Across the Curve

Credit Pipeline

Via Bloomberg:

CREDIT PIPELINE: Expect Solid Issuance to Re-Start Next Week
2016-06-24 09:28:20.167 GMT

By Robert Elson
(Bloomberg) —

LATEST UPDATES

* Microsoft (MSFT) Aaa/AAA, added to list of possible issuers,
says Morningstar; also notes PG, DOV as potentials
* Sumitomo Life (SUMILF) A3/BBB+, to hold an investor meeting
July 19, via BofAML; focus to be on hybrid capital
* It last priced a USD deal in 2013
* Korea Gas (KORGAS) Aa2/A+, has mandated C/CS/HSBC/JPM/SG/UBS
to arrange investor meetings June 27-30; 144a/Reg-S
transaction may follow
* Molson Coors Brewing (TAP) Baa2/BBB-, held investor calls
June 21-22 via BofAML/C/UBS for possible USD, euro and/or
CDN dollar transactions; expects to issue ~$6.7b in
“permanent long-term financing” to help fund its $12b
acquisition of Miller beer brands, filing shows (page 29)
* KT Corp (KOREAT) Baa1/A-, schedules investor meetings June
16-24, via BNP/BAML/C/Nom, for possible USD 144a/Reg-S
* Dubai’s Emaar Properties (EMAAR) Ba1/BBB-, plans potential
USD bond sale
* USAID Ukraine (AID) heard to be in the works with possible
full faith & credit deal
* Kingdom of Saudi Arabia (SAUDI), weighing sale of $10b-$15b
after end of Ramadan in July
* May replicate Qatar’s $9b sale by issuing 5y, 10y, 30y
bonds, sources say
* Merck & Co (MRK) A1/AA; has not priced a new issue since
Feb. 2015, $1.5b matured May 18
* General Electric Company (GE) A3/AA-, has yet to issue YTD;
parent GE Co has $11.1b maturing this year, $2.3b matured in
May
* GE may be among high grade industrials to add leverage
in 2016, BI says in note

MANDATES/MEETINGS

* ITC Holdings (ITC) Baa2/BBB+, held investor meetings June
13-14, via BAML/JPM/WFS; it filed an automatic debt
securities shelf; last issued May 2014
* Kookmin Bank (CITNAT) A1/A, mandated BAML/CA/HSBC/Miz to
arrange investor meetings June 13-17
* SMBC Aviation Capital (SMBCAC) mandated C/CA/JPM/RBC/SMBC
for investor calls June 8-9; a potential US$ 144a/Reg-S
offering may follow
* Raymond James (RJF) Baa2/BBB, had BAML/JPM/RayJ arrange
investor meetings June 13-15; last priced a new deal in 2012
* Omega Healthcare Investors (OHI) Baa3/BBB-, held investor
meeting, via BAML/JPM, June 14
* National Grid (NGGLN) Baa1/na, hired JPM to hold investor
meetings that ran June 1-3

M&A-RELATED

* Shire (SHPLN) Baa3/BBB-, closed $18b Baxalta acquisition
loan; facilities to be refinanced through capital market
debt issuance
* Zimmer Biomet (ZBH) Baa3/BBB, to acquire LDR for ~$1b; co.
said it plans to issue $750m of sr unsecured notes after
deal completion
* Air Liquide (AIFP) A3/A-, held calls regarding Airgas
refinancing; planned to refinance the $12b loan backing the
deal via a combination of USD, EUR long-term bonds
* Bayer (BAYNGR) A3/A-, said to secure $63b financing, via
BAML/CS/GS/HSBC/JPM, for Monsanto (MON) A3/BBB+ bid; co.
likely will issue $20-$30b bonds to refinance part of the
bridge loan
* Great Plains Energy (GXP) Baa2/BBB+ to issue long-term
financing including equity, equity-linked securities and
debt prior to closing of Westar Energy (WR) A2/A deal; says
financing mix will allow it to maintain investment-grade
ratings
* 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)
* Teva (TEVA) Baa1/BBB+; ~$40.5b Allergan generics buy
* $22b bridge; $5b TL commitment (Nov 18)
* Duke Energy (DUK) A3/A-; $4.9b Piedmont Natural buy
* $4.9b bridge (Nov 4)
* Anthem (ANTM) Baa2/A-; ~$50.4b Cigna buy
* $26.5b bridge (July 27)

