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Most Paused, Some Did Not

26 April 2017 by lberuti

Monday and Tuesday were all about the capitulation of hedge fund managers who held short risk positions into the first round of the French presidential election. Today marked this week’s first session of consolidation. Credit indices bounced off the tights as investors reduced a bit their strategic long risk positions ahead of the ECB meeting tomorrow. Single reference entity CDS also made a pause, but among them Financials continued to perform with CS (Credit Suisse Group AG) showing the way. The CEO announced that the bank is eventually bowing to investors’ pressure by abandoning the partial sale of its biggest profit generator, its Swiss Universal bank, and said that it will instead boost capital through a right offer. The bank will raise 4 billion Swiss Francs from the share sale. CS also posted a first quarter profit of CHF 596mln which beat analysts’ expectations of CHF 336mln. Investors celebrated the results together with the end of what were weeks of speculation regarding the funding plan by sending CS’s 5-year risk premium another 5bps tighter to 89bps.


25 April 2017 by lberuti

France’s big banks were the main beneficiaries of the country’s first round of the presidential election. They were the best performers yesterday by a fair margin, and the risk premia of their senior and subordinated debts collapsed, despite some light profit taking on long risk positions during the session. They enjoyed another very positive day today, even if peripheral financial institutions stole the show - they were playing catch up, having lagged a bit their French counterparts yesterday -. Despite the backup in OATs, there was no stopping French banks. ACAFP ( Credit Agricole SA ) issued a new 10y obligation roughly 50 to 70cts cheap to existing bonds, but the discount was gone as soon as it started trading. The €1.5Bln new issue had no lasting impact on the bank’s 5-year CDS – nor on any other maturity – and it closed another 3.5bps tighter today at 60.5bps.


24 April 2017 by lberuti

The market breathed a huge sigh of relief this morning, after the French presidential election failed to deliver any shock over the week-end. Make no mistake though, viewed over a longer-term horizon, it is another shockwave as the two mainstream parties’ candidates have been eliminated and the general elections that will take place in a couple of months will no doubt bring their lot of uncertainties. If no majority emerges in Parliament, the task of the future President – Mr Macron as it stands at the moment, unless any unexpected twist turns things on their head over the two coming weeks– will be made extremely difficult and reforming the country will be as tricky as ever. But today was all about celebrating the very likely election of a pro-Europe candidate. It seems that investors were positioned fairly defensively – this was obvious from credit index option prices last week as the implied volatility of out of the money downside protection was far more expensive than at the money downside protection, but less so on credit indices themselves – and the risk premia of credit indices reaped tighter. iTraxx Main opened 4.5bps tighter at 70bps and closed a further 2bps tighter at 68bps; iTraxx Crossover closed 18.5bps tighter at 272bps; itraxx Financials Senior closed 12.5bps at 78bps and iTraxx Financials Subordinated 27.5bps at 175bps.

Ready, Steady...

21 April 2017 by lberuti

No liquidity, no trade. That pretty much sums up the day on the credit market. Variations were minimal intraday or on a close to close basis. That was true for indices and their constituents alike, even if on balance risk premia were indicated a tad tighter for choice. Instead of trading, people spent most of the day trying to assess where the market could open on Monday based on the outcome of the first round of the French presidential election. Using the probabilities they affect to each of these outcomes, the general conclusion was that 75ish bps is probably the correct level for iTraxx Main (ITXEB) on the eve of the ballot. If people use probabilities that appear to make sense, it seems that the market behaviour after the most recent shock election results and the speed at which risky assets came back to their original levels is impacting their expectations for next Monday’s opening levels. In my humble opinion, the market reaction to a second round Le Pen / Melenchon face-off would be far worse than the 100bps open for ITXEB most people see. Even if we have all been lamenting the low realized volatility of the last twelve months, let’s hope this particular guesstimate won’t be tested.