07 12 09 07.12.09 1 Market Snapshot: Summary of rate movements and - - PowerPoint PPT Presentation

07 12 09 07.12.09

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Economics Watch

Market Snapshot: Summary of rate movements and important announcements

C t t Economics Watch:

Monday: BoE 2020‐2032 reverse gilt auction Tuesday: RICS housing market survey (price balance)

Contents:

Last week Economics Watch 3 Equities 4

BRC retail sales monitor, total sales (% y/y) Industrial production (%m/m) Manufacturing output (%m/m) CBI industrial trends survey (total orders) BoE 2013‐2019 reverse gilt auction

Equities 4 Credit 5 Nominal Yields 6 Inflation 7

g Wednesday: Pre‐Budget Report to parliament Nationwide Consumer Confidence (Index) Trade balance (£ billion)

Inflation 7 Real Yields 8 Appendix 9

Thursday: UK: BoE MPC Rate decision (%) BoE MPC asset purchase target (£billion) F id P d i t i (% / ) Friday: Producer input prices (%m/m) Producer core output prices (%m/m) In 2009, Redington was ranked globally first for ALM/LDI Advice; second in the category of Manager Selection and third for Strategic Advice by Life & Pensions Maga ine against a peer group of global firms (including

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Source: Barclays Capital

Life & Pensions Magazine against a peer group of global firms (including Watson Wyatt, Hewitt and Mercers)

Redington #1 in ALM/LDI; #2 in Investment Consulting; #3 in Strategic Advice; #3 Overall Consultant

Key data released last week

Last week Economics Watch

Date Economic Data This month Prior month ()

30‐Nov‐09 UK BoE net consumer credit £0.6 billion (‐£0.3 billion) UK BoE mortgage approvals (000’s) 57,300 (56,200) 01‐Dec‐09 Nationwide House Price Index 2.7% (2.0%) (Non‐seasonally adjusted) PMI Manufacturing Index 51.8 (53.4) PMI Construction Index 47 (46.2) 03‐Dec‐09 PMI Services Index 56.6 (56.9) 04‐Dec‐09 New Car Registrations 57.6% (31.6%) Change in US Non‐Farm Payrolls ‐11,000 (‐190,000)

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Equities : “Dubai fears subside as markets continue upwards...”

Figure 1: Total Return on major Equity Indices

• Equity markets in the UK and US ended the week higher with the FTSE 100 up

1.46% to 5322 and the S&P 500 finishing the week up 1.33% at 1,106.

• Markets recovered from previous falls as investor sentiment seemed to

t li ti th t th D b i i id t lik l t b f

Figure 1: Total Return on major Equity Indices

90 100 110

converge to a realisation that the Dubai incident was unlikely to be of grave systemic risk for financial markets.

• Abu Dhabi will not provide a “blank cheque” bailout for Dubai world .

60 70 80 Total Return S&P 500 FTSE 100

• The key economic data during the week included:
• UK Manufacturing PMI came down to 51.8 from 53.4 in October.
• It was the same story for UK Services PMI which was down marginally to

56.6 from 56.9 in October.

• Change in US Non‐Farm Payrolls fell 11,000 compared to an expected

Source: Bloomberg, Redington

50 Sep 2008 Dec 2008 Mar 2009 Jun 2009 Sep 2009

drop of 130,000. This was the smallest decline since the recession began!

• Although the PMI data was down from a month earlier, both indices remained

in positive territory which may have leant support to UK Equity Markets. 35 40 45 VIX Index Level

Figure 2: S&P VIX Volatility Index

• The VIX Index, a measure of equity market volatility was down 14% as normality

returned to equity markets. 20 25 30 35 15 Apr 2009 Jun 2009 Aug 2009 Oct 2009 Dec 2009

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Source: DataStream International Ltd, Credit Suisse, Redington

Credit: “Credit market conditions are improving...”

• Over the last week, corporate spreads as measured by the Barclays Sterling Non‐

Gilt corporate index widened by 3bps and 2bps for AA and A. Spreads on AAA and BBB narrowed by 2 bps. With regards to the 2 pan‐European High Yield indices, spreads on the BB index widened by 12bps whilst falling 74bps on the B index (Figure 3).

