and left populist parties would be about to form a government in Italy, I doubt that many would have said that credit would be at the tights of the year and that realised volatility would be rock bottom. It seems that after some bruising experiences over the last couple of years, no one wants to get bear trapped. The result is the uniformly grey above grapple.