SHELF FILINGS

* 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+, files 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

* Discovery Communications (DISCA) Baa3/BBB-; may revisit bond
market this yr, BI says (May 18)
* Ford Motor Credit (F) Baa2/BBB; may have ~$7b issuance this
yr (May 10)
* Wal-Mart (WMT) Aa2/AA; 2 maturities in April (April 1)

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End of Month Extension

Via An anonymous reader:

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FX

Via Marc Chandler at Brown Brothers Harriman:

rexit Sends Shock Waves Through Global Capital Markets

• UK  votes to leave the EU
• Dramatic response throughout the capital markets, but stabilizing as the European morning progressed
• It will take some time to sort out the economic and political consequences, which no doubt are far-reaching

The main gist of the dramatic price action is to reduce risk.  The dollar and yen are the main beneficiaries.  Core bonds have rallied, as has gold.  Equities, commodities, emerging markets have been hard hit.  Since sterling’s low was reached in the middle of the Asian session near $1.3230, it has recovered to $1.40.  The price action remains choppy and volatile.  The euro reached a low a little below $1.0915 and recovered to almost $1.12 before coming back off. The dollar was driven to JPY99.00 and has recovered through JPY103.00. In the EM space, the South African and Polish zloty is leading the move with 4.2%-4.4% declines.  Besides the pegged Hong Kong dollar, the Thai baht and Chinese yuan did best, losing 0.5% against the dollar.    Core bonds, including UK gilts, have seen yields tumble, while peripheral European bond yields are 8-13 bp higher.  One implication is that the peripheral premiums over Germany have widened dramatically.    The MSCI Asia-Pacific Index fell 4%, while the MSCI Emerging Market equity index is off 3% before Latam markets open.  The Dow Jones Stoxx 600 in Europe is off 6.6%, with financials being tagged with a nearly 10% decline.  The FTSE 100 is off 4.6% with health care is the only sector even a slight gain.  The UK financial sector is off 11%.  

The UK’s decision to leave the EU spurred a dramatic risk-off move through the capital markets.  The dollar, yen, and gold soared.  Equities and emerging market assets sold off hard. Core bond yields fell sharply.  

Sterling had initially rallied to poke through the $1.50 level for the first time since last years.  As it became evident that the Brexit was going to win, sterling crashed to $1.3230 before stabilizing.  

As the results became official, the capital markets began stabilizing.  The Swiss National Bank and the Danish central bank have intervened and remain active, according to reports.  On the other hand, the BOJ does not appear to have intervened, though the yen soared.  The dollar plummeted to JPY99.00 before rebounding to a little beyond JPY103.

Investors and policy makers are contemplating the implications.  They are far-reaching.   What we know is that Prime Minister Cameron will step down by October.  He will trigger the now-famous Article 50 that begins the formal two-year negotiating period.  That responsibility will fall to his successor.  There are three candidates that have been touted:  Johnson, the former Mayor of London, Gove, the Justice Minister, and May the Home Secretary.    Johnson appears to be the early and strong favorite.  

The victory for Brexit emboldens the nationalist forces in the other countries.  For example, in France and Italy, nationalist parties are calling for their own referendum.  Scotland is in the difficult position. Although it is fiercely pro-Europe, the turn-over was lighter than expected, and there will be pressure to have another referendum to leave the UK.  Previously, the EU particularly encouraging the Scottish independence in part to prevent precedent for other.  

There seems to be a meme in the markets that among the nationalist forces that Brexit will encourage is Trump’s candidacy for the US presidency.   We are skeptical, but we’ll watch the upcoming polls, and the events market, which has seen new money favoring a Trump victory.  

That said, the fact that the three markets, the capital markets, bookmakers, and the events markets all had are badly wrong, and many polls under-estimated the strength the Brexit vote, the tools we use have been compromised.  We quickly recognized the significance of Cox’s murder, but it only managed to slow and not reverse the swing toward Brexit.  

