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CREDIT COMMENTARY
Nov 25, 2013
Iran supports credit rally
Geopolitics can often trigger risk aversion, but developments over the weekend served to support the rally in the credit markets.
Iran and the world's major powers - the US, China, UK, Russia, Germany and France - reached a deal that will see the Middle Eastern country scale back its controversial nuclear programme. The agreement should reduce tensions in the region and marks a sea change in relations between Iran and the US, in particular.
From an economic perspective, the typical reaction of the markets to calmer conditions in the Middle East is a fall in the oil price. And so it proved today, with the price of West Texas Intermediate down about $1.50 to $93.30 a barrel. But the ban on oil exports to the EU and remains in place until a comprehensive deal is reached so it is not clear that there will be a large increase in Iranian oil supply.
CDS spreads in oil majors such as BP and Total didn't widen on the prospect of increased supplies from Iran. In fact, they were slightly tighter at 53bps and 28bps respectively.
The broader market rallied on Monday, no doubt helped by the news on Iran. But the macro backdrop remains the key driver of valuations, and the accommodating stance of central banks is positive for risk assets. The consensus is that the Fed won't taper until next year, and the ECB talk of negative deposit rates is another boon to the market.
The Markit iTraxx Europe was 1.75bps tighter at 78bps, while the Markit CDX.NA.IG tightened 0.5bp to 68bps. Last week, the differential between the two indices was 8bps, the smallest since June 2011.
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