- European credit markets in retreat after solid opening
- Positive sentiment from EUR750 billion bailout a distant memory
- Sovereigns under pressure – Greece 700bp (+23), Portugal 335bp (+57), Spain 205bp (+22), Ireland 230bp (+25)
European credit markets were in full retreat this afternoon, disappointing those who thought that the solid opening this morning would presage a day of low volatility. Unlike yesterday, there was no obvious trigger that caused the sell-off. The negative sentiment from Germany‘s unilateral action on naked sovereign CDS lingered, and the euro resumed its sell-off after recovering yesterday. The doubts over the stability of the euro clearly have not been quashed by the EUR750 billion bailout.
After opening tighter, the Markit iTraxx Europe was trading around 9bp wider at 130bp, while the Markit iTraxx Crossover was 45bp wider at 620bp. The latter index was at the same wide levels that were seen during the carnage of May 7, the Friday before the bailout. They have since recovered somewhat but are still significantly wider thann yesterday. The discord among EU members has disturbed the markets, and the lack of unity has only served to raise suspicions about possible debt restructurings in the near future.
Given this it was no surprise to see sovereigns widening, though liquidity was poor. Buyers of protection are re-entering the market, some of them clearly of the view that Bafin’s ruling won’t be followed by the other major European regulators. The Markit iTraxx SovX Western Europe index was 18bp wider at 144bp, with the peripherals under relentless pressure. Greece went through the 700bp level, the first time it has done so post-bailout. Portugal (335bp, +57)underperformed throughout the day, and Spain, Ireland and Italy all widened.
The decline in risk appetite was evident in corporates, where there were few tightening credits. Commodity names widened dramatically, their exposure to the business cycle leaving them exposed to fears about global growth. Commodity prices have fallen sharply, driven not only by the problems in Europe but also by concerns that China’s tightening in monetary policy will hamper growth and curb demand. Spreads in Glencore, Xstrata and Anglo American were among the weakest performers today.
The commodities sector also lost ground in North America, where the credit market was widening in tandem with declining stocks. The Markit CDX IG index was 9bp wider at 123bp.
Markit’s Gavan Nolan wrote this CDS report