Saudi Squeeze

September 23rd, 2016 6:58 am

Via WSJ:

Ahmed Al Omran in Riyadh, Saudi Arabia, and
Nikhil Lohade in Dubai
Sept. 23, 2016 5:30 a.m. ET

Mohammed Idrees used to travel to London once or twice a year, but these days the Saudi civil servant is asking his wife and children to cut back on using the family car to save fuel and has installed a solar panel for the kitchen to reduce electricity costs.

For decades, Saudi nationals such as Mr. Idrees enjoyed a cozy lifestyle in the desert kingdom as its rulers spent hundreds of billions of dollars of its oil revenue to subsidize essentials such as fuel, water and electricity.

But a sharp drop in the price of oil, Saudi Arabia’s main revenue source, has forced the government to withdraw some benefits this year—raising the cost of living in the kingdom and hurting its middle class, a part of society long insulated from such problems.

Saudi Arabia heads into next week’s meeting of major oil producers in a tight spot. With a slowing economy and shrinking foreign reserves, the kingdom is coming under pressure to take steps that support the price of oil, as it did this month with an accord it struck with Russia.

The sharp price drop is mainly because of a glut in the market, in part caused by Saudi Arabia itself. The world’s top oil producer continues to pump crude at record levels to defend its market share.

One option to lift prices that could work, some analysts say, is to freeze output at a certain level and exempt Iran from such a deal, given that its push to increase production to presanction levels appears to have stalled in recent months. Saudi Arabia has previously refused to sign any deal that exempts arch rival Iran.

As its people start feeling the pain, that could change.

The kingdom is grappling with major job losses among its construction workers—many from poorer countries—as some previously state-backed construction firms suffer from drying up government funding.

Those spending cuts are now hitting the Saudi working middle class.

Saudi consumers in major cities, the majority of them employed by the government, have become more conscious about their spending in recent months, said Areej al-Aqel from Sown Advisory, which provides financial-planning services for middle-class individuals and families. That means cutting back on a popular activity for most middle-class Saudis: dining out.

“Most people are ordering less food or they change their orders to more affordable options,” she said.

To boost state finances, Saudi Arabia cut fuel, electricity and water subsidies in December, after posting a record budget deficit last year. It also plans to cut the amount of money it spends on public wages and raise more nonoil revenue by introducing taxes.

But in response to these moves, inflation more than doubled from last year to about 4% now, crimping consumers even more.

The government doesn’t have much choice. Saudi Arabia’s real growth in gross domestic product slowed to 1.5% in the first quarter from the year-earlier period, according to its statistics office, and Capital Economics says data suggest it may have contracted by more than 2% in the second quarter. Much of that slowdown is related to consumer-facing sectors, which have struggled since the start of 2016 as rising inflation has eroded household incomes.

The political stakes for managing this slowdown are high. Saudi Arabia survived the Arab Spring unrest that toppled several autocratic leaders across the region and forced some others to change, largely by offering cash handouts and more government jobs to placate its people. About two thirds of Saudi workers are employed by government related entities.

Besides cushy jobs, such middle-class Saudis also received substantial overtime payments and regular bonuses. At the time of his ascension to the throne early last year, King Salman ordered a hefty bonus payment to government employees.

Such largess is looking like a thing of the past.

Besides cutting state handouts such as subsidized electricity and water, the government also plans to reduce money it spends on public wages to 40% of the budget by 2020 from 45% as part of its ambitious plan to transform the oil-dependent economy. It aims to cut one-fifth of its civil service as well.

Saudis are beginning to speak out about a sense of anxiety about the economy. “I think we are going through a difficult period,” said Emad al-Majed, a Riyadh-based pharmacy technician. There will be suffering.”

Mr. Majed, who has two children, took a bank loan to purchase an apartment last year, a decision he said made him reconsider his spending habits.

“If you are used to a certain level of spending, how can you be told to limit your expenses and cancel some stuff?,” he asked. “It is a good idea, but in practice it will be difficult for so many people.”

Saudi nationals are reluctant to gripe about rising costs, but there is clear discontent, some analysts say. In a region engulfed in political and sectarian strife, Saudi Arabia can ill-afford similar turmoil.

“Discontent so far has been mildly expressed,” said Robin Mills, chief executive at Qamar Energy, a Dubai-based consulting firm. “If the slowdown continues and starts affecting local jobs, that could change.”

For the kingdom’s fiscal position to improve significantly, analysts say oil prices would need to rise to $70 a barrel, up from about $46 now.

Saudi Arabia and the other large producers failed to reach a production-freeze deal in April, but its people are now increasingly jittery over their future. That has made people like Mr. Idrees, the civil servant, more cautious about spending because he sees people like him bearing the brunt of efforts to offset slipping oil revenue.

“I have become more diligent about spending because my view of the future is pessimistic,” he said. “There is a lot of talk about diversifying the economy, but the focus seems to be solely on increasing taxes.”

FX

September 23rd, 2016 6:50 am

Via Marc Chandler at Brown Brothers Harriman:

It’s Friday and the Dollar is Firmer Again

  • Today has the making of the sixth consecutive Friday that the dollar gains against the euro and yen
  • The main news from Europe is the flash PMI
  • The North American session features four Fed speakers, all regional presidents
  • Markit’s preliminary assessment of the US manufacturing PMI will be reported, but in terms of economic data, the focus will be on Canada
  • Much focus is on next week’s OPEC meeting in Algiers
  • Singapore August CPI came in at -0.3% y/y vs. -0.4% expected

The dollar is mostly firmer against the majors in narrow ranges.  The Scandies are outperforming while sterling and Kiwi are underperforming.  EM currencies are mixed.  ZAR and TWD are outperforming while PHP and MXN are underperforming.  MSCI Asia Pacific was down 0.2%, as Japan markets fell 0.3% after returning from holiday.  MSCI EM is down 0.2%, as Chinese markets fell 0.5%.  Euro Stoxx 600 is down 0.5% near midday, while S&P futures are pointing to a lower open.  The 10-year UST yield is flat at 1.61%.  Commodity prices are mixed, with oil flat, copper up 0.1%, and gold flat.  

