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UK and Italy Outperforming

22 September 2020 by jbchevrel

The 1st cluster which outperformed in € financial CDS today was Italian banks (Medio -6 UniCredit -5). Italian sovereign risk premium, although already very low, got even lower today. Indeed, 10y BTP rallied -5bp today, thus tightening -7.5bp vs 10y Bund. Italian Risk rallied after the nation’s latest election results soothed investors’ worries about its historically volatile politics and their impact on the eurozone. 10y Italian yield came close to 0.8% today (in March, it was above 2%). Italian people voted (on Sept 20-21) in regional elections and a constitutional referendum that sought to reduce the number of MPs. The combined results strengthened the current governing coalition (Democratic Party + 5 Star Movement). For the market, that reduced the likelihood of early elections (knowing that such early elections could favor right-wing, EU-skeptic parties). UK banks also outperformed today. This was more a retracement from previous under performance. This move was helped by BoE governor Bailey reassuring this market, clarifying that although the BoE may study the option of negative rates, it nothing sure and nothing imminent. Front end rates sold off 3/4bp on the back of that and the Great British Pound temporarily rebounded (€1.09 $1.27). As far as other names are concerned, consolidation discussions are going on, in the European banking sector. DB CFO said DB is interested in cross-border mergers, UBS CEO said the pandemic has made it clear that deals need to happen, echoing CS similar comments.