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Closing The Spread

04 June 2020 by jbchevrel

The ECB added to its PEPP by a tad more than the consensus had expected. This translated into small tightening in European CDS indices. The Main is -1 XOver -4. The Main outperformed CDX IG by 1.75bp today. President Lagarde and team decided to expand the amount of purchases by E600b to E1.35t vs a consensus of E500b and some piece having previously floated the idea of E750b. Not a big surprise, but still a net positive. BTP/DBR tightening by 20+ supports € credit sentiment, especially Italian financials. The end of the programme is now scheduled to be the end of June 2021. President Lagarde confirmed downward revisions to the projections for growth and inflation. In 2020, the EZ will likely see a contraction of -8.7% before rebounding by +5.2% in 2021. Under a more severe scenario with a strong resurgence of infections, output could shrink by as much as -12.6% in 2020 and the recovery could be +/- steep as well. Inflation (still the official justification for PEPP) is expected averaging +1.3% horizon 2022. On the fiscal side of the equation, Chancellor Merkel got the E130b package of stimulus. This is also a positive for € credit sentiment. This fiscal package was c30% bigger than expected. COVID-to-date, Germany has made more than E1.3t of stimulus. The deceleration in the tightening is notable on the Main, and absent any negative catalyst, it is fair to expect single-name CDS to outperform the index in the next few sessions.