Stephen Thariyan, Head of Credit, views the vote to ‘Leave’ as troubling for credit markets in the short to medium term, but – dependent on central bank and market reactions – volatility and uncertainty could provide some opportunities.
Following on from last night’s surprise ‘Leave’ vote, credit markets are weaker and volatile this morning. Very early this morning, the iTraxx indices (the most generic and liquid barometers of the credit markets) moved as much as 40% wider from last night’s close, but have subsequently settled back to around 20% wider at the time of writing. So far, credit markets are outperforming other markets (FX and equity) and trading has been relatively orderly. Any entrenched weakness could potentially throw up opportunities. Sterling credit markets and banks in particular are weakest.
While last night’s vote is clearly troubling for credit in the short to medium term, there could be some attractive opportunities going forward, dependent on the reactions of central banks.
We expect to see continued volatility and uncertainty in the credit markets in the short term. Last night’s vote was a vote for the anti-establishment community and, with Spanish elections looming on Sunday, this theme can only continue in Europe. It should also be noted that the uncertainty runs beyond just political implications. Yesterday the market was pricing in a 90% probability of ‘Remain’. The lack of certainty over the future of Europe will be reflected in the lack of willingness of the markets to take on risk.