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Monetary Divergence

19 May 2016 by lberuti

The ECB minutes were on the dovish side, with a clear reminder that CSPP will start in June, and one we assume earlier rather than later to avoid starting the purchase program in summer liquidity. On the other hand, FED hawks made sure the market understands that June is a live meeting. There is definitely a sense of weakness (backed by the increased probability of a rate hike in June going up to 32% compared with 4% early Monday), but the credit market is struggling to move wider on either side of the Atlantic. The spread between the risk premia of iTraxx Main in Europe and CDX IG in the US has been relatively stable since mid-April. But given the monetary divergence, some will certainly feel that owning CDS on US names is more comfortable than owning protection on their European equivalents.