29 July 2019 by jbchevrel
UK spreads underperformed the broader European credit market, with the ‘local’ UK financials CDS leading the move wider. Indeed BACRPLC, LLOYDSGR and RBSGRP are the worst-performing names in the iTraxx Main, all wider +8bp today in senior 5y. Those names compressed up to 3bp at the close, in sub/snr terms on a 1:2 basis, after steeper compression intra-day. This move comes at a juncture where market participants re-price the Brexit risk premium. Prime Minister Boris Johnson and Cabinet members have only re-asserted over the past few days their willingness to prepare for a no-deal outcome, although the new PM still argues that there will be a deal. Something which is 100% consistent with the platform on which Boris gained the leadership of the Conservative Party early last week, and which, again, looks like a "we will jump out of a window" stance. UK non-financial IG names (incl. ROLLS, ITVLN) also underperformed, to a lesser extent. In CDS indices space, this UK vs € relative underperformance translated into a slight underperformance of SnrFin by +2/3bp against Main (1:1) and SubFin (1:2). Other asset classes also reflected this higher Brexit risk premium. GBP lost -1.3% vs USD, -1.5% vs EUR & CHF. The £ short end rallied a tad, still pricing in a -25bp cut for the end of Q1-2020. Further down the curve, in sovereigns, the 5y Gilt outperformed the Bobl by c3bp. The £ 5y5y inflation swaps underperformed its €/$ equivalents by c4bp, on fears that a sustained selloff in GBP could revive inflation expectations in a ‘relatively open’ economy such as the UK. More generally, it is worth noting that credit synthetics have underperformed stocks globally, and especially in the UK where a lower GBP boiled the local equity market. As media talks about an early election in the UK have intensified, it is worth noting that the Conservatives have rebounded in the polls over the past few weeks, mainly at the expense of Nigel Farage’s Brexit Party, which implies, once again, pressure on the Conservative government to deliver Brexit.