Asia policy shapes spread direction

Events in Asia continue to shape spread direction across the globe, helping credit markets to outperform equities.

The Markit iTraxx Europe was 1.5bps tighter at 115bps, while the Markit iTraxx Crossover rallied by 7bps to trade at 470bps.

Liquidity provided by the Bank of Japan fueled a rally in risk assets, not least in the eurozone's embattled periphery. Credit spreads in Italy and Spain tightened at the prospect of Japanese outflows seeking higher yielding assets.

French sovereign and corporate CDS have also rallied - Japanese investors often look to France when parking funds in Europe. Technical factors are clearly trumping fundamentals here; last week's Markit PMI's gave a clear indication that the eurozone economy remained in the doldrums in the first-quarter.

Japan's extraordinary monetary easing will have a sizable impact on its Asian neighbours, as well as in Europe. The yen has depreciated significantly since the Bank of Japan announcement, giving exporters a significant advantage against competitors in South Korea and Taiwan.

Japanese sovereign spreads are more or less where they started the year at 72bps, but corporate and bank spreads have tightened sharply and outperformed equivalents in Europe and North America by some margin.

However, Japan's long-time rival South Korea has also seen its currency come under pressure, this time for geopolitical reasons. Escalating tensions with its northern namesake have helped push the sovereign's spreads to 86bps, its widest level since September last year.

Sabre-rattling by the volatile North Korea regime is not uncommon, and spreads may well settle down if the threats come to nothing.

Back in the mundane world of corporate results, Alcoa kicked off the earnings season yesterday. The US aluminium company's profits beat expectations, but revenues missed consensus estimates. Earnings surprises generally don't have a major impact on spreads, but the results of JPMorgan and Wells Fargo on Friday will be closely watched by investors in all asset classes.

Download full article