Después de un año y medio en la era post-covid, parece que estamos volviendo, lenta pero inexorablemente, a una cierta normalidad en la que, aunque las mascarillas siguen siendo la norma, puedes empezar a quitártela, los viajes están reviviendo y los toques de queda parecen ser una pesadilla del pasado. Esta vuelta a la normalidad también se aplica a las finanzas y la economía. Las economías de la eurozona se están recuperando del golpe que recibieron en marzo de 2020 y el BCE ha insinuado una ralentización y eventual interrupción del Programa de Compras de Emergencia para la Pandemia (PEPP) que iniciaron al principio de la misma
¿Qué es el Programa de Compras de Emergencia para la Pandemia (PEPP)?
El PEPP es una medida de política monetaria no estándar que se puso en marcha en marzo de 2020 en medio del brote del covid. Su objetivo era contrarrestar los riesgos de desaceleración económica de las economías europeas mediante una política monetaria agresiva.
Estamos hablando de un Programa de Adquisición de Activos (APP) temporal de valores del sector privado y del sector público destinado a alterar indirectamente el comportamiento de endeudamiento y gasto del sector privado, así como a abordar los posibles problemas de liquidez que pudieran surgir. Todas las clases de valores admisibles en el APP tradicional lo eran también en el PEPP. Además, incluía una exención de los requisitos de admisibilidad para los valores emitidos por el Gobierno griego. El plazo de vencimiento mínimo admisible se redujo a 70 días, mientras que el plazo de vencimiento máximo admisible para las compras de valores del sector público se fijó en 30 años y 364 días. Además, se amplió la elegibilidad del papel comercial no financiero en el marco del Programa de Compras del Sector Corporativo (CSPP) para incluir valores con un vencimiento restante de al menos 28 días
Inicialmente, el PEPP iba a disponer de €750 billones para estas compras. Sin embargo, el 4 de junio de 2020, el Consejo de Gobierno decidió asignar €600 billones de euros adicionales y, el 10 de diciembre de 2020, otros €500 billones de euros. La suma total del PEPP acabaría ascendiendo a €1.850 billones.
La duración del PEPP se especificó al principio, con el BCE declarando lo siguiente “el Consejo de Gobierno pondrá fin a las compras netas de activos en el marco del PEPP una vez que considere que la fase de crisis COVID-19 ha concluido, pero, en cualquier caso, no antes de finales de marzo de 2022”.
Antecedentes financieros y qué ha implicado el PEPP
El BCE ya estaba llevando a cabo una estrategia de Quantitative Easing (QE) cuando comenzó el brote de COVID-19. Este programa de QE comenzó en marzo de 2015 y su principal objetivo era evitar una inflación por debajo de cero en la eurozona en un momento en que las economías aún se estaban recuperando de la crisis de la deuda de la eurozona. En este programa QE, el BCE compró deuda pública y corporativa, valores respaldados por activos y bonos cubiertos, a un ritmo de 1,3 millones de euros por minuto.
A mediados-finales de 2019 el programa de QE se había estabilizado, y el balance del BCE no aumentaba, sino que se mantenía constante (ver gráfico debajo). Lo que implicó el PEPP fue una repentina reanudación y aumento del programa de QE. Como puede observarse en el gráfico, el ritmo de aumento del Balance del BCE -que consiste en todos los bonos, deuda corporativa, valores respaldados por activos y otros activos financieros- fue algo nunca visto. De hecho, en un año el Balance del BCE casi se ha duplicado, ascendiendo actualmente a €8.191 billones.
Balance del BCE, todos los activos
Fuente: Bloomberg
¿Cómo funciona el PEPP?
El PEPP ayuda a las personas y a las empresas a acceder a los fondos asequibles que necesitan para capear la crisis y es un complemento de las demás medidas de política monetaria ya aplicadas.
El PEPP permite al BCE comprar los activos mencionados anteriormente en los mercados financieros, haciendo que sus precios suban, e implícitamente, el tipo de interés del mercado baje. Esto hace que los préstamos sean más baratos para las empresas, los gobiernos y los particulares. Es una política expansiva que ayuda a mantener estable el endeudamiento, el gasto y la inversión a pesar de la crisis causada por la pandemia.
Además, el PEPP pretende impulsar el crecimiento económico y la inflación mediante la incentivación del consumo y la inversión y, en definitiva, la reactivación de la economía.
