Market dynamics are being driven by bigger picture developments surrounding the euro-zone sovereign debt crisis, syndicate bankers said today, with anticipation of the start of CBPP2 and clarity on how it will operate an important but ultimately secondary factor.

“The EU summit on the weekend is an important juncture,” said one syndicate official.

Another syndicate official also said that how events unfold this weekend is of upmost importance to the covered bond market.

“My personal opinion is that the covered bond purchase programme will not play a role on its own,” he said. “If the market is OK, then it can be supportive, but it cannot change the world on its own.

“Everything is stalled until this weekend.”

Another syndicate banker said there was no obvious answer to the question about whether euro-zone developments or CBPP2 would be more decisive for the next steps in the covered bond market, but described CBPP2 as “value added” if it came on top of good news about the euro-zone.

“If there is no momentum or the can is kicked down the road people will still be concerned that and that can still put pressure on covered bonds,” he said.

A covered bond trader said that there was limited secondary market turnover, with investors waiting for details about the ECB’s second covered bond purchase programme (CBPP2) to be released.

Some selling is taking place, but this is concentrated on French covered bonds, away from Dexia Municipal Agency where there are decent two-way flows, said a banker. Good two way flows are also taking place in the secondary market for UK and US covered bonds, he added.

Natixis analysts yesterday said that Dexia MA obligations foncières have continued to tighten by 5bp-10bp each day while weakness in French government bonds triggered selling flows in French paper after Moody’s on Monday announced that it will review the sovereign’s Aaa rating (see separate article for more on Dexia).

A syndicate official at one of the leads mandated to carry out a UniCredit Bank Austria issue said that they had decided, after the markets had worsened, that “this was no sensible time to issue”. Danske Bank, DZ Bank, Erste Group, NordLB and UniCredit have the mandate.

Another banker at the leads said that sentiment had cautiously improved last week, leading to a “brightened perspective”.

“I think this came from somewhat exaggerated hopes that the EU would come to some sort of resolution this weekend,” he added, “and then suddenly people realised this crisis could not be solved by something like 20 EU member states sitting in a room and coming up with a silver bullet.”

He said the market would remain politically driven for a while, meaning a “very bumpy ride” for some time, with windows opening and closing in reaction to news.

“There will be days like last week when books build nicely and things work,” he said, “but when this will happen, is out of our control.”