As Nassim Taleb instructed, we should not be fooled by randomness.  If you see six red results in a row at a roulette table, do not conclude the game is rigged.  If you flip a coin, and it is tails six consecutive times, the contest is not necessarily rigged.

Today has the making of the sixth consecutive Friday that the dollar gains against the euro and yen.  The Australian dollar has fallen six of the past seven Friday’s and is down today.  We note that this pattern has held in weeks that the dollar rose and in weeks, like this one, that the dollar has fallen.  If there is a narrative that makes sense of this pattern, it may simply be an effort to reduce short dollar positions ahead of weekends.  

Today’s firmer dollar was partly signaled by the loss of its downside momentum with 12 hours or so of the FOMC decision, which was hardly surprising, even if disappointing.  The Fed has painted itself into a corner.  Although Yellen conditioned a hike on continued improvement in the labor market and no new global risks, the market remains unconvinced.   The chances that the Fed funds target is 50-75 bp at the end of the year are less than 50%.  

Japan’s Finance Minister was quoted saying that deflation is the biggest problem for the Japanese economy.  This seems to wrong diagnosis of the problem.  The problem is growth potential.  The BOJ estimates that potential growth is only 0.2%.  The challenge is not that Japan is expanding below its potential, but that its potential is too low.  Today’s data confirms the economy is expanding.  The preliminary manufacturing PMI rose to 50.3.  It is back in expansion mode (above 50) for the first time since February.  The All-Industries Activity Index, a proxy for GDP rose 0.3%, a little more than expected.

After bouncing off JPY100 yesterday, the dollar reached almost JPY101.25 in Asia but met sellers that have pushed it back to JPY100.80.  Additional intraday support is seen near JPY100.50.  Japanese markets were closed yesterday, but it appears that institutions were eager to lock in the dramatic backing up of long-term yields that were triggered by BOJ action.  

The main news from Europe is the flash PMI.  Manufacturing rose on the aggregate level to 52.6 from 51.7.  This was marred by the decline in services, seemingly emanating from Germany.  The aggregate service reading fell to 52.1 from 52.8.  The composite fell to a 20-month low of 52.6.  The year’s average until now was 53.1.  

The German service sector was at 54.4 as recently as July.  It fell in August and fell further in September.  It stands at 50.6.  Manufacturing edged higher to 54.3 from 53.6.  The composite eased to 52.7 from 53.6.  It is the lowest since May.  If there is a silver lining in the disappointing German data, it is economic weakness may, over time, prompt more stimulus policies.  

France showed improvement in manufacturing, services and its composite.  Although comparisons between countries are difficult with this time series, it is interesting to note that the French composite of 53.3 (from 51.9) is above the German composite (52.7).  It is the best composite reading in France since last October.  However, the manufacturing PMI remained below 50 (49.5) where it has been since February.  The services reading rose to 54.1 from 52.3.  

The euro has been confined to less than a 25 tick range around yesterday’s North American close.  Intraday technicals warn of scope for a mild push higher into the $1.1225 area, before coming back off into the weekend.  

Sterling and the New Zealand dollar are competing for the weakest of the majors today.  Kiwi has dropped 1.25 cents since the RBNZ indicated it continued to anticipate further monetary easing.  The loss does little more unwind the previous three days of gains.  Yesterday was the first day in five that sterling did not trade below $1.30.   It dipped back below there today.

The North American session features four Fed speakers, all regional presidents:  Harker, Mester, Kaplan, and Lockhart.  Insight after the controversial FOMC meeting (three dissents and three seemingly opposed to a rate hike this year via the dot plots) will be helpful, but it may not come today.  Next week, 12 of the 17 Fed officials will speak, including Yellen and Fischer.  Also speaking will be Governor Tarullo and Chicago President Evans, who were likely among the officials who do not think a hike this year is warranted.  

Markit’s preliminary assessment of the US manufacturing PMI will be reported, but in terms of economic data, the focus will be on Canada.  Canada releases its July retail sales and August CPI.  The median forecast is for a 0.1% increase in headline retail sales and a 0.5% increase excluding autos.  Headline CPI may tick up to 1.4% from 1.3%, while the core rate may slip to 2.0% from 2.1%.  

The Canadian dollar is little changed ahead of the start of the North American session.  It is holding on to its 1.3% gain this week on the back of a weaker US dollar and higher oil prices.  The US dollar bounced off of CAD1.30 yesterday and neared CAD1.3100 in Europe, but is coming off again, and looks poised to retest yesterday’s lows.  Oil is pulling back after firming to two-week highs yesterday.  

Much focus is on next week’s OPEC meeting in Algiers.  Meetings between Saudi and Iranian officials spurred speculation of an agreement, but reports suggest a deal remains elusive.  Given the high level of output, and the coming online of the Kazakhstan field, a freeze in production may not be sufficient to sustain the recovery in oil prices.

Singapore August CPI came in at -0.3% y/y vs. -0.4% expected.  This is the lowest rate of deflation since June 2015, and could move into positive territory by year-end.  Trade and retail sales data came in stronger than expected last week.  Coming after the strong China data for August, it seems that the EM Asia outlook is stabilizing, if not improving.  It’s a tough call for the MAS meeting next month.  No move is likely then in light of improved data, but we see a very small chance of a dovish surprise.