Compras mensuales del PEPP
Fuente: Bloomberg
Cabe mencionar que el PEPP, aunque similar al Programa de Adquisición de Activos (APP) regular, tiene algunas características únicas. Éstas son:
Es flexible. En qué tipo de activos compran, cuándo lo hacen y en qué países. Esto permite al BCE responder rápidamente a los cambios en el entorno financiero o económico para preservar las mejores condiciones de financiación. Como puede verse en el gráfico anterior, el ritmo del programa se ha estabilizado en torno a la marca de €80 billones de euros en los últimos meses. Sin embargo, la cantidad que han desembolsado cada mes ha ido variando a lo largo del periodo analizado. Esto ha permitido al BCE mantener unas condiciones de financiación óptimas durante una de las peores crisis a las que se ha enfrentado la zona del euro.
Es escalable. La dotación inicial era de €750 billones y se ha aumentado a €1.850 billones. Esta cantidad puede aumentarse o reducirse según sea necesario para mantener unas condiciones de financiación favorables. Hasta ahora se han desplegado aproximadamente €1.350 billones. Por lo tanto, a menos que el programa se acorte, todavía pueden comprar activos por valor de €500 billones.
Es temporal. Se ha creado específicamente para contrarrestar el impacto de la crisis del coronavirus en la eurozona y se llevará a cabo hasta, al menos, marzo de 2022 o hasta que el Consejo de Gobierno considere que la crisis ha terminado.
¿Cuál ha sido el resultado del programa hasta ahora?
El Programa PEPP ha impulsado los mercados de bonos de la región, ayudando a mantener los rendimientos cerca de los mínimos históricos, incluso cuando los gobiernos emitieron cantidades récord de deuda para sortear la crisis pandémica. Las economías de la eurozona han podido capear el temporal gracias a este sistema de “soporte vital” para las economías y los mercados que ha sido el PEPP. Las economías han podido recuperarse en forma de V y el consumo se ha reactivado rápidamente gracias a la política monetaria laxa unida al PEPP, que ha incentivado a los agentes financieros a pedir préstamos y a prestar. Sin embargo, esto también tiene un coste, el balance del BCE expresado como porcentaje del PIB de la zona euro se ha disparado, llegando al 70% en la última lectura de agosto.
Balance del BCE en % del PIB de la Eurozona
Fuente: Bloomberg
¿Que se puede esperar ahora?
Un año y medio después del inicio de la pandemia y del PEPP, las economías están experimentando tasas de crecimiento del PIB récord, cifras de desempleo en descenso y cifras de inflación récord. Todas estas cifras apuntan en una dirección: podría ser el momento de empezar a pensar en ralentizar -y eventualmente detener- el Programa PEPP.
En la última semana, Francois Villeroy (Gobernador del Banco de Francia) ha insinuado que, dado que la evolución de los mercados es mejor de lo esperado, y con el fin de preservar las condiciones óptimas de financiación y contener la inflación, podría ser posible una reducción del ritmo de compras de activos del PEPP en los próximos meses.
¿Significa esto que el PEPP se detendrá en el cuarto trimestre de 2021? No, significa que las compras mensuales de €80 billones de euros podrían reducirse. El final del Programa está aún por discutir en función de la evolución de los mercados y las economías de la zona euro. Sin embargo, este tapering será ‘dovish’, ya que siguen permaneciendo flexibles para aumentar el ritmo si las condiciones de financiación se endurecen de nuevo. Asimismom, las políticas monetarias seguirán siendo acomodaticias, incluso después de que el PEPP termine el próximo año. Cabe recordar que el PEPP se desarrolla en paralelo al APP que ya se estaba llevando a cabo en el programa QE del BCE. Por lo tanto, incluso después de que el PEPP termine el próximo año, el APP seguirá funcionando a su ritmo normal.
¿Cómo han reaccionado los mercados y cómo lo harán en el futuro?
En el momento de redactar este artículo, los inversores de la eurozona han reaccionado a esta noticia valorando un cierto riesgo de tapering en la reunión de septiembre del BCE. El rendimiento de los bonos alemanes a 10 años subió a menos 0,36%, frente a menos 0,5% hace dos semanas, lo que refleja una caída de los precios. El rendimiento de los bonos de referencia de Italia subió al 0,712% desde su mínimo del mes pasado, el 0,513%. Los expertos afirman que hay margen para una nueva venta, pero el diferencial entre los costes de los préstamos alemanes e italianos se ha incrementado muy poco. Es decir, no hay indicios de que aumente la presión en las naciones más endeudadas.
