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The Good, the Bad and the Ugly

22 November 2018 by jbchevrel

It was a quiet session in € CDS space ($4.3B of Main), because of Thanks Giving. Financials were the most active sector, especially UK, Italians and Deutsche Bank. • UK financials outperformed (-5/-7). We were -10/-12 at some point in early AM, including on tight names such as AVLN (5y CDS is 83bp). That felt fast, on the back of headlines stating that UK/EU determined to replace the backstop. We reverted as soon as the EU reportedly said Brexit issues of Ireland and Gibraltar remain. • Italian banks are wider (+1/+2) on the day, although BTPs bull steepened and 10y BTP/Bund spread tightened -4. Slight underperformance here. 1/ BTP Italia order book was said to close at just €1.3B. That was the 2nd lowest for a BTP Italia issuance since the €0.8B in 2012, well short of the highest (€10.5B in 2014). 2/ The EC informally recommended a debt-based EDP, with a formal launch expected in JAN by Eurogroup and EU Council. That has the potential to keep Italy under pressure to tighten fiscal. The risk I see on the political side is more anti-EU sentiment… EDP may request budgetary adjustments within 3-6M, without which Italy would get sanctions (0.2%- 0.5% GDP). 3/ Di Maio said that he sees room for dialogue with the EU and that 2019 deficit won’t breach 2.4% GDP. Interestingly, market reaction to Di Maio’s comments has been eroding lately, with local media regularly reporting increasing pressures from Lega to change budget (incl. Savona). There is a general sense that Lega is gradually taking over Five Star Movement. Last poll (Noto) gives Lega 33% 5SM 25%, vs 17%/33% back in the last general election in March. • Deutsche Bank (‘DB’ / Snr +10 Sub +20) was the worst performer in iTraxx Main, iTraxx Senior Fin and iTraxx Sub Fin. The 5y senior CDS is back at the widest level since the end of 2016. The main reason today was CitiBank CEO saying a combination with DB didn’t make sense, because the overlap was too big. DB also reportedly lost money on some equity ‘risk mgt trades’ ($60M loss this year, not much for DB credit, but enough to remember that their equity trading revenue has fallen 13 quarters in a row). DB had widened earlier this week amid reports that it was the unnamed "major European bank" that helped process c$150B in payments linked to Danske Bank's money-laundering scandal.