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Gap Closed

27 December 2019 by jbchevrel

Back to Nov. 7 we wrote in ‘Catalyst Wanted’ that positive trade developments and autopilot easier central banks created a supportive environment for credit in the medium term. Price action since then makes a short more compelling, although no new systemic catalyst has emerged yet. The autopilot-central-banks regime means that we are well back in an environment where good economic surprises are met with stronger markets. At the first order, good news is good news. In particular, renewed concerns about the European economy (ex: manufacturing, to not say German autos) may well, if they happen, be met with higher risk premia. At the first order, the bar for the ECB to ease policy further seems high. The ECB’s framework seems more motivated by the fact that last one occurred 16 years ago, as opposed to an imminent need to act. The short end of the $ OIS curve is also about flat, although the Fed’s language made the bar for a hike soon look higher than the bar for a cut, I would think. And Chair Powell probably has some decent room (to cut) before President Trump stops complaining about relatively too high interest rates in the US. Since Nov. 7 post, the Conservative win (as expected) in the UK has failed to reduce UK risk premium sustainably, as only some of the tail negative risks have been avoided. Oppositely, it seems that a no-EU/UK-free-trade-agreement Brexit is very much on the cards, at the end of 2020. Although this was not the markets’ focus right after the general election, it seems fair to say that this risk has never disappeared. This re-pricing partly helped cross-index RVs like Main/CDX or Snr/Main to retrace wider. US politics can still become a driver for markets, although the chances of Democrats winning, and a fortiori the most left contenders, seem to have receded.