En cuanto a lo que ocurrirá en el futuro, es una gran pregunta para la que no hay una respuesta clara. Los mercados son imprevisibles -especialmente en las circunstancias actuales- y la reacción a la ralentización y eventual paralización del PEPP es aún desconocida. Por eso, el BCE quiere que este proceso sea lo más lento y suave posible, para que los mercados tengan tiempo de digerir la noticia sin mayores sobresaltos.
Alexandro López Rodríguez
Fuentes: ECB, Bloomberg, Reuters, Financial Times, elEconomista, Investing
Financing has always been a crucial matter to corporates regardless the sector they operate in. Notwithstanding, the current situation on debt capital markets, mostly due to the worldwide spread of Covid-19, is making it significantly more troubling than usual, leading companies to consider alternative solutions.
PRIMARY MARKET EFFECTS
On the primary market, companies are struggling to issue, failing in injecting fresh money into their business, or even roll their outstanding debt close to maturity. An example is given by the Commercial Paper market, always considered a flexible and low-cost solution for many companies, despite their credit rating. Nowadays, issuers, even those with IG status, have seen their financing costs more than tripled, now sitting at levels close to those registered during the global financial crisis. Looking at longer-term products, such as Corporate Bonds, the current situation is only worse, if possible. Indeed, putting aside a few exceptions, the market is pretty much dry for HY and non-rated issuers, and is very small for those who stand in between the IG and HY status, as investors fear a possible downgrade. In these times of uncertainty, most of issuance volumes come for highly rated issuers, benefiting from a credit profile that makes them eligible to Central Banks’ Purchase Programs.
SECONDARY MARKET EFFECTS
On the secondary market, severe outflows have been seen lately on Corporate Bonds and CPs, hitting prices and putting a remarkable pressure on yield curves. On one hand, corporate investors are trying to keep their liquidity high by either selling their long-term positions or avoiding to roll those that are about to mature. On the other, institutional investors are not only willing to build a safety cushion with their cash but they are also coping with the constraints imposed by their investment policy. As a matter of fact, over the last few weeks, downgrades by the main credit rating agencies have led to a series of fallen angels, i.e. companies who have lost their IG status, flooding the market with junk bonds. In the US, the market has seen an increase in fallen angels of about $120bn, while in Europe, it is expected to be around €61bn, considering non-financial companies only, with €38bn and €110bn in a bullish and bearish cases, respectively. As a consequence, as most institutional investors have limits on junk issuers, they had to sell quickly their position making prices plummet.
Having stated the problems, how are companies dealing with them? Their main concern is related to debt repayment when investors are not willing to roll their positions or to take on new investments. Therefore, at first, the immediate solution to this problem has been reverting to their Banks in order to use their credit facilities, ready to use but very expensive compared to capital market solutions. Later on, they notably lifted their yield curve so as to attract new funds without any success, in most cases.
CENTRAL BANKS
As a consequence, other solutions have been implemented by Central Banks. In the US, the Fed has lowered its Fed funds target rate by 100bp to a range of 0-0.25%. Moreover, a new round of Quantitative Easing has started with securities purchases of at least $700 bn that will take place over the next months. In addition to this, a series of facilities has been put in place: the Commercial Paper Funding Facility (CPFF), allowing the Fed to buy on the secondary market, through a SPV, CPs issued by highly-rated companies, at least A1-P1-F1, and one-time purchase of CPs issued by issuers with at least A2-P2-F2 rating; the Primary Market Corporate Credit Facility (PMCCF) and the Secondary Market Corporate Credit Facility (SMCCF) to buy bonds issued by eligible counterparties, respecting specific rating requirements, with maximum maturity of 4 years for the former and 5 years for the latter.
In the UK, the Bank of England has put in place many measures to support all market actors. Specifically, the cut of its interest rate to 0.1%, that will reduce costs in funding for banks, businesses and households; the Covid Corporate Financing Facility (CCFF), that supports firms’ liquidity by purchasing CPs issued by those rated at least A3-P3-F3, the Coronavirus Business Interruption Loan Scheme, that provides SMEs with access to government-backed finance, with a guarantee up to 80%, for a maximum of GBP 5 million.
