European credit derivatives markets edged wider on Friday, as traders digested comments by Countrywide‘s chief executive that the US could be heading for a recession.
Europe’s benchmark iTraxx Crossover index, a key barometer of market sentiment, opened flat at around 323bp but moved wider after Angelo Mozilo, chief executive officer of crisis-hit mortgage lender Countrywide, told CNBC overnight that the housing slump would lead to a US recession. Mr Mozilo was equally downbeat about the outlook for the commercial paper market.
Investor demand for asset-backed commercial paper, an important source of short term funding for companies, has plunged more than ten per cent in the past two weeks as investors opted for safe-haven Treasury bills. Strategists at BNP Paribas said there was nothing to suggest this trend would change anytime soon, meaning markets would remain on edge:
We expect continued reductions in ABCP and perhaps just as importantly in the longer term is the concertina effect on exiting CP in the market as shorter maturities are favoured by investors.
Still, news that BNP Paribas would re-open its three frozen funds tempered the negative tone in the market, but the Crossover had edged 4bp wider to 328bp by mid-morning. Volumes are quite low, traders said, ahead of the long holiday weekend in the UK.
In single name news, housing credits were hard-hit by Mr Mozilo’s comments. Housebuilder Standard Pacific added 11bp to 1009bp overnight in New York, data from Markit showed.
Meanwhile, five-year credit default swaps on Bank of China widened 9bp to 62bp after it revealed an above-expectations $10bn of exposure to the subprime sector, the most of any bank in Asia.