This CDS report was written by Markit’s Gavan Nolan
Hope, optimism, expectation and, of course, change. Today’s inauguration of President Obama has generated a torrent of positivity in the media, with those four words unavoidable. But there was little evidence of such sentiment in the financial markets. The turmoil in the European and US banking sectors in recent days has only served to highlight the mammoth challenges that Obama and other world leaders face in the coming months and years.
The Markit iTraxx Europe index was nearly 9bp wider at 172bp, with financials driving the deterioration.
UK banks Royal Bank of Scotland and Lloyds Banking Group are confronting calls for their nationalisation after the government’s additional bailout package was met with a tepid response. From a credit perspective, senior bondholders should welcome the strengthening of balance sheets and guarantees against losses on assets. But the uncertainty around ownership and future capital structure has unnerved investors and pushed spreads wider. Equity investors, however, are first in the firing line, and RBOS shareholders have seen their holdings all but wiped out. Spreads are wider but still a long way off levels seen last year, when the government’s support was less explicit.Irish banks are even worse off, having seen the third largest name in the sector being nationalised last week. Rumours that AIB and Bank of Ireland – the two largest domestic banks – face the same fate sent spreads in both names wider today. Other banks operating in countries with stretched public finances – such as Spain and Italy – were also under pressure today.
Ireland’s banking sector is several times the size of the national income, and a wholesale nationalisation of the industry would put its AAA rating under severe strain. The sovereign CDS spreads widened sharply today to 300bp, around the same level as AIB.
Outside of the financial sector, the auto sector was in focus. Fiat‘s spreads widened after it announced it was to take a 35% stake in struggling US car maker Chrysler. In return, Chrysler gets access to production and distribution assets. The deal does not involve a cash investment on Fiat’s part, and the Italian car maker made it clear that it would not commit to funding Chrysler in the future.
However, entering the US car market at this stage of the cycle is risky and was greeted negatively by the market. Rumours that the French government was preparing to bailout Peugeot and Renault placed them among the day’s best performers, though the negative sentiment permeating the market meant that they still widened.
The much-heralded Obama effect was nowhere to be seen in US financial markets today, with spreads widening significantly. Widening names outnumbered those that tightened by more than seven to one.Banks were again the catalyst, with fears of further losses pushing spreads wider.
State Street spooked investors after it disclosed a 71% drop in fourth-quarter profit driven by losses on ABCP conduits and other investments. The energy sector alos underperformed after ConocoPhillips announced large writedowns and job cuts.