As far as the Eurozone is concerned, the ECB has expanded its existing QE, already at €20bn, by adding €120bn. Moreover, a new Pandemic Emergency Purchase Program (PEPP) has been put in place, that will allow the ECB, through its Local Central Banks, to buy marketable debt instruments, issued by companies with a minimum rating of A2-P2-F3, that have an initial maturity of 365/366 days or less and a minimum remaining maturity of at least 28 days.
In Sweden, the Riksbank has started to buy on auction base CPs issued by non-financial companies up to a total amount SEK 300bn. The papers need to have a residual maturity of up to three months and to be issued by companies with at least A3-P3-F3 rating. Moreover, the Bank has recently decided to buy Municipal Bonds for SEK 15bn.
NATIONAL MEASURES
In addition to these measures at European level, each country is implementing further solutions. In France, the Government has enacted a guarantee scheme to support bank financing to businesses, dealing not only with pre-existing loans but also new ones providing guarantees between 70% and 90% depending on the size of the company. In Germany, two main programs have been put in place: KfW-Unternehmerkredit, for established companies, and ERP-Gründerkredit-Universell, for those that have been in existence for less than five years. They will be channeled through local banks and will be equivalent to €200bn. As for SMEs, further €50bn have been put aside to support their business. In Italy, the Government has enforced a decree that will guarantee loans for SMEs and self-employed up to 90%, for a total amount of €200bn. Moreover, it has implemented a protection for those listed companies showing a weak stock market situation, that are considered strategic in the energy, defense and telecommunication sectors, in order to avoid foreign holdings overcoming the threshold of 10%. In Spain, the Government has activated a publicly guaranteed credit line through the ICO for a total amount of €100bn that, at least in the first round, will be provided through the five largest Spanish banks. The State will provide guarantees up to 70% and 80% depending on the size of the company. Finally, the Swedish Government has arranged a measure to guarantee up to 70% of the new loans provided by banks, allowing companies to borrow up to SEK 75 million in order to relieve the pressure on their liquidity.
ONGOING PROCESS
As we have seen, Government and Central Banks’ responses has been quick, and the measures announced historical. Nevertheless, the completion of such actions turns out to be more complicated than first stated and some concerns are arising.
At the European Level, the response keeps adjusting as the effect of the crisis on the economy and on companies’ balance sheet are unfolding. We had the proof of that on 22nd of April when the Central Bank agreed to start accepting non-investment grade debt as collateral, on the path to follow the Fed and buy higher-quality junk bonds to partially limit the effect of possible fallen angels, as mentioned above. In the meantime, EU leaders are still discussing a possible 2 trillion-euro ($2.2 trillion) rescue plan for the region as an estimate of private-sector activity in the euro area plunged to just 13.5 from 29.7 in March (IHS Markit).
Concerning national intervention to guarantee liquidity to businesses, doubts are still on the table in some countries as most of measures taken are channeled through private banks. This uncertainty takes place at several levels, starting at the documentation to be drafted and going up the inequality of loans distribution between banks or between businesses. Indeed, in some countries, the implementation characteristics has led to favor specific banks and types of business, making it harder for an entire part of the economy to access the first wave of liquidity.
Paolo Barbusca
References:
– Bloomberg
– The Wall Street Journal
– Reuters
– S&Ps
– Federal Reserve
– Bank of England
– ECB
– Riskbank
Estimado Cliente, El pasado 27 de febrero 2020, NEW MOMENTUM envió un comunicado interno a los empleados con el Plan Específico de Prevención, y se les trasladaron las normas de comportamiento para protegerse a sí mismos y a su entorno, siguiendo las recomendaciones de la OMS y el Ministerio de Sanidad. Desde NEW MOMENTUM queremos informarle que nuestra oficina ha estado siempre preparada para situaciones de emergencia de este tipo y para asegurar sus servicios a los clientes.
Actualmente, estamos operando con total normalidad y ofrecemos el nivel de calidad y servicio que es habitual. Para favorecer una comunicación fluida y segura, le aconsejamos y agradecemos que lo haga mediante el uso del correo electrónico.
Por último, solo quiero decirle que, en estos tiempos de incertidumbre, todos y cada uno de nosotros en New Momentum, estamos a su disposición para cualquier anticipación de problemática de financiación o de cualquier otro tipo, relacionado con nuestros servicios.
Sin otro particular, me despido atentamente.
