07 12 09 07.12.09 1
Market Snapshot: Summary of rate movements and important announcements Economics Watch Economics Watch: Contents: C t t Monday: BoE 2020 ‐ 2032 reverse gilt auction Last week Economics Watch 3 Tuesday: RICS housing market survey (price balance) Equities Equities 4 4 BRC retail sales monitor, total sales (% y/y) Credit 5 Industrial production (%m/m) Manufacturing output (%m/m) Nominal Yields 6 CBI industrial trends survey (total orders) Inflation Inflation 7 7 BoE 2013 ‐ 2019 reverse gilt auction g Real Yields 8 Wednesday: Pre ‐ Budget Report to parliament Appendix 9 Nationwide Consumer Confidence (Index) Trade balance (£ billion) Thursday: UK: BoE MPC Rate decision (%) BoE MPC asset purchase target (£billion) Friday: F id P Producer input prices (%m/m) d i t i (% / ) 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 Life & Pensions Magazine against a peer group of global firms (including Watson Wyatt, Hewitt and Mercers) Redington Source: Barclays Capital #1 in ALM/LDI; #2 in Investment Consulting; #3 in Strategic Advice; #3 Overall Consultant 2
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) 3
Equities : “Dubai fears subside as markets continue upwards...” Figure 1: Total Return on major Equity Indices Figure 1: Total Return on major Equity Indices • Equity markets in the UK and US ended the week higher with the FTSE 100 up 110 1.46% to 5322 and the S&P 500 finishing the week up 1.33% at 1,106. 100 • Markets recovered from previous falls as investor sentiment seemed to 90 converge to a realisation that the Dubai incident was unlikely to be of grave t li ti th t th D b i i id t lik l t b f Total Return systemic risk for financial markets. 80 70 • Abu Dhabi will not provide a “blank cheque” bailout for Dubai world . S&P 500 FTSE 100 60 • The key economic data during the week included: 50 Sep 2008 Dec 2008 Mar 2009 Jun 2009 Sep 2009 • UK Manufacturing PMI came down to 51.8 from 53.4 in October. Source: Bloomberg, Redington • 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 drop of 130,000. This was the smallest decline since the recession began! Figure 2: S&P VIX Volatility Index 45 • Although the PMI data was down from a month earlier, both indices remained VIX Index Level 40 in positive territory which may have leant support to UK Equity Markets. 35 35 • The VIX Index, a measure of equity market volatility was down 14% as normality 30 returned to equity markets. 25 20 15 Apr 2009 Jun 2009 Aug 2009 Oct 2009 Dec 2009 Source: DataStream International Ltd, Credit Suisse, Redington 4
Credit: “Credit market conditions are improving...” Figure 3: Corporate Spreads by Rating • Over the last week, corporate spreads as measured by the Barclays Sterling Non ‐ 2,500 Gilt corporate index widened by 3bps and 2bps for AA and A. Spreads on AAA Sterling Non ‐ Gilt AAA and BBB narrowed by 2 bps. With regards to the 2 pan ‐ European High Yield Sterling Non ‐ Gilt AA 2,000 indices, spreads on the BB index widened by 12bps whilst falling 74bps on the B Sterling Non ‐ Gilt A index (Figure 3). Sterling Non ‐ Gilt BBB 1,500 , Pan Euro HY BB Pan Euro HY BB Pan Euro HY B Libor Spread • On a sector basis, spreads in cyclicals, non ‐ cyclicals, senior financials, sub ‐ 1,000 financials and telecoms all widened.(Figure 4) 500 • Negative ratings migrations/ downgrades have also slowed down from the • Negative ratings migrations/ downgrades have also slowed down from the 0 peaks earlier on in the financial crisis, as shown in Figure 5. ‐ 500 Feb 2008 May 2008 Aug 2008 Nov 2008 Feb 2009 May 2009 Aug 2009 Nov 2009 Source: Barclays Capital, Redington Figure 4: Barclays Sterling Non Gilt (Investment Grade) by Sector Figure 4: Barclays Sterling Non ‐ Gilt (Investment Grade) by Sector Figure 5: History of ratings downgrades Figure 5: History of ratings downgrades 1,200 1,000 800 Libor Spread d 600 400 200 0 Feb 2008 May 2008 Aug 2008 Nov 2008 Feb 2009 May 2009 Aug 2009 Nov 2009 Source: Barclays Capital, Redington 5 Cyclicals Non ‐ Cyclicals Senior ‐ Financials Sub ‐ Financials Telecoms ‐ Utilities Source: Moody’s ,Barclays Capital