Figure 3: Corporate Spreads by Rating

1,500 2,000 2,500 Sterling Non‐Gilt AAA Sterling Non‐Gilt AA Sterling Non‐Gilt A Sterling Non‐Gilt BBB Pan Euro HY BB

• On a sector basis, spreads in cyclicals, non‐cyclicals, senior financials, sub‐

financials and telecoms all widened.(Figure 4)

• Negative ratings migrations/ downgrades have also slowed down from the

500 1,000 , Libor Spread Pan Euro HY BB Pan Euro HY B

• Negative ratings migrations/ downgrades have also slowed down from the

peaks earlier on in the financial crisis, as shown in Figure 5.

Figure 4: Barclays Sterling Non Gilt (Investment Grade) by Sector

Source: Barclays Capital, Redington

Figure 5: History of ratings downgrades

‐500 Feb 2008 May 2008 Aug 2008 Nov 2008 Feb 2009 May 2009 Aug 2009 Nov 2009

Figure 4: Barclays Sterling Non‐Gilt (Investment Grade) by Sector Figure 5: History of ratings downgrades

800 1,000 1,200 d 200 400 600 Libor Spread

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Source: Barclays Capital, Redington Source: Moody’s ,Barclays Capital

Feb 2008 May 2008 Aug 2008 Nov 2008 Feb 2009 May 2009 Aug 2009 Nov 2009 Cyclicals Non‐Cyclicals Senior‐Financials Sub‐Financials Telecoms‐Utilities

Nominal Yields: “Non‐Farm Payrolls data pave the way for an interesting week...”

Figure 6: Nominal Term Structure of Gilts vs. Swaps

• Nominal swap rates remain above gilts at all maturities up to 15 years (Figure

6). Over the last week, both gilt and swap yields rose across the curve. They increased most significantly at the short end.

g p

3 4 5

• 10y gilt yields rose by around 16bps although the increase fell to around 12‐

13bps at the 30‐50y points. Swap rates rose by 8bps and by 6‐7bps at the 30‐ 50y points.

• Gilt yields may have risen on Friday to the release of the US Non‐Farms

1 2 3 %

Payrolls data which was well above consensus.

• The main focus in the rates market this week will be the release of the Pre‐

Budget Report on Wednesday. Barclays Capital expects that the government will announce a £14 billion increase in the gilt remit for the fiscal year 2009/2010 (£10 billion nominal and £4 billion linker)

Figure 7: Nominal Swap Spreads (Z‐spreads) on Selected Gilts

Source: Bloomberg, Redington

10 20 30 40 50 Tenor Swap Curve 4th December Gilt Curve 4th December

20 40 60 80 bps)

2009/2010 (£10 billion nominal and £4 billion linker).

• Whilst all the extra supply to the gilt market has been easily absorbed thus far,

it will be interesting to see if this carries on when reverse operations are scheduled to stop in January 2010.

60 ‐40 ‐20 20 Z‐Spread (b

• Barclays Capital also predicts that the Central Government Net Cash

Requirement (CGNCR) will increase by £15 billion, mainly due to the further measures for Lloyds Banking Group and RBS.

‐80 ‐60 Sep 2008 Dec 2008 Mar 2009 Jun 2009 Sep 2009 UKT 2020 UKT 2038 UKT 2055

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Source: Barclays Capital, Redington

Inflation: “Large movements in gilt breakeven inflation...”

Figure 8: Gilt breakeven inflation term structure vs. swaps

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• Gilt breakeven inflation rose steeply across the curve rising by around 10‐

11bps.The sell‐off in the nominal rates market may have helped this. i fl i h d h f

Figure 8: Gilt breakeven inflation term structure vs. swaps

1 2 %

• Swap inflation movements were much more muted with an average increase of

3‐4bps across the curve causing the differential between gilt inflation and swap inflation to narrow at all points.

• It is worth nothing that the 2.5% VAT hike scheduled for December 31st 2009 is

likely to have an impact on overall RPI inflation

Figure 9: Swap Inflation‐ Gilt Breakeven Inflation

10 20 30 40 50 Tenor Gilt Breakeven 4th December Inflation Swap 4th December

likely to have an impact on overall RPI inflation.

Source: Bloomberg, Redington

80 100 120 140 160

Figure 9: Swap Inflation Gilt Breakeven Inflation

‐20 20 40 60 80

Spread (BPS)

‐60 ‐40 Sep 2008 Dec 2008 Mar 2009 Jun 2009 Sep 2009 Dec 2009 20Y 30Y 50Y

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Source: Barclays Capital, Redington

Real Yields: “Z‐spreads on linkers decrease...”

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• Swap real yields remain roughly the same as gilt real yields up to around 5
• years. From 5‐50 years, gilt real yields remain above swap real yields except

around the 15y point at which the difference disappears. (Figure 10)

Figure 10: Real Gilt yield term Structure vs. Swaps

‐1 %

• The difference in real yields may be driven by differences in swap and gilt

breakeven inflation.

