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Atlantic Spread

19 March 2019 by jbchevrel

The iTraxx Main (-1.7bp) outperformed its US counterpart, the CDX IG (-0.9bp) on the day, taking the ‘Atlantic spread’ back to less than a basis point, as we are the day before the roll. This cross-region spread was trading above 5bp a month ago. While the market might underestimate the probability of a technical No Deal Brexit at the end of this month, the momentum in Europe was particularly strong over the past 5 weeks, as evidenced in the rally in SXXP (+7.6% since Feb 13, vs ‘just’ +4.3% for S&P 500) and the compression of non-core EGBs vs Bunds (10y BTP -40bp vs. DBR). More recently in cash space, Europe also outperformed the US (QW5A -6bp since Mar 7, while IBOXIG is roughly unchanged). The main tail risk for that direction to hold would be a Brexit without a deal on March 29, although this event looks unlikely. The UK Parliament has voted against a no-deal Brexit, but the default option remains an exit without a deal. This is in the unlikely event where the EU does not agree to grant the UK an Article 50 extension after this deadline. Although some key EU countries have voiced that the extension would not come without a satisfactory reason from the UK, the market participants are largely expecting an unanimous agreement from the EU side at the end of this week to avoid a disorderly Brexit. German Chancellor Merkel repeated today that avoiding a no-deal Brexit was, for her, a priority. A headline also just popped, stating that the EU side was said to see mid-April as the deadline for the UK to decide on Brexit delay.