Italian banks give up gains We posited after the French election that Italy was now the most likely country to trigger a material bout of political risk. Italy, of course, is no stranger to instability, having had 42 prime ministers since World War II. But it didn’t have an election scheduled for this year, with…
2017 was widely touted to be the year of volatility. The UK government started the fraught process of leaving the EU, while the Dutch and French elections were scheduled with populist far-right parties riding high in the polls. But here we are, in the middle of Q2 and volatility is at rock bottom. The Markit…
It seemed like Europe breathed a collective sigh of relief after the prospect of a far-right presidency in France receded. The centrist Emmanuel Macron secured victory in the first-round of the French presidential election on April 23, beating National Front leader Marine le Pen into second place. The two will now face each other in…
Many names have a certain kind of notoriety in the CDS market. TXU, Hellenic Republic and more recently iHeart – all posed significant challenges to the efficacy of the CDS product.
Another prime example is Novo Banco. The Portuguese name was created as a "good bank" in the restructuring of Banco Espirito Santo in August 2014. This was immediately prior to the introduction of the ISDA 2014 definitions in September of that year. The good bank/bad bank split highlighted some of the flaws in the 2003 definitions: namely senior debt restructurings triggering subordinated CDS and ambiguity around state bail-out of financials...
Its mid-March, spring is upon on us and the credit markets are rallying. A rate hike by the US Federal Reserve was greeted positively by the market thanks to a dovish tone struck by Janet Yellen and her colleagues.
Technical factors also played their part. Option expiry occurs on the third Wednesday of the month, and position covering no doubt contributed to the tightening in the indices...
We noted last month that credit markets are still sensitive to political polls, despite doubts about their accuracy.
In particular, sovereign cds in Western Europe was responding to polls showing National Front leader Marine Le Pen surging ahead in the race to become France’s next president. Le Pen has stated that she is in favour of leaving the EU under the current framework, so it was no surprise to see France’s spreads widen when she took the lead in the polls.
But it was the behavior in the “ISDA basis” - the difference between sovereign CDS trading under 2014 and 2003 definitions - that caught our attention. Before Le Pen’s surge in popularity, the basis was stable at around 3bps. After her gains in the polls, the basis increased to 23bps in the final week of January...
It is no secret that a divide - maybe a chasm - has opened up between the US and Europe. Donald Trump's mercantilist views put his presidency at loggerheads with the globalist EU, though a post-Brexit UK may yet turn out to be an ideological bedfellow.
But this week we saw signs that a division is manifesting itself in the credit markets. The Markit CDX.NA.IG has rallied steadily in recent months - since Trump's election victory on November 8 2016, the index has tightened from 75bps to 60bps. Over the same period the Markit iTraxx Europe was just 2bps tighter at 71bps. The 11bps basis between the two on-the-run indices is the largest for more than three years...
The political polling industry is suffering a crisis of credibility after failing to predict Brexit and Donald Trump's victory in the US presidential election. A thorough overhaul of its methods is surely needed.
But in a world where political risk is more potent than ever, investors have little else to go on, and polls still have the potential to trigger considerable market volatility. A prime example this week was France, where polls showed far-right - and anti-euro - candidate Marine le Pen increasing her lead in the first-round presidential vote. The reaction in the credit markets was significant - French sovereign CDS widened from 56bps to 68bps in the space of three days, and is now over 40bps wider than levels reached in the post-Brexit aftermath of September 2016...
Many market commentators have commented that 2017 will be the year of political risk. Ongoing uncertainty around Brexit, Donald Trump’s inaugural year as US president and a series of elections in continental Europe make conditions ripe for bouts of volatility.
This may be self-evident, but so far the credit markets are taking little heed. Realised volatility in the Markit iTraxx Europe, as measured by the VolX index, dropped sharply in Q4 and has remained around the 28-29% level this year. Indeed, the last three months have been the longest period of low volatility since March 2007, when the first signs of the US sub-prime crisis emerged. It was a similar story with the Markit iTraxx Crossover...
Speeches by UK prime ministers were rarely market moving events, despite what some of the more breathless commentators in the broadcast media would have you think. But perhaps this has changed since the Brexit referendum in June last year, even if the spin doctors manage the message in advance.
The main thrust of Theresa May’s speech this week was leaked in the days leading up to her address, so traders and investors were not exactly hanging on her every word. But there were still some pronouncements that did affect sentiment, particularly in the FX markets, such as the confirmation that the final deal will be put to parliament...