Bruno Atlan, CEO
This week, the Government Council released its decision on the monetary policy to support households, firms and banks during the current economy disfunction. The Council conducted the following package made of “ambitious and coordinated fiscal policy response”:
1) In order to immediately provide liquidity support until June 2020, the Long-Term Refinancing Operation (LTROs) – injecting low interest rate funding to banks with sovereign debt as collateral on the loans – will be delivered as being an effective backstop in case of need, carried out as a fixed rate tender procedure via an auction mechanism and an interest rate amounting to the average rate on deposit facility (-0,50%).
2) Afterwards, from June 2020 to June 2021, the Targeted Long-Term Refinancing Operations (TLTROs) will be applied to push banks to lend to small, medium-sized enterprises and households. With an interest rate on these TLTRO III being at 25 basis points below the average rate applied: The Main Refinancing Operation rate (MRO), rate at which banks can borrow money from the ECB.
3) The European Central Bank decided not to change its interest rate on the main refinancing operations (0,00%), the interest rates on the margin lending facility (0,25%) and its deposit facility (-0,50%).
4) It also decided to raise the bank’s asset purchases by a temporary envelope of an additional € 120 billion until the end of the year in order to concentrate on bonds issued by companies and to further lower borrowing costs for the private sector.
5) Lastly, The ECB will fully reinvest the principal payments from maturing securities purchased under the Asset Purchase Programme (APP).
Source: ECB
In an uncontrolled scenario of the death toll outbreak, some sectors found themselves making the most of the situation to achieve record profits. Indeed, Asian-based companies such as Top Glove, a rubber surgical gloves producer, and Zhende Medical, a medical supplier, saw their stocks skyrocket by 14% and 33% at the beginning of the month.
As such, we could have thought that the global healthcare sector would have been less affected by the situation, but it happened to be hypothetical.
Indeed, as the S&P 500 fell by more than -11.5% since the start of the week, the Health Care Select Sector SPDR Fund, composed by the biggest pharmaceuticals and health care equipment companies (Johnson & Johnson, UnitedHealth, Merck & Co, Pfizer, etc.), also lost more than 10% over the same period.
There are two main explanations to that:
Most pharmaceuticals company’s supply chain depends heavily on China, leading markets to fear a shortage. Indeed, Laboratories buy a large part of their bulk components, vaccines, anti-cancer drugs and generics from China. In the 1980s, drug companies chose to relocate part of their production to Asian Factories, where they kept their research and development activities due to cheaper Labor and more flexible regulations. Thus, a lasting virus spread would potentially put global supply at risk. Therefore, governments are currently alarming healthcare professionals on taking the necessary measures to guarantee health coverage. A few days ago, French Pharmaceutical giant Sanofi responded to that by announcing, a few days ago, that it will relocate part of its production sties in Europe before 2022. Too late for Investors.
The other explanation to healthcare stocks downturns appears to be political with the rising likeliness to see Bernie Sanders as the 2022 election Democratic candidate. The Left-wing program of the politician contains a dismantling of America’s private health care system, which would be replaced by a government-run Medicare-for-All. On the markets side, as the investiture of the democratic candidate seems more and more probable, private health insurance actors such as UnitedHealth are taking a big hit with the stock dropping by -13% over the week. Even though it is still unlikely to imagine such legislation to go through, this puts the lights back on a sector that has been at the center of discussions since Barack Obama’s election and his affordable Care Act in 2008, period that corresponds to UnitedHealth’s all time low in stock markets, before its impressive performance in the past years, under the new laws.
Authors: Emilie Mayer, Côme Vigoureux
Sources: Reuters, France Info, State Street SPDR, Investopedia
Brazil: Impact of Elections on Financial Markets, an Opportunity for Importers and Exporters? Recent events in Brazil generated volatilities in different financial markets, with a drastic shift in commodities, currency, bonds and stocks prices. This trend has already had a consequent implication for domestic but also foreign companies doing business in Brazil. For example, Spanish exporters will benefit of a 17% depreciation of the EUR versus BRL (from 4.92 the September 14th to 4.08 the October 29th). This opportunity may represent an interesting opportunity for European companies involved in Brazil to hedge a potential comes back on the 4.50 area.
Stock Market
After a bloody month of October for Global Equity markets and indexes from all over the world taking big losses (Nasdaq & Nikkei: -9 %; China: -7,75 %; CAC 40 & DAX: -7 %; India: -5,75%), the only survivor appears to be Brazil. Indeed, the BOVESPA grew by 10% this last month of national election that ended with the victory of Jair Bolsonaro, far-right party candidate promising a market-friendly economic program.
