LONDON: Does anybody have even the faintest idea where European credit markets are going next? Answers on a postcard please.
To aid us on our quest for illumination, let us first trawl the archives for the source of the current market indecision.
The end of September to the middle of January saw an extremely aggressive credit rally, with the Santa rally that started in the middle of November forming the main part of that move. On a generic basis, the tightening took the Main and Crossover back to levels not seen since the spring of 2011.
This was accompanied by a surge in equities across the globe and yet more tightening in European peripheral sovereign bond markets, buoyed by the backstop bid to end all backstop bids in the form of the OMT.
But a move of that magnitude cannot go on forever, and we had a fairly robust shakeout at the end of January, and then again at the beginning of February.
That correction, which was well overdue by the time it arrived, saw the Main post a 50% retracement of the Santa rally, and although the Crossover just failed to emulate the IG index in terms of percentage retracement, we did see a fairly substantial shakeout of weak HY longs.
Now all of that was thoroughly logical, and consistent with the price action seen in bull runs since time immemorial.
The problem is that nobody seems to know where we go from here. This week has seen a partial resurrection of the December feelgood feeling, especially in the financial sector.
In reality, though, the indices are now slap back in the middle of their - admittedly wide - 2013 ranges of 100-118bp on the Main and 414-452bp on the Crossover. So what can break the ennui?
Well, this weekend's G20 meeting will create plenty of headlines, but most of those are likely to centre on currency wars and the effect on the yen, which is unlikely to affect European credit much unless there is a huge move in the euro.
The real near-term focus in Europe is actually next weekend's Italian elections. The market is currently pricing in a victory for a coalition of Monti's centrists and the centre left, and that would seem to be the most market-friendly result.
Should the mercurial Silvio get yet another term, though, we could see some peripheral widening that may spark another round of Santa rally profit-taking.
Providing the Italian elections go to plan, the likelihood is that the market grinds tighter as we head into spring, but we can expect days of high volatility - as was seen in Tuesday's rally off the February wides - interspersed with the type of topsy-turvy price action seen on a frustrating Valentine's Day.
Whether or not that allows the indices to break to the downside as we head into the summer, only time will tell.
indiatimes.com
To aid us on our quest for illumination, let us first trawl the archives for the source of the current market indecision.
The end of September to the middle of January saw an extremely aggressive credit rally, with the Santa rally that started in the middle of November forming the main part of that move. On a generic basis, the tightening took the Main and Crossover back to levels not seen since the spring of 2011.
This was accompanied by a surge in equities across the globe and yet more tightening in European peripheral sovereign bond markets, buoyed by the backstop bid to end all backstop bids in the form of the OMT.
But a move of that magnitude cannot go on forever, and we had a fairly robust shakeout at the end of January, and then again at the beginning of February.
That correction, which was well overdue by the time it arrived, saw the Main post a 50% retracement of the Santa rally, and although the Crossover just failed to emulate the IG index in terms of percentage retracement, we did see a fairly substantial shakeout of weak HY longs.
Now all of that was thoroughly logical, and consistent with the price action seen in bull runs since time immemorial.
The problem is that nobody seems to know where we go from here. This week has seen a partial resurrection of the December feelgood feeling, especially in the financial sector.
In reality, though, the indices are now slap back in the middle of their - admittedly wide - 2013 ranges of 100-118bp on the Main and 414-452bp on the Crossover. So what can break the ennui?
Well, this weekend's G20 meeting will create plenty of headlines, but most of those are likely to centre on currency wars and the effect on the yen, which is unlikely to affect European credit much unless there is a huge move in the euro.
The real near-term focus in Europe is actually next weekend's Italian elections. The market is currently pricing in a victory for a coalition of Monti's centrists and the centre left, and that would seem to be the most market-friendly result.
Should the mercurial Silvio get yet another term, though, we could see some peripheral widening that may spark another round of Santa rally profit-taking.
Providing the Italian elections go to plan, the likelihood is that the market grinds tighter as we head into spring, but we can expect days of high volatility - as was seen in Tuesday's rally off the February wides - interspersed with the type of topsy-turvy price action seen on a frustrating Valentine's Day.
Whether or not that allows the indices to break to the downside as we head into the summer, only time will tell.
indiatimes.com
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