This CDS report was written by Markit’s Gavan Nolan
European credit indices moved wider today as the pall hanging over the UK financial sector refused to lift. The Markit iTraxx Europe index was trading around 172.5bp, roughly in line with equities. HiVol and Crossover underperformed, trading around 404bp and 1055bp respectively.
Widening names outnumbered those that tightened by about five to one, with utilities among the worst performers. Spanish firm Union Fenosa has widened sharply in recent days amid an absence of news. However, it emerged today that a report from the Spanish competition regulator had been leaked to the press. The report said that Fenosa’s proposed merger with fellow Spanish utility Gas Natural will hurt competition. The regulator has since issued a statement saying the report wasn’t exact and it may take legal action if the source of the leak is found.
Spreads in the UK banking sector itself were relatively stable, with Bank of Scotland (part of the newly formed Lloyds Banking Group) and HSBC the only names to widen. Barclays, the subject of intense speculation this week, tightened slightly, though its spreads remain significantly wider than its peers. Its stock price came under intense pressure again today, with the future ownership of the sector uncertain. French banks fared somewhat better. News that the French government is set to inject more capital into banks helped stabilise spreads. Societe Generale‘s better than expected results for the fourth-quarter also boosted sentiment in the sector.
In the US, equity indices bounced back a little after yesterday’s precipitous fall. The Markit CDX IG index also improved, tightening by about 1bp to trade around 222bp. But the move was modest, and among the underlying constituents widening names outnumbered those that tightened by about four to one. The retail sector was one of the better performers. Hopes that President Obama’s impending fiscal stimulus plan will reinvigorate the economy provided some positive sentiment. Details of the plan are eagerly awaited, though there will inevitably be some delay before the effects are felt in the wider economy. Critics would argue such a stimulus risks boosting the economy at the wrong point in the cycle. However, this would imply an optimistic view of a turnaround, one not widely shared in the markets given the severity of the recession.
As in Europe, banking spreads were relatively stable, with better than expected results from Northern Trust helping to offset State Street‘s dire figures. IBM was among the strongest performers after it posted solid results after the close yesterday. The technology behemoth said quarterly profit was $3.28 a share, well above expectations. Investors were encouraged by the firm’s 2009 outlook. IBM now expects to earn $9.20 a share, above consensus expectations of $8.70 a share. The company’s spreads held up relatively well throughout most of 2008 due to strong operational performance. Its geographical diversity meant that it was less exposed to the ailing US economy than some of its peers. But the swift decline in Europe’s main economies and Asia’s powerhouses in the latter half of the year sent spreads wider.