This CDS report was written by Markit’s Gavan Nolan
The considerable volatility in European credit indices continued today, with little sign of a consistent pattern. A rate cut of 50bp by the ECB was expected and did little to encourage protection sellers. The Markit iTraxx Europe index rallied, defying the widespread fall in equity indices. The main and HiVol were both about 3% tighter, though the Crossover was more or less flat at just over 1,000bp. Among single names the landscape was less defined. Tightening and widening names in the main index were split almost equally, with utilities and telecoms outperforming. Banks were again a negative force on spreads.
Yesterday’s reports that HSBC may need to raise up to $30 billion in new capital continued to weigh on the market. HSBC could be one of many banks looking to bolster its balance sheet in the coming months. Another prime candidates is Bank of America. The market is awash with rumours that the bank is set to receive a large capital infusion from the government. BofA completed its takeover of Merrill Lynch on Jan 1 but it is thought that losses at the brokerage are larger than previously thought. BofA is due to report fourth-quarter results next week, and they are expected to include significant writedowns.
Citigroup, one of BofA’s main rivals, was forced to seek government assistance in November and yesterday announced plans to sell off large portions of its business. The other large US bank left standing, JP Morgan, posted better than expected results today. However, JPM’s CEO Jamie Dimon said he expects conditions for banks in 2009 to deteriorate, a view only the most bullish would disagree with. Exposure to credit cards will place upward pressure on spreads as unemployment continues to rise.
North American indices were not as resilient as their European indices. The Markit CDX IG index was trading as wide as 226bp, though it has since recovered to 222bp. The CDX has underperformed the iTraxx this year, reversing the trend seen in December (see chart above).
Technical factors have certainly played a part, but the prevalence of defaults in the US has also been relevant.
Canadian telecoms equipment maker Nortel Networks filed for bankruptcy yesterday (see http://www.markit.com/information/products/category/indices/cdx for indices affected by credit event).
Now cardboard box and packaging firm Smurfit-Stone Container Corp has warned that it could file for Chapter 11. The company is heavily exposed to the consumer downturn and its liquidity has been under pressure for some time. It has upcoming interest payments and may choose to go into restructuring before these are due. Smurfit-Stone is a long-standing member of the Markit CDX HY. Other firms in the paper and packaging sector, such as International Paper, widened sharply on the news.