 

Some Corporate Bond Stuff

September 23rd, 2016 6:46 am

Via Bloomberg:

IG CREDIT: Above Average Volume; ORCL 30Y Most Active
2016-09-23 09:52:12.233 GMT

By Robert Elson
(Bloomberg) — Secondary IG trading ended with a Trace
count of $18.5b vs $16.3b Wednesday, $15.9b the previous
Thursday. 10-DMA $15.7b; 10-Thursday moving avg $15.4b.

* 144a trading added $2.7b of IG volume vs $2.1b Wednesday,
$2.2b last Thursday

* Trace most active issues:
* Bloomberg estimates of the most active issue:
* ORCL 4.00% 2046 was 1st with client flows accounting for
81% of volume; client buying near twice selling
* SHPLN 3.20% 2026 was next with client and affiliate
flows taking 56% of volume
* MSFT 2.40% 2026 was 3rd with client and affiliate trades
taking 61% of volume; client selling 4:3 over buying
* DELL 6.02% 2026 was the most active 144a issue with client
trades taking 75% of volume, buying 5:4 over selling

* Bloomberg Barclays US IG Corporate Bond Index OAS at 137 vs
138
* 2016 wide/tight: 215 (a new wide since Jan. 2012)/135
* 2015 wide/tight: 171/122
* 2014 wide/tight: 137/97
* All time wide/tight back to 1989: 555 (Dec. 2008)/54
(March 1997)

* Current market levels vs early Thursday, Wednesday:
* 2Y 0.766% vs 0.774% vs 0.787%
* 10Y 1.606% vs 1.644% vs 1.684%
* Dow futures -16 vs +53 vs +61
* Oil $45.60 vs $45.79 vs $45.04
* ¥en 100.82 vs 100.79 vs 101.52

* IG issuance totaled $18.05b Thursday vs no issuance
Wednesday, $5.5b Tuesday, $14.6b Monday
* September volume at $146.81b; YTD $1.31t

Credit Pipeline

September 23rd, 2016 6:43 am

Via Bob Elson at Bloomberg:

IG CREDIT PIPELINE: Friday Issuance Always Possible
2016-09-23 09:22:13.342 GMT

By Robert Elson
(Bloomberg) — At least 15 Friday sessions have seen IG
issuance this year. A self-led Financial deal is possible.

LATEST UPDATES

* El Puerto de Liverpool (LIVEPL) na/BBB+/BBB+, mandates
C/CS/JPM for investor meetings Sept. 26-28; 144a/Reg-S 10Y
expected to follow
* Korea Housing Finance (KHFC) Aa1/na, mandates BNP/C/ING/SCB
for investor meetings; 144a/Reg-S covered 5Y is expected to
follow
* Viacom (VIA) Baa2/BBB-, will proceed to access debt markets
in near term
* ICBC Financial Leasing (ICBCIL) A1/A, mandates
C/BNP/BoC/GS/ICBC/JPM/ShangPudong for possible $bench
144a/Reg-S deal; investor calls/meetings from Sept. 20
* Starbucks (SBUX) A2/A-, filed a debt shelf Sept. 15; has
$400m maturing Dec. 5
* Bayer (BAYNGR) A3/A-; ~$66b Monsanto acquisition
* Deal agreed Sept. 14 after fourth bid
* Hybrid bond sales planned as part of $57b bridge
financing
* HollyFrontier (HFC) Baa3/BBB-, hires BAML/C/MUFG/TD for
investor calls Sept. 15-16
* Goodman Australia Industrial Partnership (GAIF) Baa1/BBB+,
mandates ANZ/HSBC/JPM for investor meetings and calls Sept.
19-23; USD transaction may follow
* Air Liquide (AIFP) A3/A-, mandates Barc/BNP/C/HSBC/JPM/MUFG
for investor meetings Sept. 19-21; 144a/Reg-S deal may
follow
* KEB Hana (KEB) A1/A, mandates C/CA/JPM/SCB/UBS for investor
meetings from Sept. 26; 144A/Reg S transaction may follow
* MTN Group (MTNSJ) Baa3/BBB-, mandates Barclays/BAML/C/SCB
for roadshows from Sept. 9; 144a/Reg-S may follow
* Danaher (DHR) A2/A to buy Cepheid for ~$4b; sees financing
deal with cash and debt issuance
* BRF (BRFSBZ) Ba1/BBB, to hold investor meetings Sept. 12-13,
via BBSecs/Bradesco/Itau/JPM/SANTAN; 144a/Reg-S deal may
follow
* Banco Inbursa (BINBUR) na/BBB+/BBB+, mandates BAML/C/CS for
investor meetings Sept. 7-12
* Fitch says may price $1.5b 10Y
* Brunswick (BC) Baa3/BBB-, files automatic mixed shelf; last
issued in 2013
* Woolworths (WOWAU) Baa2/BBB, to hold U.S. debt investor
update call Sept. 7; last priced a new deal in 2011
* Sydney Airport (SYDAU) Baa2/BBB, to hold investor conference
calls Sept. 6-7, via BA,L/JPM/Sco; last issued in April,
$900m 144a/Reg-S 10Y
* Municipality Finance (KUNTA) Aa1/AA+, to hold Green Bond
roadshows over the coming weeks, via BAML/CA/HSBC/SEB; plans
$500m 5Y-10Y 144a/Reg-S deal
* Kingdom of Saudi Arabia (SAUDI), may raise more than $10b
following roadshows in late Sept.
* Said to have hired 6 banks to lead first intl bond sale
(July 14)
* Korea National Oil (KOROIL) Aa2/AA, has mandated
C/GS/HSBC/SG/KDB/UBS for investor meetings to begin Sept. 6;
144a/Reg-S deal may follow
* Pfizer (PFE) A1/AA, to buy Medivation (MDVN) for ~$14b;
expects to finance deal with existing cash
* Moody’s maintained its negative outlook on PFE, saying
low cash levels may “lead to future debt issuance for
US cash needs.”
* Couche-Tard (ATDBCN) Baa2/BBB, expects to sell USD bonds
related to ~$4.4b acquisition of CST Brands (CST) Ba3/BB
* Enbridge (ENBCN) Baa2/BBB+, files $7b mixed shelf Aug.22;
$350m matures Oct. 1
* General Electric Company’s plan to take on additional $20b
of debt could pressure ratings, Moody’s says
* Industrial Bank of Korea (INDKOR) Aa2/AA-, mandates HSBC/Nom
for roadshow from Aug. 22; 144a/Reg-S deal may follow
* Israel Electric (ISRELE) Baa2/BBB-; said to hire C, JPM for
at least $500m bond sale in 4Q

