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Going Out With A Bang

18 July 2019 by lberuti

Mario Draghi will leave the presidency of the ECB in a few months, and it appears he wants to go on a high. The ECB has apparently begun studying a potential revamp of its inflation goal, as Mr Draghi now favours a “symmetrical approach” which would give the central bank some flexibility to be either above or below its target (currently set at 2%). For instance, it would allow it to keep inflation elevated for a while after a period of weakness to ensure price growth is entrenched. When the report came out mid-morning, it pushed equity markets up and credit risk premia down. After some tentative weakness early on, credit indices gapped tighter. While iTraxx Main never recovered and ended the session within a whisker of its tightest level of the year, iTraxx Crossover rapidly found people interesting in buying protection. A number of its constituents have been trading poorly recently (Loxam, Casino, Thomas Cook, Boparan, Pizza Express were all wider on the day again) and the fact that the question of the default of Galapagos (a member of iTraxx Crossovere series 22 to 30 but not the current series 31) was officially asked to the ISDA Determination Committee yesterday probably did not help either. This set the scene for one of the biggest sessions of decompression we have experienced in a while. That phenomenon is often measured by comparing the risk premium of iTraxx Crossover to 4x the risk premium of iTraxx Main: it widened by 7bps on the day, and while it was trading at 25bps not long ago, it closed at 54bps tonight.