• Z‐Spreads are the weighted average constant spread added to the swap zero

h k i f h il h d l i l

‐2 10 20 30 40 50 Tenor Gilt Real Yield 4th December Swap Real Yield 4th December

curve to get the market price of the gilt. They are used as a relative value measure between cash and the swap market.

• Z‐spreads on linkers remain positive, but over the week have increased

marginally by around 0.8 bps for IL2020 and fallen by around 1‐2bps for IL2037 and IL2055 (Figure 11)

Figure 11: Z spread on selected linkers

Source: Bloomberg, Redington 80 100 120

and IL2055. (Figure 11)

Figure 11: Z‐spread on selected linkers

20 40 60

Z‐Spread (bps)

‐20 Sep 2008 Dec 2008 Mar 2009 Jun 2009 Sep 2009 UKTI 2020 UKTI 2037 UKTI 2055

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Source: Barclays Capital, Redington

Appendix: Summary Tables

Figure 12: Growth Assets Figure 13: Interest rates and inflation:

Equities Level 1 WeekChange 1 Month Change 1 Year Change FTSE 100 5,322 1.46% 4.2% 27.6% S&P 500 1,106 1.33% 5.7% 27.0% Eurostoxx 50 2,910 2.80% 5.3% 22.8% Nikkei 225 10,023 10.36% 1.8% 25.2% UK Gilts Level 1 WeekChange 1 Month Change 1 Year Change 10Y 3.71 16.4 (-1.3) 5.5 20Y 4.27 12.8 1.6 8.4 30Y 4.25 13.5 1.1 45.6 50Y 4.17 12.8 (-2.2) 52.4 FX Level 1 WeekChange 1 Month Change 1 Year Change GBPUSD 1.65 0.08% 0.64% 0.64% GBPEUR 1.11 0.6% (-1%) (-1%) EURUSD 1.49 (-%) 1.4% 1.4% UK Nominal Swaps Level 1 WeekChange 1 Month Change 1 Year Change 10Y 3.82 8.3 (-16.3) 18.3 20Y 4.14 6.5 (-12.5) 51.8 30Y 4.05 6.5 (-8.7) 81.8 50Y 3.98 5.5 (-8.8) 87.5 Credit Spread by Sector Level 1 WeekChange 1 Month Change 1 Year Change Cyclicals 181 1.8 0.4 (-289.9) Non-Cyclicals 132 2.9 8.8 (-120.8) Senior-Financials 205 0.8 0.6 (-240.7) Sub-Financials 412 3.7 24.1 (-282.6) Telecoms-Utilities 146 1.4 5.0 (-183.9) Credit Spreads by Rating Level 1 WeekChange 1 Month Change 1 Year Change Gilt Breakeven Inflation Level 1 WeekChange 1 Month Change 1 Year Change 10Y 3.18 10.3 6.3 212.8 20Y 3.52 9.7 13.7 81.6 30Y 3.74 10.6 7.3 75.9 50Y 3.76 10.2 0.1 75.8

*

** *

Aaa 30 (-2.3) 6.6 (-74.1) Aa 164 3.0 6.3 (-183.1) A 235 1.8 7.6 (-309.4) Baa 304 (-1.8) 4.4 (-329) IPD Property Index Level 1 Month Change 3 Month Change YTD UK RPI Swap Level 1 WeekChange 1 Month Change 1 Year Change 10Y 3.46 3.7 (-2.3) 143.1 20Y 3.76 3.2 4.5 66.5 30Y 3.78 3.9 6.3 63.2 50Y 3.73 3.7 3.7 73.8 Z-Spreads Level 1 WeekChange 1 Month Change 1 Year Change Property Return 632 2.5% 5.3%

• 4.3%

UKT 2020 0.9 7.8 18.3 (-12.5) UKT 2038 18.8 5.4 11.0 (-33.2) UKT 2055 18.8 5.5 7.1 (-32.8) UKTI 2020 24.8 0.7 5.9 (-53.9) UKTI 2037 13.5 (-1.1) 7.4 (-55.0) UKTI 2055 15.4 (-1.6) 7.8 (-43.1)

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* In normal market conditions, z‐spreads on linkers are negative (a negative spread must be added to the swap zero curve to get the market price of the gilt). Last year this trend had reversed although the effects of QE are helping to reduce z‐spreads. * *IPD Property Index is as of September

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Disclaimer

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