MANDATES/MEETINGS

* Sumitomo Life (SUMILF) A3/BBB+; investor mtg July 19

M&A-RELATED

* Analog Devices (ADI) A3/BBB; ~$13.2b Linear Technology acq
* To raise nearly $7.3b debt for deal (July 26)
* $63b financing said secured w/ $20b-$30b bonds seen
* Danone (BNFP) Baa1/BBB+; ~$12.1b WhiteWave (WWAV) Ba2/BB
* Co. Says deal 100% debt-financed, expects to keep IG
profile (July 7)
* Zimmer Biomet (ZBH) Baa3/BBB; ~$1b LDR acq
* Plans $750m issuance post-completion (June 7)
* Great Plains Energy (GXP) Baa2/BBB+; ~$12.1b Westar acq
* $8b committed debt secured for deal (May 31)
* Abbott (ABT) A2/A+; ~$5.7b St. Jude buy, ~$3.1b Alere buy
* $17.2b bridge loan commitment (April 28)
* Sherwin-Williams (SHW) A2/A; ~$9.3b Valspar buy
* $8.3b debt financing expected (March 20)

SHELF FILINGS

* IBM (IBM) Aa3/AA-; automatic mixed shelf (July 26)
* Nike (NKE) A1/AA-; automatic debt shelf (July 21)
* Potash Corp (POT) A3/BBB+; debt shelf; last issued March
2015 (June 29)
* Tesla Motors (TSLA); automatic debt, common stk shelf (May
18)
* Debt may convert to common stk
* Reynolds American (RAI) Baa3/BBB filed automatic debt shelf;
sold $9b last June (May 13)
* Statoil (STLNO) Aa3/A+; debt shelf; last issued USD Nov.
2014 (May 9)
* Corporate Office (OFC) Baa3/BBB-; debt shelf (April 12)
* Rogers (RCICN) Baa1/BBB+; $4b debt shelf (March 4)

OTHER

* Visa (V) A1/A+; CFO says will issue $2b debt for buybacks by
yr end (July 21)
* Investment Corp of Dubai (INVCOR); weighs bond sale (July 4)
* Alcoa (AA) Ba1/BBB-; upstream entity to borrow $1b (June 29)
* GE (GE) A3/AA-; may issue despite no deals this yr (June 1)
* Discovery Communications (DISCA) Baa3/BBB-; may revisit bond
market this yr, BI says (May 18)
* American Express (AXP) A3/BBB+; plans ~$3b-$7b term debt
issuance (April)

Early FX

September 23rd, 2016 6:40 am

Via Kit Juckes at SocGen:

The week appears to be simply running out of steam (or maybe that’s just me), but the net result of the BOJ and Fed is lower yields, which wasn’t the idea. I still think the long global bond rally’s in its final stage but I’m not getting much encouragement.

PMIs today (so far so good at 53.3 in France), , and inflation/retail sales in Canada. The Kiwi’s down, which suits, as are sterling and over the last 24 hours, the yen. These three remain shorts. But broader dollar strength needs the downward drift in Treasury yields to be reversed. As for the overall mood, today is quieter but the carry rally’s not run out of legs just yet.

<http://www.sgmarkets.com/r/?id=h1163d828,18662a27,18662a28&p1=136122&p2=965003c2d4391a6c6177e95af99643cf>

[*] Editorial – A last hurrah (or two) for the carry crowd

Neither the Bank of Japan, nor the FOMC, sprang any significant surprises this week, but the market reaction was, nevertheless, to halt and for now reverse the rise in bond yields and the dollar’s rally. We’re back to yield-hunting and back to that odd world where the strongest currencies are a mix of some of the highest-yielding of the majors (rand, rouble, real) and the lowest-yielding (yen). At the other extreme, this week’s weakest currencies are the “Trumped” (Mexican peso) and the “Brexited” (sterling).

[http://email.sgresearch.com/Content/PublicationPicture/232920/1]

[*] Go long EUR/USD multi-month forward volatility

FX volatility entered a moderate regime in early 2015 but since July has come under significant pressure and is experiencing an unusually long period of stability. The current lows suggest multi-month volatility hedges, as in the medium term central bank activity will increase and political risk will stay high (US election, Brexit, EM “key man” risk). EUR/USD currently has the lowest G10 forward volatility, so we recommend going long a 6m6m FVA delivering a 6m straddle in six months bought at 9.2 volatility. The strategy has significant odds of providing vega gains.

[*] Technicals

The USD/JPY is now undergoing a choppy consolidation and is revisiting the support of 100. As long as this holds, a rebound towards the highs of earlier this month at 104/104.45 looks likely. A break above will lead to a sustainable recovery. A USD/CAD down move towards 1.28 and perhaps even to the neckline at 1.2650/1.25 looks on cards. This will determine any deeper correction.

