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Same Headline, Opposite Moves

24 August 2018 by jbchevrel

Today UCGIM (-6) was the best-performer in the Main index (ex ATLIM), while SOCGENSLAC (+7) was the worst performer. Those opposite moves were triggered by the same headline: “UniCredit Hired Rothschild to Work on Possible SocGen Deal”. That price action demonstrates that the merger is perceived as good news for UCG and bad news for SG, illustrating the aversion to Italian risk ahead of next month’s budget discussions. The fact that the 10y BTP/DBR spread stands just 10bp below its peak reached in May concurs with that observation. This is still early days (for reference, that deal was first rumoured two years ago), but the potential combined proforma would be close to being the largest European bank by total assets (c€2.1T, just behind BNP at c€2.3T). Elsewhere, it was a positive day for risk assets. The PBOC and (more importantly) Powell’s speech at Jackson Hole took the dollar down, pushing CDS indices tighter (esp. XOver -5bp), in sympathy with higher equities (SPX +0.6%) and commodities (BCOM +0.7%).