European credit derivatives markets weakened on Tuesday, with both the benchmark iTraxx Crossover index and the investment-grade iTraxx Europe index moving wider.
By mid-morning, the Crossover index of 50 mostly high-yield corporate borrowers widened about 3bp to 331bp, while the Europe index added 1bp to 45bp. Investors are waiting for the resumption of US trading after the long Labour Day weekend, as well as for key US manufacturing data, due at 14:00GMT.
UniCredit’s strategists described the tone in the markets as the calm before the storm, saying:
This could be a decisive week for credit markets as credits are currently ‘on the edge’, still in the well established trading range…Although the majority of investors already switched to the bears’ camp (which we interpret as a positive signal), the severity of the crisis is likely to intensify the longer the basic functioning of the market is distorted
Dresdner’s Willem Sels agreed, noting that when the US reopens:
The attention will now again turn to the implications of the persistent weakness in the money markets. The longer the crisis lasts, the more dangerous it gets, as the scope of investors and vehicles that need to roll their funding quickly widens. We are looking for further credit spread widening.
In single-name news, the cancellation of oil firm Repsol and Gas Natural’s Gassi Touil project with Algeria’s state-owned Sonatrach pushed Repsol’s five-year credit default swaps 4bp wider to 70bp.