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Deviating From Roll Gravity

07 March 2019 by jbchevrel

The ECB GC meeting had seemingly set a risk-on tone at 12.45 when we got the release, but it turned bearish for most markets later. At first, CDS indices tightened on the prospects of a new round of TLTROs and ‘lower for longer’ rates (ECB is now committed to keep depo rate at -0.4% until 2020). Indeed, CDX IG started the session by tightening 2bp, before widening back 2.5bp. This is still relatively strong, compared to stocks (SPX -0.7%). The second key development was the continued convergence between CDXIG and the Main. Main-IG spread was indeed negative for most of the session and closed around flat. In stocks, € outperformed US too (SXXP -0.4% SPX -0.7%). On ECB 1245 release, SX5E jumped +10 vs SPX +1. This shows the dragging CTA/profit-taking force at play in SPX. Before today, CTAs had reduced ~1/3 longs in SPX. And because they tend to unwind over c12 business days, this caps any short-term rally. We have broken 2,750, which is, the average YTD entry point of CTAs in SPX. Therefore more volatility is to expect on the downside, possibly pushing CDXIG wider than Main, in the short term.