Back to trade war reality ?

After six weeks of continued spread tightening fueled by the de-escalation in tariffs, the market got a sudden trade reality check last week after D. Trump threatened to impose a 50% tariff on the EU and a 25% tariff on foreign-made iPhones last Friday. Short term, “constructive discussions“ between D. Trump and the Commission President U. von der Leyen led to an extension of the deadline from 1 st June to July 9 , and will undoubtedly give some relief. Indeed, the credit market repricing was all the more violent last week as spreads had come back roughly (or sometimes even tighter) to where they were before the Liberation Day. Therefore, US HY spreads underperformed with a 25bp widening last week, followed by € AT1s (°16bp) and the iTraxx X-Over (+15bp), which largely underperformed the Eur HY cash market (+4bp). The normalization of negative bases has been one of the topic of last week on the IG market too, with a scissor’s effect between the iTraxx Main (+3.5bp over the week) and the cash market (-1bp for the iBoxx N-F senior index). And we believe this should continue over the next few weeks, as highlighted in our previous Credit News “ Focus on negative basis opportunities ”. We hereafter do a focus on the High Yield market, looking at the recent performance by sector and analysing the relative value of Auto parts vs other sectors in the HY € space. The potential rally today should be seen as an opportunity to lighten portfolios in Auto parts in our opinion.