The cost of protecting European corporate debt against default rose on Tuesday after a series of credit downgrades stoked investor fears of falling profits and prolonged recession.
WPP, the global advertising agency, and Lafarge, one of the largest cement producers in the world, were among the main movers in the benchmark iTraxx Europe index of investment grade corporate debt after Standard & Poors lowered its rating on both companies.
The benchmark Markit iTraxx Europe index of investment grade debt was trading around 141.25 basis points, a 6.3bp move wider from Monday’s close of 134.95bp. Analysts said trading volumes were thin due to the US Veterans day holiday.
Five-year credit default swaps written on Lafarge widened by 27.75bp to 535bp after S&P lowered its outlook from ‘stable’ to ‘negative’ and predicted a weak Q4 performance. This means the cost of insuring €10 million of Lafarge senior debt stands at €535,000 per annum.
CDS on WPP widened by 18.27bp to 314bp after S&P cut its rating by one notch to BBB, citing the company’s increased levels of debt as cause for concern.
The European moves followed a similar momentum to Asian credit indices which moved tighter in Tuesday trade. The iTraxx Japan, the benchmark index for Japanese CDS, closed narrowly wider 3bp at 228bp as the Nikkei dropped 3 per cent.
Ratings actions also drove emerging market sovereign CDS trading after Fitch downgraded Bulgaria, Hungary, Kazakhstan and Romania because of the increasing threat of global recession.
The cost of protecting against Hungarian default rose 17.57bp to 371.5bp. Spreads on Romania fell 3.86bp in morning trade to 513bp, a minuscule narrowing considering the cost of insuring its debt stood at 394bp at the beginning of the month.
Asian sovereign debt was also in the spotlight after Fitch lowered its outlook on South Korea, the continent’s forth largest economy, from ‘stable’ to ‘negative’. Spreads on South Korea widened to 310bp from Monday’s close of 280bp.
Spreads on China also widened in spite of its plans for large-scale fiscal measures to boost its economy announced on Sunday. Its 5-year CDS spreads widened by 5bp to 125bp.
Analysts at BNP Paribas said one of the main questions facing the CDS markets was how Asian exporters and Mexico would hold up in six months time when US demand was flagging.