The European heads of state are holding a previously scheduled summit on June 28-29.  Several key officials warned during the campaign that a decision to leave would meet an uncompromisingly firm EC.  The logic that made them treat Greece as an example leads to the same treatment of the UK.   The UK just lowered the barrier to exit, and that barrier needs to be resurrected in some fashion.  

Merkel and Hollande may take a page from football to find that strong defense is a good offense.  They may choose to demonstrate the commitment to the European project by agreeing to new measures of integration.  Defense and/or security areas may be more promising at this juncture than economic or financial.    

Spain holds elections this weekend.  Rajoy, the former Prime Minister, and caretaker since last December will likely see his fortunes wane.  His center-right PP was still polling as the biggest political party in Spain, though shy of a majority.   His most likely coalition partner was demanding he step down as a condition, and the Podemos, the new political force that is more anti-austerity than anti-Europe, is expected to emerge as the second largest political party.  This would push the Socialists into third place.  A coalition led by Podemos could work if the Socialist accept Catalonia’s right to a referendum on independence.    

The ECB will announce the results of its first new TLTRO lending facility.  Counting the rolling over of some outstanding loans, many expect the first round to see 350-450 bln euros drawn.  Spanish and Italian banks are thought to be the largest participants.  

The US S&P 500 that will trigger circuit breakers at the open.   The US 10-year bond yield is off 21 bp to 1.53%.  The sharp decline in US yields is not a reflection of new fears about the US growth or inflation outlook.  It is a function of safe haven demand.  The bulk of the decline in the US 10-year yield can be partly explained by the nearly identical decline in the two-year yield (now 58 bp).   This reflects not only safe haven demand but also the ideas that the Fed will not hike rates this year.  And more, the Fed funds have been averaging 37-38 bp and the implied yield on the December Fed funds futures contract is currently 35 bp.  

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Peripheral Spreads

I have watched the spread between the 10 year US and Spain and Italy as a gauge of the amount of fear coursing through markets. That move in the overnight panic has been dramatic. Yesterday morning at 545AM the 10 year Spanish bond yielded 1.46 and 10 year US traded at 1.72. As I compose this electronic missive the Spanish bond trades at 1.56. Teen year US has moved to 1.51 from 1.72. Thus the spread has moved from Spain being 26 rich to US  to now trading 5 basis points cheap. So that is a 31 basis point move overnight.

There has been a similar move in Italy spreads. Ten year Italy has moved from 1.31 yesterday to 1.40 this morning. Thus it has moved from 41 rich to US to 11 rich for a similar 30 basis point move.

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TD Securities Analysts Think Brexit Win Likely

Via TDSecurities:

TD Securities’ models point to a Leave win.

Our models now suggest a small Leave majority. With about 60% of all votes counted, Leave is ahead by 51.6%. We note that there are a few important Remain voting areas to report (particularly in London), but we are doubtful of their ability to shift the final vote in favour of Remain. While it is not mathematically impossible for Remain to pull ahead, the surprises seen so far tonight suggest stronger Leave support in Leave areas, but less stronger than expected Remain support in Remain areas. There remain a large number of London boroughs to report (which will be strong Remain), but we worry that the likelihood of large upside surprises in these areas is low. Betfair odds point to a 94% probability of a Leave win.

On the market side, we’ve broken through some key levels, with cable breaking below 1.35 and US 10yr treasury yields down nearly 25bps to 1.44%. A G7 statement seems likely to us, warning markets that they are vigilantly watching developments, but questions early on are likely to cycle to how quickly political uncertainty rises in the UK with how long the government can last.

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Academic Predicts Zero Percent Chance of Remain

Via Robert SInche at Amherst Pierpont Securities:

According to Bloomberg, Chris Hanretty of the University of East Anglia, who has done extensive analysis of the votes on a district level, has now said he sees a 0% probability of a vote to Remain. Now, as an academic he should know better than to say anything has a 0% probability. But with 13.4 million votes counted the Leave vote has taken a 30K lead, the largest of the night, with the percentage of 51.3%. It seems the early signs of bigger wins for the Leave vote in early reports and smaller-than-expected victories for the Remain campaign were good signals of the surprise unfolding.

