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Red Alert

10 April 2017 by lberuti

When the session is weak, particularly in the afternoon, it is fairly common to see credit index bases – the difference between the quoted value of a credit index and the theoretical value computed with its individual constituents - go wider, as indices tend to react faster than their constituents. And the session was weak today in the morning after polls showed that France might be tempted to elect a communist president – Mr Melenchon says he is not, even though the communist party endorsed him, but most cannot see the difference –, with the election now becoming a four-horse race – the far right, the right, the centre-left and the far-left candidates all currently seem to stand a credible chance to appear in the second round -. And it got weaker into the close when rumours that China – swiftly denied by the Chinese foreign ministry though - had gathered troops on the North Korean border surfaced in the market. That explains the move wider of most European credit index bases, but only part of the basis move of iTraxx Crossover’s (ITXEX). Indeed, QUIBB (Financiere Quick) announced a refinancing operation that will almost certainly leave the current CDS without any deliverable debt. QUIBB’s 5-year risk premium closed 394bps tighter at 157bps, which is the equivalent 5bps of ITXEX or 25cts. QUIBB’s CDS tightening alone explains half of the 50cts move of ITXEX’s basis.