18 May 2020 by jbchevrel
Today was a strong session, with CDS indices tighter across the board. The Main is tighter by -7bp. Some bullish compression occurred with XOver tighter by -40bp on the day. Early on, the sentiment was positive thanks to reports related to a COVID19 vaccine. An experimental vaccine from the US biotech Moderna showed signs that it can create an immune-system response to fend off the new COVID19 , offering tentative hopes in the global effort to combat the pandemic. The results are just a sample from the small, first study designed to look at the safety of the shot in human volunteers and should be viewed with caution. This seems to be a 1st good sign that Moderna can generate an antibody that can stop the virus from replicating. But now, Moderna is moving ahead with plans for a larger test to pick a dose of the vaccine and further study its effectiveness, as well as a phase 3 test with thousands of patients. As chairman Powell clearly reminded us during this weekend, a vaccine would be a real game-changer for the COVID19 crisis. Later on in the session, Germany and France agreed to support a €500b recovery fund backed by joint borrowing to help the EU weather the COVID19 crisis, especially the worst hit countries in the South. Merkel and Macron proposed a plan to distribute the money to member states, with repayment based on contributions to the bloc’s budget. Peripheral risk tightened aggressively on the back of that news, with Italy (5y CDS -17bp) and to a lesser extent Spain (5y CDS -6bp), squeezing tighter. Merkel said the funds will be within the framework of the EU’s budget, and the EC will have authority to borrow money on capital markets. The distribution will be based on the needs of member states, while repayment would be pegged to the amounts paid into EU budget, Macron said. While Germany and France seem to have found common ground, an EU agreement over a package is not in the marble yet, requiring the backing from the 27 member states, something the market expects to be an almost immediate corollary from the Macron-Merkel accord. It will be interesting to see how smoothly (all) the remaining countries agree on the mechanism to be used (grants wanted by Italy/Spain or loans preferred by NL/Scandies).