Economy and Tax
Alongside with its counselor and future economy minister, Paulo Guedes, a University of Chicago economist and fund manager known for its market-friendly position, Bolsonaro promised to undertake reforms widely praised by national investors.
Firstly, the new cabinet plans on privatizing every state-owned firm, including both energy giants Eletrobas and Petrobas, to raise over $400 billion and reduce the budget gap. This symbolizes the business-friendly policy promised during the election including deregulation and tax exemptions for companies. This strengthened analyst view of the Brazilian stock market, the national Index is up 13% since September and trading way beyond historical levels, leading analysts say it could reach 100,000 by the end of the year (current level is around 88,000 while it was at 75,000 in September).
In order to bring deficit from $37bn to “zero” as promised, the elected president planned spending cuts by implementing, what will appear to be the main challenge of its mandate, a pension system reform. This ambition to reform the country led investors to endorse Bolsonaro’s candidacy over the left-wing candidate. Moreover, the Workers Party is considered by many Brazilians to be responsible for the country’s worst recession in history. Indeed, the GDP of the eighth-largest economy in the world shrank by almost 8% and close to 13 million people are unemployed.
Rate market
The announcement of reforms and project to reduce deficit already had an impact on financial markets, firstly in the national bond market with the yield on the 10Y Government Bond going back to last month of May levels at 10% (against 12,5% in September – See Below).
Currency market
Those announcements combined with the assurance that the Central Bank will be able to act independently brought back the domestic currency to the milestone of 3,6 per dollar with analysts planning a stabilization at those levels. Following the strengthening of the Real, Price of nationally produced commodities such as Sugar and Coffee (Brazil being responsible for a Third of worldwide production) rallied last month. Indeed, a stronger Brazilian real makes commodity exports less attractive for holders of other currencies (See Graph below).
Even though investors have welcomed Bolsonaro’s election positively, no details of this program have been released and there is no certainty on whether it will be approved or not. Indeed, his Social Liberal Party (PSL) doesn’t hold the majority at the house of Congress, which could make it more complicated to vote constitutional amendments such as a pension reform.
On the financial markets side, analysts believe the Bovespa index could resume its rise during the next months if the new government (official on the 1st of January) materialize its reforms in 2019. Otherwise, this positive trend won´t be sustainable.
Conclusion
Volatility doesn’t necessarily mean bad news, with some anticipation and expertise on its side, it could also represent a strong opportunity for any kind of business. New Momentum can assist you in all kind of capital market problematics.
Côme Vigoureux
Sources: Reuters, Bloomberg, BBC
Last 15th of March, Standard & Poor’s decided to upgrade Portugal’s credit rating to BBB, an announcement quickly followed by the one of Moody’s, which, chose to leave the one of Italy unchanged. Later this months the S&P’s maintained Spain’s rating at A- with a positive outlook, opening the debate on a future increase in the short run. In a climate of Bond Rallies, those decisions drove investors to rush on those countries’ bonds, as well as those of their neighbors.
What parameters did rating agencies consider in their assessment? What can we expect from the apparent recovery of “Mediterranean” economies in the debt capital markets, both sovereign and corporate?
Facts and Macro Explanations
In Portugal, the reforms undertaken by the government over the last years appear to pay off as the countries’ economy is expected to grow between 1,5% and 1,7% during the next two years. Moreover, Portugal is expected to record a budgetary surplus (including the debt reimbursement) by 2020, allowing them to reduce their debt to GDP ratio. Enough for S&P’s to upgrade the countries’ credit rating.
Net contributions to real GDP growth (Portugal) | In percentage points
Sources: Banco de Portugal and Statistics Portugal
The picture seems a little less bright for Italy where the Treasury revised its GDP Growth estimate to 0,1% , after slipping into recession in the second half of 2018. Moody’s decision appears to be more motivated by next week’s agenda and it still unclear whether the other rating agencies will also postpone report scheduled at the end of May. Indeed, the vote on 2020’s budget proposal is scheduled next month and the possible increase of the Value Added tax with it. Moreover, the outcome of the EU election is likely to have an impact on the Government’s policy.