[http://email.sgresearch.com/Content/PublicationPicture/232920/3]

[*] Quant

The SG Quant Fund has switched back to more sizable long carry and EM positions. The biggest longs are in NOK, AUD and NZD. The most sizeable shorts are in SEK, USD, EUR and GBP.

[http://email.sgresearch.com/Content/PublicationPicture/232920/4]

“Healthy Adjustment”

September 22nd, 2016 7:32 am

Via Bloomberg:
Tiger Cub Citrone Sees Market in Biggest Correction Since 2008
Simone Foxman
SimoneFoxman
September 21, 2016 — 10:31 AM EDT

Discovery’s Citrone says downturn may last 3 to 4 months
It’s a ‘healthy adjustment’ in overvalued market, Citrone says

 

Robert Citrone, the Tiger cub who now runs one of the best-known macro hedge funds, is warning investors that the market moment they’ve been anticipating is at hand.

“We believe we are in the midst of the market correction we have been expecting,” Citrone, founder of Discovery Capital Management, told investors in an e-mail obtained by Bloomberg. “It will likely persist over the next 3-4 months and be the largest correction since the 2008 crisis,” he said. The firm managed about $12.4 billion at the start of 2016.

Money managers including Paul Singer have signaled that the markets may be on the precipice as central banks reexamine monetary policy. In remarks last week at the CNBC Institutional Investor Delivering Alpha Conference, Singer said years of easing had created “a very dangerous time in the global economy and global financial markets.” Carl Icahn, who warned of risks at the same event, described predicting the moment of a correction as “sort of a guessing game.”

Market volatility returned on about Sept. 9, when concern that central bankers may be losing their appetite for further stimulus efforts spurred the biggest slump since the U.K. secession vote in June, ending the summer’s calm. The CBOE Volatility Index has increased about 19 percent this month through Sept. 20.

Citrone, whose fund specializes in making wagers on macroeconomic events, tempered his view by describing the correction as a “healthy adjustment from overvalued market levels, which are primarily a result of exceptionally easy monetary policies.” One of the many hedge fund managers dubbed Tiger cubs after working at Julian Robertson’s Tiger Management, Citrone founded Discovery in 1999.

Patrick Clifford, an external spokesman for Discovery, declined to comment.

Credit Pipeline

September 22nd, 2016 7:28 am

Via Bloomberg:

IG CREDIT PIPELINE: 4 Set to Price, More Domestics Expected
2016-09-22 09:53:23.329 GMT

By Robert Elson
(Bloomberg) — Set to price today:

* Sinopec Group Overseas Development (SINOPE) Aa3/A+, to price
$bench 144a/Reg-S 3-part deal, via managers C/BoC/GS
* 3Y, IPT +115 area
* 5Y, IPT +120 area
* 10Y, IPT +150 area
* Mexico City Airport Baa1/BBB+, to price $bench 144a/Reg-S 2-
part deal, via BBVA/C/HSBC/JPM/SANTAN
* 10Y, IPT +low-300s
* 30Y, IPT +mid/high-300s
* Hyundai Capital America (HYNMTR) Baa1/A-, to price $bench
144a/Reg-S 2-part deal, via Barc/HSBC/JPM/MS
* 3Y, IPT +105 area
* 10Y, IPT +130 area
* Goldman Sachs (GS) A3/BBB+, to price $bench 5/NC4 fixed
and/or floating; IPT +140 area/equiv

LATEST UPDATES

* Korea Housing Finance (KHFC) Aa1/na, mandates BNP/C/ING/SCB
for investor meetings; 144a/Reg-S covered 5Y is expected to
follow
* Viacom (VIA) Baa2/BBB-, will proceed to access debt markets
in near term
* ICBC Financial Leasing (ICBCIL) A1/A, mandates
C/BNP/BoC/GS/ICBC/JPM/ShangPudong for possible $bench
144a/Reg-S deal; investor calls/meetings from Sept. 20
* Starbucks (SBUX) A2/A-, filed a debt shelf Sept. 15; has
$400m maturing Dec. 5
* Bayer (BAYNGR) A3/A-; ~$66b Monsanto acquisition
* Deal agreed Sept. 14 after fourth bid
* Hybrid bond sales planned as part of $57b bridge
financing
* HollyFrontier (HFC) Baa3/BBB-, hires BAML/C/MUFG/TD for
investor calls Sept. 15-16
* Goodman Australia Industrial Partnership (GAIF) Baa1/BBB+,
mandates ANZ/HSBC/JPM for investor meetings and calls Sept.
19-23; USD transaction may follow
* Air Liquide (AIFP) A3/A-, mandates Barc/BNP/C/HSBC/JPM/MUFG
for investor meetings Sept. 19-21; 144a/Reg-S deal may
follow
* KEB Hana (KEB) A1/A, mandates C/CA/JPM/SCB/UBS for investor
meetings from Sept. 26; 144A/Reg S transaction may follow
* MTN Group (MTNSJ) Baa3/BBB-, mandates Barclays/BAML/C/SCB
for roadshows from Sept. 9; 144a/Reg-S may follow
* Danaher (DHR) A2/A to buy Cepheid for ~$4b; sees financing
deal with cash and debt issuance
* BRF (BRFSBZ) Ba1/BBB, to hold investor meetings Sept. 12-13,
via BBSecs/Bradesco/Itau/JPM/SANTAN; 144a/Reg-S deal may
follow
* Banco Inbursa (BINBUR) na/BBB+/BBB+, mandates BAML/C/CS for
investor meetings Sept. 7-12
* Fitch says may price $1.5b 10Y
* Brunswick (BC) Baa3/BBB-, files automatic mixed shelf; last
issued in 2013
* Woolworths (WOWAU) Baa2/BBB, to hold U.S. debt investor
update call Sept. 7; last priced a new deal in 2011
* Sydney Airport (SYDAU) Baa2/BBB, to hold investor conference
calls Sept. 6-7, via BA,L/JPM/Sco; last issued in April,
$900m 144a/Reg-S 10Y
* Municipality Finance (KUNTA) Aa1/AA+, to hold Green Bond
roadshows over the coming weeks, via BAML/CA/HSBC/SEB; plans
$500m 5Y-10Y 144a/Reg-S deal
* Kingdom of Saudi Arabia (SAUDI), may raise more than $10b
following roadshows in late Sept.
* Said to have hired 6 banks to lead first intl bond sale
(July 14)
* Korea National Oil (KOROIL) Aa2/AA, has mandated
C/GS/HSBC/SG/KDB/UBS for investor meetings to begin Sept. 6;
144a/Reg-S deal may follow
* Pfizer (PFE) A1/AA, to buy Medivation (MDVN) for ~$14b;
expects to finance deal with existing cash
* Moody’s maintained its negative outlook on PFE, saying
low cash levels may “lead to future debt issuance for
US cash needs.”
* Couche-Tard (ATDBCN) Baa2/BBB, expects to sell USD bonds
related to ~$4.4b acquisition of CST Brands (CST) Ba3/BB
* Enbridge (ENBCN) Baa2/BBB+, files $7b mixed shelf Aug.22;
$350m matures Oct. 1
* General Electric Company’s plan to take on additional $20b
of debt could pressure ratings, Moody’s says
* Industrial Bank of Korea (INDKOR) Aa2/AA-, mandates HSBC/Nom
for roadshow from Aug. 22; 144a/Reg-S deal may follow
* Israel Electric (ISRELE) Baa2/BBB-; said to hire C, JPM for
at least $500m bond sale in 4Q

