18 June 2019 by jbchevrel
Today was marked by an aggressive broad-based rally in risky assets. Our beloved credit synthetics were no exception, with Europe leading the way. The Main s31 rallied more than 4bp, tightening c2bp relative to CDX IG s32. Reportedly positioning (short Europe vs US) may well help us see lower levels in that ‘Atlantic spread’. Draghi indeed lifted risk this morning, saying that if the outlook doesn’t improve, additional stimulus will be needed. Stimulus can take many aspects and the ECB toolbox is big. Later in the session, as talks about restarting QE gained traction, ECB sources headlines (coincidentally) hit us stating that a rate cut was the most likely vector of easing. Draghi himself had (also coincidentally) stressed that further interest cuts remain part of ECB tools. Because good news often come in pairs, President Trump tweeted: "Had a very good telephone conversation with President Xi of China. We will be having an extended meeting next week at the G-20 in Japan. Our respective teams will begin talks prior to our meeting." No need to say that the upcoming G20 meeting (Jun 28-29) is the next meaningful catalyst for US/China trade tensions. That positive development contrasts with Commerce Secretary Ross playing down hopes for some time. In a less friendly register, President Trump linked Draghi’s dovish rhetoric to currency and stocks (‘DAX’) manipulation. No need to say, the big one tomorrow is gonna be the Fed. Some US banks’ economists expect the Fed not to cut at all in 2019, vs 3+ cuts priced in by March. We may well hit some golden mean between the two. Looking at an aggregate ECB forecast from € banks in 2017, depo rate should have reached between 0.5% and 1% by now… Back to reality, the € short end is pricing in one 10-bp cut by EOY-19 and another half through H1-20.