In Spain, S&P’s decided to maintain the current rating of A- with a positive outlook, although some analysts were expecting to see it rise. The agency pointed out that their position could evolve in the coming months if the government manages to consolidate the deficit level and improve the payout of exterior debt. On the political side, the outcome of the Catalonia crisis and the anticipated election could also be preponderant. The Spanish economy is expected to grow at 2,2% this year and then deaccelerate as the economic cycle will mature, sustained by a growing internal demand, according to S&P’s. The rating agency also expects the private consumption to rise as salaries will keep growing. Nevertheless, the recent growth of the minimum salary could reduce the pace of new employments creation.
Consequence on Sovereign Bond Markets
Shortly after Moody’s decision to leave Italy’s Baa3 credit rating unchanged, the Italian Treasury 10y Bond yield was pushed to 2.42%, its lowest since May 2018. Its spread over Germany’s narrowed to its tightest since last September at 234 basis points, far from its end of 2018’s level when it crossed the 300bp.
On its side, Portugal’s 10y bond yield dropped to its lowest in at least 25 years, to 1.25%. This only confirmed the market trend as the gap over Germany has narrowed by about 30 basis points since the start of the year and was last at about 137 basis points after investors rallied on the German Bond, pushing it to negative levels.
At the end, Spanish 10y Yield curve could be even more significant to analyze investors views on the region. Indeed, if S&P’s announcements on Spain didn’t influence consequently its 10y Yield curve, the one on Portugal’s upgrade had it decreased by 4.5%. Now looking back to the last 6 months, the Spanish curve went from 1,73% to 1,10% since October, showing investors overall optimism on the region.
Spain Generic Govt 10Y Yield
Source: Bloomberg
To recall, Spain broke a national record on its 10-year bond sale last January, with about 47 billion euros of orders on a 10 billion-euro issue. This paved the way for Italy and Portugal to go out in the market. But the most iconic case is surely the one of Greece that issued its first 10y Note in the last decade after Moody’s improved the country’s credit rating to B1 with stable Outlook. This allowed Athens to capitalize on it and go test investors’ confidence after the mixed success of a previous a shorter-term bond sale two months before. In the meantime, yields on old 10y bonds dropped to their lowest since 2006 (It is currently trading around 3.77%). To recall, Greece is just going out of one the biggest recession in its history and was disabled to issue new bonds, receiving emergency loans from the EU and the IMF for financing. This drove the Government Bond 10y yield to a record high of 48.60% back in 2012.
First sovereign issuers, then corporates?
It is usual to see banks benefit from countries upgrades, especially in southern Europe. This time, the upgrade of Portugal’s rating was quickly followed by S&P’s rising Santander’s long and short-term credit rating in Portugal to BBB and A-2. In Spain, Fitch improved Abanca’s rating to BBB- and F3, meaning that the Galician bank is now considered as Investment Grade. In the meantime, it increased Liberbank’s rating from BB to BB+ with a stable outlook.
It could not take so long to see the trend spreading to companies which are partly owned by local governments or with the biggest exposure to such economies.
Côme Vigoureux
Sources : Reuters, Bloomberg, S&P’s, Moody’s, Fitch
The recent EURUSD spot move is drawing a new FX world picture. The acceleration of the move has been quite unusual for the last 5years (between the summers 2014 and today EURUSD spot lost almost 25%).
The market seems consolidating the current level around 1.0500-1.0700 which gives us the opportunity to analyze the situation.
What has changed in the EURUSD market which can explain this spot acceleration?
We can easily find arguments to demonstrate that what happened was predictable but without back trading consideration lets summarize some facts.
At the countries levels, Europe has to manage social tensions and political crisis. Greece, Ukraine, France (extreme right party increase) are elements which can explain the lack of trust in European countries to manage those issues. Terrorism represents as well in Europe a threat particularly imminent. European institutions have, by consequences, to deal between urgent threats with heavy political process and unlikely consensus making any solution very slow.
At the financial level, Central banks seem more and more isolated with a bigger distance with real problematic and finally a panel of solution quite limited to fix the economic situation. The SNB PEG release has been the perfect demonstration of this situation. By unexpected decision EURCHF collapsed from 1.2000 to 0.8500 in less than one day, making the FX market much more volatile and strengthening the trust issue in those institutions. All CHF exporters have seen their margins considerably reduced by that decision jeopardizing the Swiss economy. Even if the PEG was probably very expensive to maintain and unilateral decision created an extra tension to a situation already uncomfortable. In Europe, ECB decision to unleash QE seems to convince less than in the others countries due to the fact that it is difficult for nineteen Europeans nations to do the same thing. In New Momentum, we saw a lot of our customers (corporates and Institutional) believe finally in a limited centrals banks impact on the economic world.