MANDATES/MEETINGS

* Sumitomo Life (SUMILF) A3/BBB+; investor mtg July 19

M&A-RELATED

* Analog Devices (ADI) A3/BBB; ~$13.2b Linear Technology acq
* To raise nearly $7.3b debt for deal (July 26)
* $63b financing said secured w/ $20b-$30b bonds seen
* Danone (BNFP) Baa1/BBB+; ~$12.1b WhiteWave (WWAV) Ba2/BB
* Co. Says deal 100% debt-financed, expects to keep IG
profile (July 7)
* Zimmer Biomet (ZBH) Baa3/BBB; ~$1b LDR acq
* Plans $750m issuance post-completion (June 7)
* Great Plains Energy (GXP) Baa2/BBB+; ~$12.1b Westar acq
* $8b committed debt secured for deal (May 31)
* Abbott (ABT) A2/A+; ~$5.7b St. Jude buy, ~$3.1b Alere buy
* $17.2b bridge loan commitment (April 28)
* Sherwin-Williams (SHW) A2/A; ~$9.3b Valspar buy
* $8.3b debt financing expected (March 20)

SHELF FILINGS

* IBM (IBM) Aa3/AA-; automatic mixed shelf (July 26)
* Nike (NKE) A1/AA-; automatic debt shelf (July 21)
* Potash Corp (POT) A3/BBB+; debt shelf; last issued March
2015 (June 29)
* Tesla Motors (TSLA); automatic debt, common stk shelf (May
18)
* Debt may convert to common stk
* Reynolds American (RAI) Baa3/BBB filed automatic debt shelf;
sold $9b last June (May 13)
* Statoil (STLNO) Aa3/A+; debt shelf; last issued USD Nov.
2014 (May 9)
* Corporate Office (OFC) Baa3/BBB-; debt shelf (April 12)
* Rogers (RCICN) Baa1/BBB+; $4b debt shelf (March 4)

OTHER

* Visa (V) A1/A+; CFO says will issue $2b debt for buybacks by
yr end (July 21)
* Investment Corp of Dubai (INVCOR); weighs bond sale (July 4)
* Alcoa (AA) Ba1/BBB-; upstream entity to borrow $1b (June 29)
* GE (GE) A3/AA-; may issue despite no deals this yr (June 1)
* Discovery Communications (DISCA) Baa3/BBB-; may revisit bond
market this yr, BI says (May 18)
* American Express (AXP) A3/BBB+; plans ~$3b-$7b term debt
issuance (April)

Some Corporate Bond Stuff

September 22nd, 2016 7:21 am

Via Bloomberg:

IG CREDIT: Volume Lower as Market Awaited Fed; Issuance Returns
2016-09-22 10:20:50.215 GMT

By Robert Elson
(Bloomberg) — Secondary IG trading ended with a Trace
count of $16.3b vs $19.1b Tuesday, $17b the previous Wednesday.

