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The Best Of Both Worlds

18 January 2019 by jbchevrel

Today was a strong day for risk, CDS indices are tighter (iTraxx Main -2.5 CDX IG -3) and stocks are higher (SX5E +2% SPX +1.5%). Risk seems to be enjoying the best of both worlds, with both positive news on the trade side of the equation and more accommodative central banks, on the monetary side. Adding to it, on the technical side, CTAs have kept adding risk. But there are a few caveats in this rosy picture. Positive trade headlines have been denied or strongly mitigated, with little reaction market reaction. Thursday headline *U.S. WEIGHS ROLLING BACK CHINA TARIFFS TO CALM MARKETS: WSJ was later met with *TREASURY DENIES REPORT MNUCHIN PUSHED TO LOWER CHINA TARIFFS. Moreover, the headline mentions Mnuchin, who is arguably on the dovish side of the equation. It would be interesting to see, not only if this is confirmed, but also whether that opinion is shared by Lightizer, who is more on the hawkish side. Friday headline *CHINA IS SAID TO OFFER PATH TO ELIMINATE U.S. TRADE IMBALANCE was followed by *U.S. TRADE NEGOTIATORS SAID TO BE SKEPTICAL OF CHINA’S OFFER. This is not the first time China tries this path to break the deadlock on trade, but in the past, it has been met with little enthusiasm from the US side. It is legitimate to wonder how high is the hurdle for the Fed to reprice, and it is worth noting that $ 1y1y OIS has moved from below 210bp to 240bp in two weeks.