This CDS report was written by Markit’s Gavan Nolan
Credit markets on both sides of Atlantic lost ground today in tandem with their equity counterparts, continuing a trend seen since the beginning of the week. The Markit iTraxx Europe index was 6bp wider at around 175bp, a significant sell-off but modest compared to equity indices. The FTSE 100 was off over 6% at one point, while the EuroSTOXX 50 was down 5.5%. The Markit Crossover index widened beyond 1,000bp, though it recovered somewhat later in the day.
Widening credits outnumbered tightening names by about two to one, with banks, autos and retailers underperforming. Deutsche Bank shook the financial sector after it announced that it would post a large loss for the fourth-quarter and its first annual loss in five decades. The German bank said it lost EUR4.8 billion in Q4, mainly attributable to a poor performance by its proprietary trading division. Deutsche also announced a renegotiation of the terms of its takeover of Postbank. Deutsche Post, the owner of Postbank, will now take an 8% stake in Deutsche Bank. Deutsche Post is part-owned by the German state and the government is likely to have played some part in the negotiations. The postal company’s spreads widened sharply after the announcement. Negative sentiment surrounding HSBC also contributed to spread widening in the sector.
As well as banks, car makers were among the main laggards today. In particular, Peugeot and Renault widened considerably after Moody’s placed their Baa2 ratings on review for downgrade. The rating agency cited the decline in car demand in Europe, a trend that it expects to continue in 2009. A downgrade to junk cannot be ruled out if the eurozone economy deteriorates faster than expected.
UK supermarket chain Tesco widened sharply following its weak results yesterday. Tesco is now trading 13bp wider than its smaller rival J Sainsbury.
In the US, credit also underperformed equity, with the Markit CDX IG about 9bp wider at 227bp. Banks were again the catalyst for the sell-off. Citigroup‘s spreads were trading in excess of 400bp, its widest level since its bailout by the US government in November. As rumoured, Citi has agreed to combine its Smith Barney business with Morgan Stanley‘s brokerage unit, fuelling speculation that Citi will be broken up. The news pushed out banking spreads and weighed on the broader market. Only a handful of names tightened today.
Another high-profile default did little to help sentiment. Nortel Networks Corp filed for bankruptcy protection today in Canada and the US. The telecoms equipment maker has been struggling for some time and its default was no great surprise (it has been trading upfront since September). The company, once Canada’s largest, has been facing intense competition from more nimble rivals. It was poorly positioned for an economic downturn and the inevitable cutback in telecoms infrastructure spending. Nortel was a constituent of the Markit CDX HY indices series 1-10. Details of a credit event auction will be announced on www.creditfixings.com in due course.
On the subject of credit event auctions, the first such process for a sovereign name was held today. Ecuador‘s refusal to pay an interest payment last month – the government regarded the debt as illegal because it was issued by a previous administration – constituted a default, Ecuador’s second in 10 years. The initial results of the auction produced an inside market midpoint of 32.375. The final results will be announced shortly on http://www.creditfixings.com/information/affiliations/fixings/auctions/2009/ecuado.shtml.