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Who Was Left Out Of Today’ Rally?

08 January 2015 by lberuti

As QE is taking centre stage again, risky assets enjoyed a positive session across the board. After a strong buy quiet start, equity and credit alike benefitted in the afternoon from the publication on the ECB website of a letter by Mario Draghi stating that policy makers may add measures that include buying sovereign bonds. But that did not prevent some names to have a difficult time. TSCO’s ( Tesco Plc ) 5 year risk premium closed 20bps wider despite announcing a better trading update than investors had anticipated. While that was enough to push the stock 16% higher, credit investors were spooked by the fact the company could not be doing enough to keep its investment status. AIRFP ( Airbus Group NV ) and ROLLS ( Rolls Royce Holding Plc ) also saw their 5-year-CDS widen meaningfully (by 12bps and 7.5bps respectively), but for reasons they cannot control. They have large currency exposures that they hedge with banks through derivatives products. As the USD experienced big moves against most currencies, these contracts saw their market values move meaningfully, generating exposure for the banks which wrote them (AIRFP and ROLLS now potentially owe them money). That is why the CVA desks of these banks have been out in the market trying to buy protection, sending their risk premia higher.