11 October 2019 by jbchevrel
Stairway or tunnel. You choose. Today € financial spreads tightened on recent optimism regarding both US-China trade talks and a Brexit deal. UK banks have outperformed in this move, clearing the no-deal Brexit risk premium (tighter -10/-13 in senior holdco -17/-20 in sub holdco). Italian banks have performed strongly too (~-5 in senior preferred -10/-13 in sub). It was an impressive compression in UK risk premium over the past two sessions. UK banks stocks have risen something like 10%. The pound has gained 2.5%. In cross-index RV, this compression of risk premium also weighed on Senior/Main (~7 in 1:1) and Sub/Senior (~5 in 1:2). The Varadkar-Johnson and Barnier-Barclay meetings have undoubtedly been constructive. While many of the Street’s strategists have (again) changed their minds on the back of that to call a Brexit deal, here are a few things to keep in mind before piling into ‘Brexit risk’. Firstly, a deal looks more likely now but it still has to be agreed. Secondly, assuming the deal is agreed, it has to pass the Commons. It is probably fair to assume that if a deal is agreed, the EU wouldn’t refuse an extension if needed. But if the deal doesn’t pass the Commons, the UK gets a new extension, and there is a UK general election, it would be a whole new ball game. As far as the arithmetics of the Commons. The total is 650. We have 288 Cons. 245 Lab. 35 SNP 35 Indep. 19 LibDem. 10 DUP 7 Sinn Fein (who do not attend) 5 Independent Group for Change 4 Plaid Cymru 1 Green 1 Speaker. With 1 speaker 3 deputies and 7 Sinn Fein who don’t vote, to get a majority a deal needs the support of 320 MPs. The government currently has 288, having recently withdrawn the whip from 21 rebels. Points of thought here could be: Unknown #1 Let’s see what the DUP thinks of the potential deal. Without DUP support, we could see a path where the ERG hardliners don’t support the deal either. Unknown #2 There has been a lot of noise around the 20 ish Labour MPs to rebel. I think their vote isn’t a given, in this context. Unknown #3 the vote of all the 21 Tory rebels is not secured either. Then it is probably fair to assume that LibDems and SNP will vote against a deal, along with the vast majority of Labour, vs the vast majority of Tories. But it is clearly not a 100% here. And the UK rally we have seen today might have gone a bit ahead of itself (GBP/EUR 1.1475). Although Brexit is the focus right now, the ECB APP restart will probably weigh on the relative performance of € bank CDS vs UK bank CDS. Regarding the re-start of the PSPP, we could get more color on the planned purchases at the next ECB monetary policy meeting on October 24. More importantly, there may be some questions on the headroom for future expansion of the programme, but it is unlikely that we will get a detailed answer. If €15bn of the €20bn/month in purchases come in PSPP, if seems fair to expect some €4bn in German paper, €3.1bn in French, €2.6bn in Italian, €1.8bn in Spanish and around €3bn in other sovereigns. These numbers may seem relatively low, but it is worth remembering that from a flow standpoint, ECB re-investments are around €29bn for the month. While it is not enough to call a rally from these levels on peripheral spreads, it can probably prevent any selloff from occurring in the short term. Today an anonymous source piece revealed that the ECB will run out of German bonds to buy in just over a year if it follows capital key. Interestingly, it adds that ECB policymakers would rather bend capital key than change the 33% issuer limit.