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All Eyes On Italy

27 September 2018 by jbchevrel

Today not just Italy CDS but all European CDS indices tracked the BTP/DBR spread: wider at the open and reverting tighter post BTP auction. The initial widening happened due to the delay in the budget meeting. Then the 5y/10y auction was strong (highest b2c since May) as locals rushed to add duration at this level. BTP/DBR kept tightening post auction mainly due to the Bund leg (German Sep CPI 2.3%y v 2.0%y exp). Budget-wise, ANSA just reported 2.4-2.5%, which feels close to expectation, but today’s cabinet meeting (currently going on) still to confirm… Anything closer to 3% will be negative, as risk will be on the upside thereafter. In the initial selloff, it is worth noting that iTraxx XOver performed in line with iTraxx Main, contrasting with the XO/Main outperformance on Italy-led selloffs last summer. Outside of Europe, it was also a decently risk-on session, as yesterday’s not-dovish-not-hawkish FOMC came as a relief for EM and US risky assets.