20 December 2018 by jbchevrel
The Fed has ‘disappointed’ risky assets, despite efforts by Jay Powell to sound dovish and the lower median dot from 3 to 2. No change on balance sheet normalisation was mentioned. Credit widening gathered momentum as NY came in today, closing the day +6 on Main and +8 on CDX IG. Along with other risky assets, crude oil fell abruptly (-4.5%), leading drillers and other energy-related names wider by 10-15bp, across the US and Canada. MO (+30) widened the most. The 5y CDS now pays 100 while it was in mid 30s about two months ago. The main cause here seems to be the $12.8B investment for the Juul minority stake. Indeed, this implies a relatively high valuation of Juul at $38B. Despite stocks being in oversold territory (the most since GFC and Dot Com), the fact that the market prices in just 0.4 hike for next year while the year communicates on 2 can be perceived as bearish. Another potential option for the Fed to ease panic would be to alter the normalisation path of its balance sheet.