This CDS report was written by Markit’s Gavan Nolan
The financial sector has been the catalyst of the recent market sell-off. Insurers, in particular, and banks have widened sharply amid great uncertainty over their stability. But the inevitable bounce came today as soothing words from US officials and an upbeat statement from Citigroup tempered pessimism. In a similar pattern to yesterday, European credit spreads widened after the open before recovering in the afternoon as stock markets rallied and positive sentiment travelled from the US. The Markit iTraxx Europe index was about 3bp tighter at 202.5bp, while the Markit iTraxx Crossover index outperformed at 1111bp, about 32bp tighter than yesterday’s close. While the afternoon’s trading was more positive, the tightening was modest compared to the 5-6% rally seen in the stock markets.
The likes of Axa, Generali and even the much-slated Aviva rallied today, as the insurance sector stabilised after widening sharply in recent weeks. Events across the Atlantic drove the spread tightening, and it is questionable how long the rally can be maintained given its vulnerability to unfavourable movement in the broader markets. Banks also performed strongly, with Barclays resilient in the face of uncertainty surrounding its participation in the UK government’s asset protection scheme. Reports indicated that the bank’s entire balance sheet will be subject to a stringent stress test, regardless of the amount of assets it chooses to insure. German company E.On dragged the rest of the energy sector down with it after it gave a downbeat outlook for 2009 and 2010.
News from the US was the primary driver behind the financials rally. An internal memo sent by Citigroup’s chief executive Vikram Pandit to all employees said that the banks is having its best quarter-to-date performance since the third-quarter of 2007. The affirmation of strength sent spreads in Citi and the rest of the banking sector tighter (see chart above). Ben Bernanke’s reiteration that growth will return to the US economy later this year, as long as the banking system is stabilised, also helped sentiment. Unlike Europe, the credit markets kept pace with the equity markets. The Markit CDX IG tightened to 247bp, 15bp (5%) tighter than the previous close.