Spreads have tightened significantly over the summer with the lows of iTraxx Main and iTraxx Crossover last week being 34bp and 113bp lower, respectively, than the highs that followed market uncertainty post-Brexit. This is partly due to an improved sentiment also evident in lower volatility, with the VIX index during last week closing at its lowest level since July 2014. However, the main contributor is the CSPP, which has resulted in a technical tightening evident in the larger percentage tightening in the iTraxx Main versus Crossover.
As usual, activity in the primary market slowed down during the summer and we only saw a few new issues in the Nordic market. Looking beyond the Nordic market, we saw multibillion EUR deals from large American banks such as Wells Fargo (NYSE:WFC), JP Morgan, Goldman Sachs (NYSE:GS) and Bank of America (NYSE:BAC).
In our view, the CSPP will offset potential spread widening from the pick-up in new issue activity that will follow as the holiday season comes to an end.
The European Banking Authority published the results of its stress test on 29 July. The results were largely as expected and have been a non-event for the Nordic banks. However, taking a closer look at the data, we have difficulty seeing the European banking sector being very supportive for the economy in the coming years. For more, see our research The EBA's stress test confirms Nordic Strength, 1 August, and Armchair thoughts on the outcome of the EBA stress test, 15 August.
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