EUR Swaps: Risk aversion persists as S&P edges up; What next for ECB?

Risk aversion persists
Hopes of risk aversion losing steam following the SVB fallout are in the balance with the Bund rallying three points and 10y yield dropping to 2.20% (-30bps) while European stocks remain under pressure. US stock futures have crept into the green in early trading with the S&P +0.4% but the EuroStoxx Banks Index was last still -6% with the biggest fallers including Credit Suisse (-11%) and Commerzbank (-10%). CDS spread indices are 8bps wider for iTraxx Europe and +33bps for iTrraxx Crossover - the latter roughly matched by the widening in Credit Suisse CDS. And issuers are understandably absent - traditionally, KfW is the first to emerge after a crisis. Still, 

Bund asset swap spreads have seen double-digit widening with last prices vs €STR putting the Schatz at 60.4bps (+16bps), Bobl at 51.6bps (+12bps), Bund at 49.6bps (+11bps) and Buxl at 27.0bps (+7bps). The 10y BTP-Bund spread is are 12.5bps wider and the OAT-Bund spread is +4bps.

In the short-end, white Euribors have leapt up to +60bps higher earlier and Sep23 is still +54bps in volume of over 515K. €STR for this week's ECB meeting has rallied by 12bps to 2.74% versus the last fix of 2.403%, while the May23 ECB has rallied by 29bps to 2.94%.  

Further out, the euro swap curve has bull steepened with 2s/5s at -38.5bps (+10bps), 5s/10s at -14bps (+4bps) and 10s/30s at -49.5bps (+2.5bp).

In basis, the front IMM FRA/OIS contract has soared by +16.8bps to 14.6bps-mid although the second contract is only 4bps wider.

In vol markets, 1m gamma expiries have soared by 25 normals with 1m10y last at 141.7 (+25.7) while 3m expiries are around 15 normals higher with 3m10y at 128.6 (+15.5). The top left has seen similar gains with 1y1 last marked at 125.2 (+12.6).

Expect no ECB forward guidance - Barclays
In a strategy note published over the weekend Barclays still expects the ECB to hike by 50bps on Thursday but expects no forward guidance on future meetings. It writes:

• “The ECB is still likely to increase all policy rates by 50bp on 16 March… A quite extreme scenario would likely have become the base case for a 50bp increase in all policy rates not to be announced by the Governing Council on 16 March.

  
  

• “We now expect the GC to offer no forward guidance on the pace of hikes for the May meeting. Even before the collapse of the Silicon Valley Bank, the GC was split on the type of communication to pursue… Recent events will likely convince the GC not to make any commitment.

  
  

• “We think that the main justification for the lack of forward guidance will be the numerous and very important data releases between the March and May meetings, rather than financial spill-overs from the Silicon Valley Bank’s collapse. We expect the president, to instill confidence, to indicate that the ECB is vigilant to potential pockets of vulnerabilities, but confident about the health of the euro area banking system.

  
  

• “If the ECB were to include in the Monetary Policy Statement a sentence with a strong signal that an additional 50bp hike at the May meeting remains the base case, we would interpret that as quite hawkish in context of current events. We also think that the memories of financial fragmentation are still fresh, which calls for a more cautious approach.”