As I have suggested for weeks, I think most analysts have overestimated the negative impact of a Leave vote as the UK has been a marginal member of the EU on/off for many decades. I think the talk of a domino effect on other countries looking to leave is nonsense…leaving the EU and its governance and leaving the EUR, the single currency, are dramatically different issues. GBP/USD surged to over 1.50 early on and is now falling below 1.40…I continue to believe GBP/USD is likely to bottom around 1.35, at which I think it offers an excellent reward/risk profile. I would also think a fall in USD/JPY below 102 would be classified by the MOF as “disorderly” market conditions, so we should be watching for at least verbal intervention if it falls that low.

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Initial Claims

Via Stephen Stanley at Amherst Pierpont Securities:

Initial unemployment claims sank by more than expected in the week ended June 18, sliding 18,000 to 259,000.  It looks like there was a little week-to-week noise over the past two readings, and the state-by-state data suggest that it occurred in California (which accounts for by far the most claims of any state).  The average over the past two weeks is 268K, the average over the past four weeks is 267K, and the year-to-date average is 269K.  That, folks, is the definition of stability.  While Chair Yellen and the FOMC were clearly spooked by the May employment report, there has not been very much corroborating evidence of a shift in labor demand.  Rather, to the extent that job growth is slowing, it is most likely because the supply of available and qualified workers has dwindled.  I look for a bounceback to a decent payroll gain in June, though a June advance that is merely solid may not be enough to satisfy the Fed Chair, who sees scary monsters around every corner and requires much less evidence to raise goosebumps than she does to make them go away.

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New Home Sales

Via Stephen Stanley at Amherst Pierpont Securities:

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AS UK Vote Unfolds

Via Bloomberg:

What to Watch for as the Night Unfolds    

Voting will take place all day today, with polling stations closing at 10 p.m. local time. Once polling stations close, politicians, investors and the public will face an anxious couple of hours before the first results are announced. Wherever you are following around the world, here’s what to expect, and when. All times are for London.

10 p.m. The ballot boxes will be transported to centers in 382 areas for local counts. First, officials will tally up the number of ballot papers in each box and check it matches records from the relevant polling station. Then they’ll announce the local turnout for each area. Only then will teams begin to sort and count the ballot papers. Each result will be announced locally: The official in charge will read it out in the counting center, often in front of television cameras.

It’s the total number of votes that counts; it doesn’t matter how many individual areas each side wins. And the timings below, based on a list compiled by the Press Association newswire, are only a very rough guide; the timetable often slips. If either side disputes the result in a particular area, the ballot papers may need to be recounted, and that can take time.

Chris Hanretty of the University of East Anglia has projected likely outcomes for most of the voting areas based on local levels of Euro-skepticism. Other academics have done similar work. “Anywhere with a high U.K. Independence Party vote, a large older population and a large non-graduate population is going to be relatively good for ‘Leave,”’ says John Curtice, the Strathclyde University professor who’ll be analyzing the results for the BBC on the night.

12 midnight    The first results are due — but they’re unlikely to provide much useful information about the overall outcome. The Isles of Scilly, off England’s southwest coast, and Gibraltar are due to be up first. The smallest count area, the Scillies are home to only 2,000 of the UK’s 65-million population. In Gibraltar, the British territory on the tip of southern Spain where 33,000 live, a poll in April found 88 percent planning to vote “Remain.”    

12:30 a.m.   The real action starts. Sunderland and its northeast English rival, Newcastle, with a combined population approaching 600,000, will race to be the first major center to announce a result. We should expect “Leave” to be 6 percentage points ahead in Sunderland, according to Hanretty.  But there’s a large margin of error: “Leave” is 90 percent likely to be between 1 point behind and 13 points ahead. A closer result there would indicate “Remain” on course for a nationwide win. The model suggests “Remain” should be 12 points ahead in Newcastle. But beware — the cities are just a few miles apart and we’ll be unable to discern any national trend.    

12:45 a.m.  Expect the result from the City of London, Britain’s most pro-EU district, according to the Hanretty tally. But it’s also the second-smallest count area and totally unrepresentative of Britain as a whole. The result from Swindon in western England will add to our knowledge. Out of 188 districts ranked by polling company YouGov Plc, it’s the 12th most Euro-skeptic.

