Credit spreads tightening again after widening in early August

Headlines

• Credit spreads tightening again after widening in early August
• Hawkish FOMC minutes 
• Primary market activity gradually picking up speed – financials leading the way
  

Market commentary

The improvement in credit spreads that we saw a week ago continued this week. The tendency of wider credit spreads seen in early August, driven by geopolitical tension in Eastern Europe and the Middle East, seems to have shifted for now and we expect spreads to continue to improve going forward. Itraxx Main tightened 5bp and Itraxx Crossover tightened some 20bp during the past week . Both Main and Crossover are now at levels comparable to those at the beginning of July.

Hawkish FOMC minutes Although geopolitical tension and concerns related to Europe an recovery are still weighing on market risk sentiment, the past week’s focus has been on central banks and in particular the release of the Bank of England’s MPC minutes as well as Fed’s FOMC minutes. Both  protocols revealed hawkish shifts and discussions on the slack in the labour market. The market focused on the hawkish FOMC statement: ‘if convergence towards the Committee’s objective occurred more quickly than expected, it might become appropriate to begin removing monetary policy accommodation sooner than currently anticipated.’ Focus now turns to Janet Yellen’s speech in Jackson Hole.

Primary markets The primary markets activity is still rather low in European markets although this past week, activity has picked up somewhat, particularly from the financial sector. Early in the week, Credit Suisse and Deutsche Bank led the way among financials in the EUR market. In the Nordics, Danske Bank issued SEK5bn floating rate notes due in April 2018. In the corporate sector, Volvo Treasury issued EUR300m due in November 2019. We expect primary activity from the corporate sector as well as from SSAs to pick up somewhat during the week after the UK bank holiday and even further as we move into September.