This CDS report was written by Markit’s Gavan Nolan
The European credit market has been following the path of its equity cousin this week, and today was no exception. The Markit iTraxx Europe index was 5bp tighter at 155.5bp, while the Markit iTraxx Crossover index was trading around 1037bp, about 28bp tighter on the day. Both indices were around 3% tighter compared to yesterday’s close, tracking the performance of the major European stock indices. Unlike yesterday, tightening credits in the main index outnumbered those that widened by more than seven to one. The rally was broad-based, with utilities and select retailers – notably Marks & Spencer – outperforming. Banks and car firms were the main laggards.The insurance sector received a boost after two of the major players reported solid results. UK insurer Aviva said that life and pensions new business sales rose by 11% in 2008, helped by its expansion into the US. Sales in Europe and Asia also were up significantly, more than offsetting a flat performance in the UK. Italian insurer Generali‘s was another to benefit from geographical diversification. Its better than expected results were fuelled by higher sales in central and eastern Europe, overshadowing lacklustre performances in its core western European markets.
Russia‘s credit standing has been under pressure for some time and it received another blow today after Fitch downgraded it to BBB from BBB+. The rating agency said the action reflected falling commodity prices and the consequent deterioration in Russia’s external position. Capital flight has become a serious problem and the rouble has depreciated sharply in the past six months. Russia built up a massive stock of foreign exchange reserves during the commodities boom but has seen this depleted as it tries to defend the rouble. The government opted for a gradual depreciation last year as opposed to a devaluation. Kazakhstan, perhaps seeing the steep costs of Russia’s policy, chose the devaluation option today.
Credit investors, however, were nonplussed by the rating agency decision. The above chart shows that Russia’s CDS spreads widened significantly in the latter months of last year. The markets were quick to recognise the effects of falling oil prices on Russia’s current account and its financial system. The sovereign’s spreads left the realms of BBB credit last September, and it has been trading the equivalent of a BB name for some time. Russia tightened today.