1 a.m.  Oldham is due to provide the first result from northwest England. The U.K. Independence Party has polled strongly there recently, so expect it to tend toward “Leave.”

1:30 a.m. The flow of results will start to speed up. “Leave” is projected to have a 20-point lead in Basildon, in Essex, and Hartlepool, in the northeast. Wales has seen a trend toward anti-EU sentiment recently, and the first district expected, the former mining area of Merthyr Tydfil, could go either way.

2 a.m. About 40 results are scheduled to be in by about now. The first London boroughs are due, with big “Remain” leads expected in Wandsworth and Westminster.

3 a.m.  We’re scheduled to have reached 140 results by now — more than a third of the total. Thanet, where UKIP’s Nigel Farage tried to win a seat in Parliament last year, is among the “Leave” strongholds.

3:30 a.m.  Pro-EU Edinburgh and Cambridge are also expected to report, along with Boston, in Lincolnshire, an area that has seen one of the most noticeable influxes of eastern European workers. We should have more than half the results by now.

4 a.m.  The busiest time — nearly 100 counts are scheduled to be completed at this hour.

5 a.m.    More big cities announce their results, and with the bulk already in, it may only be these very populous areas, which tend to be pro-EU, that can have much influence on the final outcome at this stage.

6 a.m.    Leeds and Bristol are the last two really big cities left to announce how people have voted though pro-Brexit rural Cornwall is also due now.

7 a.m.   The last three scheduled results, from Arun on the south coast, Waveney on the east coast and Harborough in the East Midlands.  Once the final area has declared, the stage will be set for Chief Counting Officer Jenny Watson to formally announce the national result in front of the television cameras in Manchester.  

By Eddie Buckle, Bloomberg News

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FX

Via Marc Chandler at Brown Brothers Harriman:

R-Day is Here, but Can it Prove Anti-Climactic?  

• Latest polls consistent with drift toward remain
• Betting, events and capital markets are more decisive anticipating UK remains in the EU
• Foreign investors sell Japanese bonds for the first time since the end of March
• ECB will begin accepting Greek sovereign bonds as collateral, but won’t be included in QE purchases
• Eurozone flash composite PMI dragged down by periphery and France

The market continues to put anticipate the UK stays in the EU and has bid sterling to new highs for the year.  More broadly, the dollar and yen are heavy against the major and emerging market currencies.  Equities are rallying.  It is the fifth consecutive advance of the MSCI Emerging Market equity index.  The MSCI Asia-Pacific Index was up 0.75%, while the Dow Jones Stoxx 600 is 1.4% higher, led by telecoms and material sectors.   Core bond yields are 2-5 bp higher, while peripheral bonds yields are 4-6 bp lower, though Greek bonds, which the ECB will begin accepting again as collateral, are seeing an 11 bp decline in 10-year yields.  The high beta emerging market currencies, like the Russian ruble, the South African rand, and Mexican peso are leading the EM, followed by Eastern and Central European currencies.  

The UK’s referendum is underway.  The capital markets are continuing the move that began last week with the murder of UK MP Cox.  The tragedy seemed to mark a shift in investor sentiment.  Sterling bottomed on June 17 just ahead of $1.40.  Earlier today in Asia, after more polls showed a move toward remain, sterling rallied to almost $1.4845, its highest level since last December.  

Sterling has consolidated its latest gains, and also the momentum has stalled, it remains in the upper end of the ranges seen over the past two sessions.   The US dollar is broadly lower against all the major currencies save the Japanese yen.  The dollar traded on both sides of yesterday’s range against the yen.  It has been unable to make much headway above JPY105.  It appears to be carving out a little base around JPY104.    There has been some indication that the BOJ may have been holding back on its rinban and QQE operations in the JGB market as if to prepare a bigger war chest in case of a Brexit vote.

There are a couple of points to make about the UK referendum.  First, the betting and event markets have moved well ahead of the polls.  Nearly all the last phone polls show remain ahead, while most of the online surveys show leave ahead.  We note that speculator in the futures markets had been adding to gross long sterling positions in the week before the market actually turned.  

