Uncertainty over the actions of central banks has led to considerable market volatility in recent weeks. There are doubts as to whether the Federal Reserve will retain its current stance, with some speculating that it will change the language on how long it will keep rates at very low levels. The timing of the Fed’s exit strategy will be crucial, and there is some concern that the stimulus could be withdrawn while the economy is still fragile. In the UK investors are expecting the Bank of England to take more aggressive action in the form of an extension to its quantitative easing programme. The Fed will announce tomorrow and the BofE the following day.
Among single names there was a strong widening bias, with cyclical sectors in particular suffering from the rise in risk aversion. Commodity-related credits such as Xstrata and Arcelor Mittal widened significantly, as did building products firms Holcim and St Gobain. Autos also widened, not helped by BMW posting third-quarter earnings well below expectations. The German car maker said it anticipates that sales will decline by 10-15% this year.
The pattern of widening CDS indices and falling stock prices was repeated in the US, though the movements were modest in comparison. The Markit CDX IG index was trading around 108.5bp, less than 1bp wider than yesterday’s close and tracking equities. Tightening credits were scarce, with cyclical and defensive sectors losing ground.
Black & Decker was among the few names to rally after the announcement of its takeover by Stanley Works. The latter firm is acquiring the power tools company in an all-stock deal that equates to a 22% premium based on Friday’s close. Black & Decker credit investors will benefit from Stanley’s superior credit profile, currently rated ‘A’. BDK spreads rallied sharply on the news.
A far bigger deal was announced in the railroad sector, where Warren Buffett’s Berkshire Hathaway announced it had agreed to acquire Burlington Northern Santa Fe in a deal valued at $44 billion. The transaction is the largest in Berkshire’s history and is a cyclical bet on the US economy, according to Buffett. That said, railroads have performed relatively well during the recession. Indeed, Burlington’s spreads have been trading tighter than AAA-rated BRK for well over a year. BRK is trading more like a single A credit due to balance sheet damage incurred in the downturn.
