Credit derivative markets turned their attention away from financial armageddon towards plain old recession on Wednesday morning, pushing up the costs of protection on thhe main indices for the first time this week.
The iTraxx main index of investment grade companies addded 5.5 basis points to 129.5bp by mid-morning, meaning it now costs €129,500 annually to insure €10m worth of debt over five years. The Crossover list of mostly junk-rated debt was also wider by about 11bp at 676bp.
Analysts said that now the unprecedented global government intervention in the financial industry had pulled it back from the brink of all-out disaster, people could begin to focus again on the fundamentals of the real economy including earnings expectations and inflation and growth data.
“The global government rescue packages have made a difference, by putting a floor under global banking, but market focus will turn to the upcoming Q3 earnings season and the potential of earnings forecasts being revised down with recession fears spreading rapidly through economies,” said analysts at BNP Paribas.
While corporate earnings were a major focus, some of the European banks also saw spreads drift a touch wider again after the huge rally of recent days, suggesting traders were repositioning and adding new protection. Credit Suisse was 12bp wider at about 88bp, RBS 5bp wider at about 86bp and Barclays, also 5bp wider at 84bp, according to CMA. All however are at levels far below their wides of recent weeks – RBS for example was at 315bp at the end of last week.
Early moves in the US might also be wider after poor economic data and comments from one Fed member that the country was already in recession. US banks saw incredbile moves on Tuesday after the government agreed to inject capital into them directly.
The two banks that will receive the least money, Goldman Sachs and Morgan Stanley, set to get $10bn each, in fact saw the greatest benefit in their CDS spreads. Morgan spreads peaked at about 1,420bp according to Markit Group, and finished on Tuesday at 423bp, though they had been as tight as 385bp during the day. Goldman meanwhile was trading at about 550bp at the end of last week and finished 199.7bp.
“Morgan Stanley and Goldman Sachs were the main beneficiaries of the financial rescue package announced by the US government,” said Gavan Nolan at Markit Group. “The two broker-dealers – now bank holding companies – were under severe pressure last week, with Morgan Stanley’s solvency position under particular scrutiny.”