10 July 2019 by jbchevrel
Today was marked by another aggressive broad-based rally in risky assets, following Chair Powell’s testimony before Congress. Rates markets seemed positioned for some hawkishness, as G4 govies cheapened, on the basis that since Powell’s previous comments we had had 1/ strong NFP last Friday 2/ Trump/Xi rapprochement 3/ some Fed speakers pushing back on dovishness. Despite those, Powell stressed that inflation has been running below target, that trade tensions/global growth concerns weigh on activity and that uncertainties about the outlook have increased in recent months. That sent global credit spreads down, with CDX IG outperforming iTraxx Main although slightly. The Atlantic spread didn’t move much (now standing at the lows ~4bp) despite the more remarkable outperformance of US yields over core Europe’s. Indeed, the 10y UST/DBR spread tightened by 5bp to c175bp. As far as European financials, greatly dependent on the absolute level of € rates and short end steepness, Powell’s speech came as a halting signal for fin stocks to rally but spurred a rally in credit regardless (c3bp of SnrFin31 and c7bp of SubFin31), after the session had been characterized by a decent decompression in indices (Sub/Snr s31 reached 8bp intra-day while it had closed c5bp yesterday). In EM space also, Powell’s speech dictated the price action, with CDX EM tighter -3bp and the most $/$ rate sensitive sovereign, Argentina, outperformed notably other CDX constituents, tighter -15bp on the 5y. One could have expected Turkey to follow suit in this context, however the fact that President Erdogan explicitly said that the recently dismissed ex CBRT chief should have been quicker to cut rates supported risk premium (the 5y CDS is just tighter -1.5bp on day).