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Squeeze

19 August 2019 by jbchevrel

Today was a reasonably risk-on session (Main & CDX IG -3 Xover -12 CDX HY -9) as reported improvement in US-China talks and German fiscal back door added to confidence in central banks. Reuters had reported this weekend that German MOF said they have fiscal strength to counter any downturn 'with full force' and suggested that the German government could spend c€50B extra to support the economy. That sent DAX +1.3% and FTSE MIB +1.9%. Asian CDS indices went tighter about 2bp across the board, and local stocks recovered across the board. China's PBoC announced key interest rate reforms over the weekend which are also likely to reduce interest rates used in most loans to the real economy. President Trump suggested that trade talks with China are ongoing but not anywhere close to a conclusion. In Europe, most names are tighter (only 3 constituents of the Main are wider, and by less than a basis point), DB, Italian & UK banks being one notable pocket of out performance. While this may be flow-driven, the biggest UK story over the weekend was the leak of the government's assessment of no-deal impact suggesting many risks of shortages (food, medicine in particular). The government then accused ex-ministers of the leak which they denied. Miners and other ‘wide’ high-betas were also well offered (retailers and autos in the CDX IG). The only notable laggard today is EM (CDX +7) due to Argentina only, which widened back to low 50s in upfront 500-coupon terms. Other CDX EM single names are little changed, from -5 (Turkey) to unchanged. Looking to the sessions ahead, we will get euro area ‘flash’ PMIs on Thursday, minutes from FED and ECB on Wednesday and Thursday, and central bank speakers including Fed Chair Powell at the Fed’s Jackson Hole Symposium on Friday.