Nominal Yields: “Non ‐ Farm Payrolls data pave the way for an interesting week...” Figure 6: Nominal Term Structure of Gilts vs. Swaps g p 5 • 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. 4 3 3 • 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 ‐ 2 50y points. 1 • Gilt yields may have risen on Friday to the release of the US Non ‐ Farms Payrolls data which was well above consensus. 0 0 10 20 30 40 50 Tenor Source: Bloomberg, Redington • The main focus in the rates market this week will be the release of the Pre ‐ Swap Curve 4th December Gilt Curve 4th December Budget Report on Wednesday. Barclays Capital expects that the government Figure 7: Nominal Swap Spreads (Z ‐ spreads) on Selected Gilts will announce a £14 billion increase in the gilt remit for the fiscal year 2009/2010 (£10 billion nominal and £4 billion linker) 2009/2010 (£10 billion nominal and £4 billion linker). 80 60 • 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 40 scheduled to stop in January 2010. bps) Z ‐ Spread (b 20 20 0 • Barclays Capital also predicts that the Central Government Net Cash ‐ 20 Requirement (CGNCR) will increase by £15 billion, mainly due to the further measures for Lloyds Banking Group and RBS. ‐ 40 ‐ 60 60 ‐ 80 Sep 2008 Dec 2008 Mar 2009 Jun 2009 Sep 2009 UKT 2020 UKT 2038 UKT 2055 6 Source: Barclays Capital, Redington
Inflation: “Large movements in gilt breakeven inflation...” Figure 8: Gilt breakeven inflation term structure vs. swaps Figure 8: Gilt breakeven inflation term structure vs. swaps 4 • 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. 3 • Swap inflation movements were much more muted with an average increase of i fl i h d h f 2 3 ‐ 4bps across the curve causing the differential between gilt inflation and swap % inflation to narrow at all points. 1 • It is worth nothing that the 2.5% VAT hike scheduled for December 31 st 2009 is likely to have an impact on overall RPI inflation likely to have an impact on overall RPI inflation. 0 0 10 20 30 40 50 Tenor Gilt Breakeven 4th December Inflation Swap 4th December Source: Bloomberg, Redington Figure 9: Swap Inflation Gilt Breakeven Inflation Figure 9: Swap Inflation ‐ Gilt Breakeven Inflation 160 140 120 100 80 80 Spread (BPS) 60 40 20 0 ‐ 20 ‐ 40 ‐ 60 Sep 2008 Dec 2008 Mar 2009 Jun 2009 Sep 2009 Dec 2009 20Y 30Y 50Y 7 Source: Barclays Capital, Redington
Real Yields: “Z ‐ spreads on linkers decrease...” Figure 10: Real Gilt yield term Structure vs. Swaps • Swap real yields remain roughly the same as gilt real yields up to around 5 1 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) 0 0 • The difference in real yields may be driven by differences in swap and gilt % breakeven inflation. ‐ 1 • Z ‐ Spreads are the weighted average constant spread added to the swap zero curve to get the market price of the gilt. They are used as a relative value h k i f h il h d l i l measure between cash and the swap market. ‐ 2 0 10 20 30 40 50 Tenor • Z ‐ spreads on linkers remain positive , but over the week have increased Gilt Real Yield 4th December Swap Real Yield 4th December Source: Bloomberg, Redington marginally by around 0.8 bps for IL2020 and fallen by around 1 ‐ 2bps for IL2037 Figure 11: Z spread on selected linkers Figure 11: Z ‐ spread on selected linkers and IL2055 (Figure 11) and IL2055. (Figure 11) 120 100 80 Z ‐ Spread (bps) 60 40 20 0 ‐ 20 Sep 2008 Dec 2008 Mar 2009 Jun 2009 Sep 2009 Source: Barclays Capital, Redington 8 UKTI 2020 UKTI 2037 UKTI 2055
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