Big squeeze closes credit in January

Solid month but choppy waters ahead…

Across all markets, January has been a good month in performance. Equities, commodities, rates and credit have all delivered surprisingly good returns. That’s not necessarily all good. It highlights a relief trade in equities after a damning 2018 where dovish policy keeps rates low and liquidity in plentiful supply. Macro worries keep the bid for rates well-supported and yields anchored while credit has slipped in there somewhere as a ‘hybrid alternative’. There were odd months in 2018 which played out the same way only to be swept away later by a tsunami-like weakness, where it really felt like a financial market crash was coming. We dare think 2019 will follow the same path. After all, the issues which troubled markets in 2018 are still with us now.

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When the doves fly

Holding on to gains…

After a difficult final quarter of 2018, we have got just what we needed in January as we corrected some the ills which so blighted 2018’s performance. Brexit might have dominated Tuesday’s session and led to a blank session for markets, but Wednesday was all about gauging the repercussions of the win for Theresa May.  Just like a game of tennis, the ball is back in the EU’s court.

Sterling weakened than recovered. Equities dropped (for other reasons) and were still underwater on Wednesday. Cash credit has been flat amid little activity although we managed some deals in Wednesday’s session. European earnings are emerging and have displayed a bias to weakness (Bosch, Siemens – as industrials are expected to be pressured by Chinese macro slowdown), while Santander’s earnings showed some strength as LatAm/Spain offset weakness in the UK.

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SANTAN – Spain may be its home BUT… | Bank Capital Insights

LATAM is where it is growing…

SANTAN delivered in line earnings this morning driven by growth in its LATAM franchises and consumer finance businesses in Europe. For the year 2018, net income increased by 18% to EUR 7.8 billion, translating to a ROE of 8%.  

SANTAN is now becoming more and more reliant on LATAM, which now contributes to more than 40% of overall earnings. And it is seeing earnings pressure in its domestic market and in UK. There is nothing to suggest that these trends will reverse anytime soon.

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Show Time! | Bank Capital Insights

European bank earnings are upon us…

The large US banks reported much better than expected Q4 earnings and revenue growth (other than in FICC) and we saw a significant rally in their respective stock prices.  Now, a number of the large cap European banks are due to report earnings this week including Santander, DB, BBVA & Danske Bank and each one of them has distinct issues/topics that investors would be interested in.

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Tough get going

Timing is key

The upcoming first FOMC meeting of the year, a ramp up in the earnings season, Friday’s non-farms payroll report and the next stage of the Brexit debate with a series of votes due (on Tuesday) will all make for this week to be a rather disjointed one – with opportunities to get some business done needing investors to be spot-on with their timing.

As we might have expected, we endured a tentative start to the week, meaning there was little direction in markets – until US markets opened amid several poor earnings reports, and lower we went. Stocks were clearly weaker largely on the back of the subdued 2019 outlook from bellwether giant Caterpillar and rates were eventually better bid for choice. Credit was treading water (moderately tighter if anything), even as we managed to get a couple of corporate bond deals away.

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Event-risk fraught week ahead

Yield is the key in 2019…

Equity market valuations, when taken in isolation, seem to paint a picture that the macro outlook is bright…or that equities are cheap because rates are going nowhere. The earnings season is upon us and the flow of reports has been quite mixed, but the equity market is looking sprightly. In the meantime, there is no sell-off in rate markets as broad macro economic weakness is underpinning the support for fixed income product. That benchmark 10-year Bund yield is going to struggle to get anywhere near 0.50% this year (currently sitting at 0.19%). If it does, it’s going to need a smooth or no-Brexit, a US/China trade agreement, and a recovery in Chinese and US growth levels closer to 7% and 3% in 2019 against the forecasted 6% and 2%, respectively. Indeed, we don’t see it either.

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BCP AT1 high coupon and high risk | Bank Capital Insights

BCP re-opens the EUR AT1 market – valuation thoughts

Who would have imagined that the first AT1 deal of 2019 would come from a Portuguese Bank and that on the day of the ECB meeting?  BCP, Portugal’s largest private sector bank issued its debut EUR AT1 paying a coupon of 9.25% for a Perp NC5 structure and EUR 400 million in size.

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Back with a vengeance

Primary going some, and some more…

Thursday was deal day

The ECB meeting had absolutely no impact on the credit primary market in a surprising session which saw over €8bn of IG non-financial deals. Most likely taking the view that the central bank wasn’t going to change anything apart from being more dovish – which is what happened – borrowers flooded the IG vanilla corporate market with deals.

It was a stern effort and will take the month’s primary corporate bond deal flow to much more respectable levels. And there was juice in the deals, with another hybrid in there as well – the third this year. Overall, it was a stunning session in primary and pushed the ECB meeting/press conference into the background as far as corporate bond market investors were concerned.

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Want a nice trade to play SANTAN AT1 call decision? | Trade Ideas

Will they or won’t they?  SANTAN due to make decision on EURO AT1 callable in March 2019

Banco Santander (SANTAN) is due to report Q4 2018 earnings on 30 Jan 2019.   More importantly, for the bank capital market, would be the likelihood of a call decision on their 6.25% EUR AT1 (which is callable on 12 March 19).

Currently it trades with a cash price of €97 and if called at par, it translates to 3 points upside for 6 weeks risk.  But, if they don’t call, these bonds may drop to €90 or a lower cash price area..

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We can’t have run out of steam already!

Dull as dishwater…

Where have all the deals gone? The window is wide open and we’re screaming for corporate borrowers to get their skates on. Surely they are not still nervous about funding conditions. Maybe it’s just that they are punch drunk on the liquidity that they managed to hoard over the previous multi-year halcyon period for low-cost borrowing – and haven’t spent it. They extended maturities, there is no wall of funding approaching over the next year or two and the economic environment isn’t exactly bright and predictable. That must be it.

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