European credit derivative markets were reasonably steady on Friday morning, in contrast to a global rout in equity markets.
The cost of insuring €10m of high-yield European corporate debt against default, as indicated by the iTraxx Crossover index, increased some €10,000 to €365,000 by mid-morning, off an earlier high of €385,000. The investment-grade iTraxx Europe index widened to 53bp or €53,000.
Bid/offer spreads on the indices also improved, suggesting that liquidity was seeping back into the system.
In contrast, European equities fell sharply in morning trade on Friday, tracking losses in Asian markets. US futures point to weakness at the open in New York, with the Dow expected to open 120 points lower.
By late morning on Friday, London’s FTSE 100 shed 3.2 per cent or 200 points to 6,071.6. The pan-regional FTSE Eurofirst 300 had fallen 2.9 per cent to 1,481.84, and turned negative for the year to date.
Meanwhile, the ECB injected more than €61bn into the market in its second operation in 24 hours.
Still, as rumours swirl of hedge funds in trouble, bets being taken on the next big investment bank to reveal subprime-related losses and the SEC on the prowl for hidden subprime losses, strategists expect the Crossover, a key indicator of sentiment in European credit markets, will soon return to the levels above 400bp.
As Lehman Brothers noted:
The first three days of the first full week of August brought signs of encouraging global capital market stabilization. Equities rose, spreads tightened, yen weakened, and investment grade debt origination flowed again. Many of us perhaps dared contemplate the questions, “is that it?” and “has the time arrived to back up the truck on risk assets?” Unfortunately, the unwelcome arrival of new clouds obliterated what turned out to be another false dawn.