Under such circumstances, the market seems vulnerable to a “buy the rumor sell the fact” type of activity.   The fast participants, speculators, hedge funds may take profits as the slower participants, like corporations, asset managers and the like more gradually re-build the UK exposure that had been shed.  

Second, that said, it may be helpful to consider some potential chart points as mile markers of sorts.  The $1.4885 area corresponds to a 50% retracement of the down move since last June’s high around $1.5930.   The upper Bollinger Band that has been frayed a bit comes in near $1.4835.  Above there is the 61.8% retracement near $1.5130, and the 100-day moving average is near $1.5230.  Sterling has shot up so quickly; it is difficult to have much confidence in nearby support, though a break of $1.46 would signal the snapping of the momentum.  

Third, the polls close at 10 pm BST, which is 5 pm EST.  The first results expected to take roughly two hours to begin trickling in.  Of course, all districts are not equal.  Areas, for example, in which UKIP has run strong in recent elections, should be expected to vote for the exit, while the most cosmopolitan cities and university areas can be expected to favor remain.  The demographic that favors Brexit appear to be lower incomes, no college degree, and older voters.   A record 46.5 mln citizens have registered to vote.  

Fourth, liquidity is expected to be compromised.  The results will be reported during the Asian session, which is typically not the most active.  While traders around the world will be watching events unfold, there is a great risk, and that will be impacting market conditions.   As has been the case, but especially now, after the strong move over the past week, a vote to leave the EU will have a much greater impact than a decision to stay.  Turnout is key, and incidentally, the heavy rain in southeast part of the UK. Including London is experiencing exceptionally poor weather.  

Outside of the UK referendum, there are four other developments to note:  

1.  For the first week since the end of March, foreign investors sold Japanese bonds in the week ending June 17, according to the MOF’s weekly data.   Over the past 11 weeks, foreign investors bought an average of JPY365 bln of Japanese bonds a week.  The selling could be simply normal profit-taking within the large accumulation, which would hypothesize new buying.  Alternatively, if part of the buying of negative yielding JGBs was as a proxy for the yen, the liquidation could be an early sign that profit-taking on long yen exposure.  

2.  There has been a rather subdued reaction to the ECB’s decision to reinstate the waiver for the use of Greek sovereign bonds for collateral.  Recall that early last year, as Greece lurched without a program, the ECB stopped accepting Greek bonds as collateral.  This forced the Greek banks to rely on more expensive emergency lending by the central bank of Greece.  Greek bond yields are lower, but at 7.67%, the 10-year yield, for example, has not made new lows in the week.  Nor are Greek equities outperforming.   However, the shift back to borrowing from the ECB is a positive development for Greek banks.  Financials are leading the Athens Stock Exchange Higher with a 2.3% gain today.  Overall, European financials are market performers today, matching the 1.4% gains of the Dow Jones Stoxx 600.  

3.  The flash June eurozone PMI will not change perceptions that a) the regional economy is slowing after the 0.6% pace in Q1 and b) France is a laggard.  The eurozone manufacturing PMI ticked up to 52.6 from 51.5.  Many had looked for a small decline.  Services, which, of course, are a larger part of the economy slowed to 52.4 from 53.3, much lower than expected, and the lowest since the end of 2014.  The net effect was that the composite reading eased to 52.8 from 53.1.  Of note, the French composite fell back below the 50 boom/bust to 49.4.  New manufacturing orders fell for the sixth month.  Separately, a measure of business confidence fell to nine-month lows.    Lastly, the new TLTROs are launched today, with details tomorrow.  The headline draw is likely to be inflated by rolling some outstanding borrowings into the new, more generous facility, and the elevated participation often seen in the first tranche of an operation.  

4.  The UK referendum may keep many investors sidelined today.  There are several US economic reports, including weekly initial jobless claims, which have been elevated recently.  Markit releases its preliminary manufacturing PMI (expected little higher from 50.7 in May) and new homes sales (sharp pullback is expected after a 16.6% gain in April).  Leading economic indicators (May) and KC Fed’s manufacturing survey typically don’t draw much market interest.  

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