What are the market anticipation and why the idea of breaking the parity is more and more credible?
One of the best way to have the market feelings about a trend is reflected in the market prices and more particularly in the FX options pricing. Why those products particularly because every parameter is priced: the level of volatility given by the implied volatilities and the smile which included the asymmetry between the upside or downside level (given by the Risk Reversal or RR).
The implied volatilities for example moved from the lowest levels ever this summers at a level almost three time higher (3 Months implied volatility moved from 4.88% the 30june14 to 11.31% actually (Bloomberg source)). The acceleration of the move is as important as the current level itself because it traduces the market tension with the current situation. All the elements explain in the previous part contributed for sure for a good part of it but the technical level of the current spot around 1.0500 very close of the psychological level of the parity maintains a high level of uncertainty. Let´s relativize a bit those levels, in capital market world, FX remains an asset with the lowest volatilities. For example Lehman crisis brought EURUSD 3 Months implied volatility at 23% when the VIX reached more than 45%. Last point, does an asset with 25% move in few months is worth 11% vol Implied? The ratio seems to us still interesting even if the best level of the last summer seems definitively gone.
The smile component completed this analysis by the information regarding a trend. The 3 months 25d RR is quoting 2.10% PUT EUR over, it means that a PUT EUR 25d (strike 1.0165 with 1.0600 spot) will have a volatility 2.10% higher than CALL EUR 25d (strike 1.1003 with 1.0600spot). In other word the market is paying more to buy a hedge in the downside than the upside. Higher is the extra cost, more the market is ready to pay for the downside. To translate that with the market data the 3 months 25d RR moved from 0.55% PUT EUR over this summer at 2.10% currently, or almost 4 times higher.
The Graphic above shows the 3 Months Implied volatility and 3 Months 25d Risk Reversal, confirming all the elements explained above with first an Implied volatility much higher and Risk reversal paying more for PUT EUR (-0.55% to -2.10%). The green curve reflects the spread and we see that during the last summer we were in a configuration where volatility and smile were the cheapest. It traduces a very interesting idea probably more explicit in the graphics below that PUT EUR 25d was on its cheapest level.
Between this summer and today, the PUT EUR 25d increased from 5.30% to 12.67%. This reflects all the ideas expressed above, the market prices the bearish trend much more than 8 months ago. An interesting exercise can complete this demonstration, let´s consider the current spot 1.0600 (to be able to compare the volatility and smile effect we will assume a constant spot at 1.0600) and let´s take the 01july2014 market data and the current one:
01july2014 : EUR PUT 25d with Spot at 1.0600 would be equivalent to a strike of 1.0415
17march2015 : EUR PUT 25d with Spot at 1.0600 is equivalent to a strike of 1.0202
What does that mean? If we had the July market data today, the strike would be closer than the current spot. The fact that we see more than 200pips between the two strikes reflects that today the market anticipates a much bigger potential on a downside movement. A corporate exposed to a EURUSD lower will have to pay a more expensive premium to get a hedge at a similar strike.
The previous elements finally have shown that the market anticipates all the current events as a serious and credible risk for EUR against USD (or others currencies). It would be probably interesting to quantify that risk and get some answer about a potential timing. Once again a part of the answer will be given by the market pricing but instead of considering vanillas options we will focus on One Touch options which reflects the price during a maturity to touch a certain level. On a spot ref of 1.0600, a 3 Month One Touch 1.0000 is priced 28% and a 6 Months One touch around 50%. In other words, the EURUSD Spot has 50% to reach 1.0000 in 6 months regarding the market anticipation.
Beside the mathematics, what would change a break of the parity?
Let´s consider another effect very important and probably underestimated by the market, the psychological impact of a EURUSD below the parity. In New Momentum, we see a lot of customer under hedge on a level below 1.0000. That fact mixed with the bank risk aversion is creating a perfect situation for an acceleration below the parity. It means that the market is probably long EUR and will contribute to a panic situation when everyone will run behind their exposures. A lot of market experience disappears from the banks with the new bonus regulation, making the market with less memories than before. The recent EURCHF movement can give us a good idea of what can be a market panicking. Even if for the moment we believe in a consolidation of the spot (if any politic announcement or critical event happens), however we are firmly convinced than below the parity all the negative effects will accelerate the trend.
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