* 10-DMA $15.4b; 10-Wednesday moving avg $17b
* 144a trading added $2.1b of IG volume vs $2.4b, $2.9b last
Wednesday

* The Trace most active issues not available this morning
* Bloomberg estimates of the most active issue:
* PEMEX 6.75% 2047 was 1st with client and affiliate flows
accounting for 57% of volume
* SHPLN 3.20% 2026 was next with client and affiliate
flows taking 71% of volume
* GILD 2.95% 2027 was 3rd with client and affiliate trades
taking 54% of volume; client buying 1.5x selling
* HPE 4.90% 2025 was the most active 144a issue with dealer-
to-dealer trades taking 64% of volume, client selling 28%

* Bloomberg Barclays US IG Corporate Bond Index OAS at 138 vs
139
* 2016 wide/tight: 215 (a new wide since Jan. 2012)/135
* 2015 wide/tight: 171/122
* 2014 wide/tight: 137/97
* All time wide/tight back to 1989: 555 (Dec. 2008)/54
(March 1997)

* Current market levels vs early Wednesday:
* 2Y 0.774% vs 0.787%
* 10Y 1.644% vs 1.684%
* Dow futures +53 vs +61
* Oil $45.79 vs $45.04
* ¥en 100.79 vs 101.52

* No IG issuance Wednesday vs $5.5b Tuesday, $14.6b Monday
* September volume at $128.76b; YTD $1.29t

* Pipeline – 4 Set to Price, More Domestics Expected
* Note: subscribe bar in upper left corner

FX

September 22nd, 2016 7:19 am

Via Marc Chandler at Brown Brothers Harriman:

Dollar Remains Under Pressure Post-Fed, Yen Stabilizes

  • The Federal Reserve’s decision to stand pat was the most complicated in years
  • The FOMC statement reintroduced a risk assessment that it had removed in January
  • Indonesia cuts rates 25 bp while Philippines stood pat, both expected
  • Turkey is expected to cut the overnight lending rate 25 bp to 8.25%, while SARB expected to stand pat
  • Mexico reports mid-September CPI, which is expected to rise 2.74% y/y vs. 2.80% in mid-August

The dollar is mostly softer against the majors in the wake of the FOMC decision.  The Aussie and the Norwegian krone are outperforming while the yen and the Kiwi are underperforming.  EM currencies are mostly higher.  ZAR and KRW are outperforming while SGD and RUB are underperforming.  MSCI Asia Pacific ex-Japan was up 1.1%, as Japan markets were closed for a holiday.  MSCI EM is up 1.3%, as Chinese markets rose 0.8%.  Euro Stoxx 600 is up 1.2% near midday, while S&P futures are pointing to a lower open.  The 10-year UST yield is flat at 1.65%.  Commodity prices are mostly higher, with oil up 1%, copper up 1%, and gold down 0.2%.

The US dollar has lost another 0.5% against most of the major currencies today, as Asia and Europe respond to the Fed’s decision.  There are some exceptions to this generalization.  The Norwegian krone has gained nearly three times as much, with the help of its central bank, which has played down the need for lower rates at today’s meeting.  The euro is at its lowest level against Nokkie since the end of last year.  

Another notable exception is the Japanese yen.  It appears to be stabilizing at lower levels.  The dollar had seen a high yesterday near JPY102.80 and a low in Asia today just above JPY100.  It is recovering in the European morning and is approaching JPY101.  

The New Zealand dollar is a third exception.  The currency has seen some profit-taking after the RBNZ also left rates on hold, but signaled its easing cycle is not complete.  

The Federal Reserve’s decision to stand pat was the most complicated in years.  The case for a hike had strengthened, Yellen said, but still the consensus to hike was not there.  Three regional Fed presidents dissented, the most in a couple of years.  In the dot plots, 3 (of 17) did not see a hike this year.  Many suspect that at two of those came from Governors Brainard and Tarullo.  The idea is that they may have dissented to a rate hike, and at the end of the day, Yellen chose to keep the Board of Governors united.  

The FOMC statement reintroduced a risk assessment that it had removed in January.  This is also seen by many as a necessary precursor to a hike.  Yellen herself indicated the Fed was prepared to raise rates this year provided the labor market continued to improve, and no new risks emerged.  Some apparently think this guidance could translate into a November hike.  We are skeptical.  There is simply no precedent for a hike so close (one week before) to a national election.  Bloomberg’s calculation puts the odds of a November hike as high as 21.4%.  The CME assessment, whose methodology we tend to share, puts the odds at 12.4%.  

There were two other important housekeeping duties the Fed appears to have completed at yesterday’s meeting.  First, it has taken another step in the process begun earlier this year of lowering the long-term Fed funds equilibrium rate.  It now stands at 2.9%, down from 3% in June and 4% a year ago.  Second, it reduced what it sees as the long-term growth potential to 1.8% from 2%.  There is some risk that the long-term potential growth is revised lower again, as the weakness in productivity growth acts as a drag.  

Yellen defended the Fed’s action several times against reporters who pressed Trump’s argument that the Fed’s reluctance to raise rates is a reflection of their support for Clinton.  We suspect that to the contrary, as a rate hike would have been seen as a “seal of good housekeeping.”  A rate hike would have said that the economy is sufficiently strong to allow for a continued normalization of policy.  We also argue that other such banks, who are still in an easing mode, would have welcomed a Fed hike.  

Speaking of politics, Nate Silver’s fivethirtyeight.com election tracker sees the US presidential race the closest in the cycle.  The polls alone have it 57.6% to 42.4%, and when combined with history and economic trends, Sliver puts the race at 57.1% to 42.9%.  The first debate is this coming Monday, September 26.

The one currency that many observers linked to Trump’s success in the polls was the Mexican peso, which had fallen to record lows.  A combination of the rally in oil prices (helped by a large drawdown in US inventories), the rally in stocks, and the Fed standing pat is lending support to the peso, despite the tightening in the US presidential contest.  Yesterday, the peso snapped a six-day slide, and it is extending its recovery today.  

The US reports weekly initial jobless claims, existing home sales, leading economic indicators and the KC Fed survey.  In light of the FOMC statement and guidance, the data pose little more than headline risk.  

In terms of the price action, the euro rallied from a little below $1.1125 yesterday to nearly $1.1250 today before running out of steam.  This completed a retracement objective of the decline from the month’s high on September 8 near $1.1325.  The intraday technicals allow for some slippage in the North American session.  Initial support is seen near $1.1200, and a close below $1.1180 would suggest a period of consolidation.  

