Our Experts Comment the Times Series

See All the Comments


03 September 2019 by jbchevrel

Today it wasn’t only the comeback of the US markets after Labour day, it was also the much-awaited day the UK Parliament came back from summer recess. UK spreads underperformed the broader European credit market, with the ‘local’ UK financials CDS leading the move wider. Indeed BACRPLC, LLOYDSGR and RBSGRP were among the worst-performing names in the iTraxx Main, wider ~+5/6bp this AM and ~+3/4bp at the close, in senior 5y CDS. This is continued underperformance comes at a juncture where market participants re-price the Brexit risk premium, in the context of opposition between Prime Minister Boris Johnson and the opposition, including the 14 Conservative MPs (incl. very senior figures) who said that they would vote against the government. It is unclear whether and when a snap election can occur. Gordon Rayner twitted that ministries were told to clear their decks by Thursday in the expection that Parliament will not be sitting after that, suggesting preparation to an election. But then, Editor Paul Waugh twitted that Labour’s Nick Brown said the party would not back PM’s snap election bid. He said party wanted Johnson to "stew in his own juices" and be made to "own" his mess. Number of Labour MPs seem reluctant, as they fear to lose their seats. Pollsters show that Johnson is perceived as the best PM by the highest number of voters (Survation’s ‘best PM’ poll: Johnson 45% Swinson 19% Corbyn 17%). Johnson’s lead varied between 8% and 11% over Labour, which implies going from no majority to ~30 seats. While Labour anti-Brexit press argues an election could end up like the 2017 one, it is worth noting that contrary to his main opponent, Johnson has a very clear stance on Brexit, which have enabled Conservatives to regain the biggest chunk of voters they had lost to the Brexit Party between 2017 and the last EU elections. Oppositely, around half of the people who voted Labour in 2017 do not currently intend to do so, most of them have gone to the LibDems, who have, also, a clear stance on Brexit. 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) to 15 (intraday, closed +14). Other asset classes also reflect this higher Brexit risk premium. GBP is close to the low end of the range, and cable came south 1.20 this morning, marking new lowest levels since the flash crash. The £ short end prices in ~-10bp for Nov MPC and the belly still looks rich vs peers. In particular, the 5y Gilt/Bobl spread is at the low of the recent range, below 120bp.