The TwentyFour Blog

"The European CLO market is much smaller, but given the US is further ahead in the economic cycle, the US market can provide a good indication of what might happen in Europe."

Markets appear more confident the UK will avoid a ‘no-deal’ Brexit, but this isn’t feeding through to rate rise expectations. TwentyFour Asset Management's Ben Hayward examines why.

So is there any Brexit premium left at this juncture? We certainly believe there is.

For us, it is the insight into the US economy and the strength or weakness of their customers, that we find most interesting in the banking results, and especially so when the US economic data is increasingly pointing to a slowdown.

It is not clear to us just how much more monetary easing will placate equity investors, and we see a real risk that when we enter the third quarter earnings season next week, company specific data from the bottom up will be more of a shock than the macro picture has been.

"We think the downside to markets is still underappreciated, and thus we would prefer to stay long protection."

The active versus passive management debate is well documented, but with ESG or sustainable investing the debate takes on a new dimension.

When Mario Draghi unveiled the European Central Bank’s latest stimulus package earlier this month, the restarting of quantitative easing with €20bn per month of government bond purchases took most of the headlines.

The globally operating travel group Thomas Cook entered liquidation this week, after it was unable to reach an agreement between its shareholders, financiers and numerous creditors, leaving hundreds of thousands of travellers stranded. A potential restructuring would likely have resulted in a significant loss for bondholders, but now it looks like the senior unsecured bonds are virtually worthless – Debtwire expects a recovery of 0-10% and the bonds are now trading at around 6 cents.

Coming out of the summer, we felt the European ABS primary market would see heavy supply, with continental issuers taking advantage of a slow start to the year by using ABS to address annual funding targets, but also increasingly using ABS as a capital management tool. This has played out and demand has been extremely strong, as investors have shown a willingness to take money off the side-lines, aided by a tailwind from the additional stimulus announced by the ECB on September 12.

There has been a bit of nervousness to say the least in US money markets over the last few days. The overnight repo rate in dollars surged to levels not seen since the aftermath of the financial crisis, touching almost 10% on Tuesday. During the financial crisis the high dollar repo rates were a clear sign of trouble in the banking system, so it’s natural that investors might be uneasy about this. We should stress upfront that this is not the case today, the spike in the repo rate is a short term technicality created by a confluence of events, none of which should be worrisome, but in which in aggregate created a shortage of dollar cash in a short space of time and over a very short period.

Regular readers of our blog will know that in the world of additional tier 1 (AT1), the Nationwide Building Society has been one of our favoured issuers in the market. We held the old sterling Nationwide 6.875% perpetual bonds from launch in 2014, and were not in the least surprised when the issuer called the bond at the earliest opportunity in June, though it did leave us a gap to fill in the subordinated bank sector.