Sterling, which had spent part of the past four sessions below $1.30, is now back above this threshold.  It appears to have met some news sellers in the $1.3080 area.   Intraday technical indicators also allow for a retracement toward $1.3025.  

The dollar appears to have stalled in front of JPY101.  Japanese markets were closed today and participants may be reluctant to take a strong view without Japanese participation.  The risk is that by steepening the yield curve and raising long-term rates, the BOJ solves one problem (what we have called the reproduction problem for capital–negative interest rates) but opens the door to another.  It is undermining the incentives to export savings.  Given the current account surplus, without the export of savings, the yen will be under upward pressure.

The Australian and Canadian dollars are well bid.  The Aussie appears set to retest $0.7700, and the bulls have their sights set on this month’s high a little above $0.7730.  The US dollar had encountered steady offers near CAD1.3250 over the past week or so.  The USD bears finally are prevailing. It has been sold through CAD1.3035 today, the 50% retracement of the recent run-up.  The 61.8% retracement target is found near CAD1.2985.

EM is well bid after the Fed.  With a nearly two month window before the next likely Fed rate hike, investors will likely put more money into EM and risk assets.  MSCI EM is likely to soon test the September high near 930.  After that, charts point to a test of the May 2015 high near 1070.  

Philippine central bank kept rates steady at 3.0%, as expected.  CPI rose only 1.8% y/y in August, below the 2-4% target range.  The economy remains robust, but low price pressures will allow the central bank to ease if needed in the coming months.  Officials have said that reserve requirement cuts have been discussed, but we think it would have been premature to move now.

Bank Indonesia cut rates 25 bp to 5.0%, as expected.  CPI rose 2.8% y/y in August, below the 3-5% target range.  BI had been on hold since its last 25 bp cut in June, but the sluggish economy should lead to several more rate cuts before the easing cycle ends.

Turkish central bank is expected to cut the overnight lending rate 25 bp to 8.25%.  No change in the 7.5% benchmark rate is expected.  CPI rose 8.1% y/y in August, above the 3-7% target range.  However, the economy remains sluggidrish and so the bank will likely be under pressure to ease more aggressively.

The South African Reserve Bank is expected to keep rates steady at 7.0%.  August CPI came in as expected at 5.9% y/y, which puts it back in the 3-6% target range for the first time since December.  With the economic outlook so poor, we think the central bank would prefer not to tighten any more.  The rand is the wild card, but recent gains should allow SARB to stand pat now.  Indeed, the tightening cycle is likely over, but easing is unlikely until 2017.  

Mexico reports mid-September CPI, which is expected to rise 2.74% y/y vs. 2.80% in mid-August.  Inflation remains below the 3% target.  However, there have been signs of rising price pressures even before this latest bout of peso weakness.  The central bank will be concerned about the second round inflation impact of the weak peso.  The next policy meeting is September 29 and recent peso weakness is likely to push the bank into hiking rates then.  However, the Fed decision has clearly given Mexican policymakers some much-needed breathing room.

Early FX

September 22nd, 2016 4:38 am

Via Kit Juckes at SocGen:

That thing where I realise an hour later that blackberry doesn’t always send things anymore….

<http://www.sgmarkets.com/r/?id=h11627cf4,1863fd1a,1863fd1b&p1=136122&p2=a05212a102fa59d0acb353411ed084c8>

A grey, flat, Dutch morning after an FOMC/BOJ day that delivered a market response I didn’t expect. These are treacherous markets but the overwhelming magnetic force of yield and carry continues to work its magic.

The FOMC voted 7-3 to keep rates on hold, deciding to wait for more data before raising rates. The chances of a single hike in 2016 coming in December have increased. The chances of rates getting above 2pct before the next recession were already remote and even the Fed’s ‘dot-plot’ projection is moving that way.

[http://email.sgresearch.com/Content/PublicationPicture/232881/1]

The announcement constitutes a ‘hawkish hold’ in line with market expectations. Moving the projected path of rates down towards, but still well above, what is priced into markets doesn’t signal anything to me, but that’s cited by some as a reason for the market reaction – lower 10-year Treasury yields, and a strong risk rally. To the extent real and nominal Treasury yields are lower, the market reaction makes sense. It’s just that I don’t get why real yields should head back down. But there’s no point quibbling. Rather, I think there’s an opportunity, taking the move down in treasury yields post-FOMC, to go long USD/JPY  here, with a tight stop (99.00) on the grounds that I just don’t think we can push TIIPS yields, in particular, much lower. Of course there’s a danger of a position flush below 100 but I’ve blathered long enough about the case for a medium-term long USD/JPY and this is an opportunity to get on with it.

While the Fed was taking centre stage, the RBNZ left rates on hold too, but were more overtly dovish, signalling scope to ease in due course. The Kiwi’s been on a tear in recent weeks and this clips its wings somewhat. Not enough to get our short at 0.7280 onside, but this morning, all help is appreciated. AUD/NZD too, had a day in the sun for once!

Today’s calendar sees the INSEE business confidence index in France (exp flat at 101, which won’t help us much), Euro Area consumer confidence (up a bit to -8.1) UK CBI trends (bounce confirmed) and US existing home sales (a touch softer at a 5.28mln rate). We also get central bank policy meetings in Turkey and Norway, with the Norgesbank battling more inflation than most. EUR/NOK shots and even more so, GBP/NOK shorts, appeal at this point. Otherwise, we’ll be reacting to the BOJ, Fed and the revival of the carry surge. Oil prices are marginally higher, Asian equities are higher too.