European credit derivatives were nudged back towards reality on Wednesday morning, as the return of bearish sentiment to the market saw spreads open wider for the first time in six sessions. Analysts said a round of profit taking after a recent US election bounce, and pessimistic forecasts for the non-manufacturing ISM results due out later on Wednesday, were pushing the market lower.
“Medium term I don’t think the election matters too much but the issues at hand are so huge that who ever is in charge is not going to be the most important factor,” said Jim Reid, a credit strategist at Deutsche Bank. “In the shorter term, I think there was an increasing view in the last couple of days that a fresh start would actually be good for the markets and so it had already been priced in. If McCain had won then perhaps the markets would have fallen further.”
The Markit iTraxx Europe index of investment grade borrowers’ credit default swaps widened 6.69 basis points to 139bp this morning. This means it costs €139,000 annually to insure €10 million debt over five years. Yesterday, the index closed nearly 13bp tighter, at 132bp.
BNP Paribas CDS widened slightly during the morning by 1.56bp to 51.5bp after the bank announced its net profit had suffered a 55.6 per cent drop in the third quarter.
The European telecoms sector, a large component of the iTraxx Europe index, saw spreads continue to deteriorate, with Vodafone CDS rising 6.93bp to 192.75bp. Telecom Italia, Telenor, Portugal Telecom were also among the largest percentage losers in the iTraxx Europe index.
Elsewhere pressure continued to ease on another constituent member, Glencore, as spreads on its CDS fell by 25.97bp to 975.48.
The iTraxx Crossover index of mostly junk-rated companies also widened, by 11.04bp to 729.17bp.
The Crossover index was also dragged down by Banca Italease. Spreads on its CDS widened 183.55bp to 983.55bp, well over the trading levels for distressed debt, before news was announced an Italian government bank bailout plan would be approved next week. Later in the morning its CDS had recovered to 875bp.
Sentiment toward emerging market credit improved. Names with exposure to commodities, such as Kazakhstan and Russian oil producer Gazprom, outperformed the market following a rise in prices, according to analysts at Markit. CDS against the Republic of Kazakhstan tightened 212bp to 483bp and Gazprom CDS tightened 200bp to 796bp.
In India, ICICI Bank spreads also continued to tighten. Its CDS tightened 247bp to 921bp.
