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Growing Expectations Into The ECB

03 June 2014 by HCM

Over the last 3 weeks, since BTPs touched a low of 122, expectations around the ECB meeting which will take place on Thursday have been growing. There is an overwhelming consensus that both a rate cut and unconventional measures will be announced. Economic data out of Europe have been uninspiring recently: employment and growth appeared subdued, and inflation has been undershooting expectations. So, according to the market, this combination is increasing the probability that the ECB will act decisively. First and foremost that translated into a solid performance of credit since May 20th, with iTraxx Main (the gauge for investment grade credit strength in Europe) tightening 6.5bps to 65bps (a level last seen in early 2008). Secondly, the spread between iTraxx Main and CDX IG (its equivalent in the US) has shrunk from 6bps to less than 3bps during the same period.