Confusion Reigns

Risky assets experienced a volatile session today, perhaps a reflection of market participants’ confusion over US monetary policy. The two major US economic releases of the day – the Richmond Fed manufacturing and the Conference Board consumer confidence surveys – were both well below expectations.

“Recovery locks are currently indicating a recovery of 18-20.”

Gavan Nolan

This had the typical effect of causing spreads to widen and stock prices to fall. But the markets quickly recovered in the afternoon, and European spreads were only slightly wider at the close.

“It is quite possible that investors see the slew of disappointing data as making the next stage of QE an inevitably, maybe as soon as November,” Gavan Nolan, vice president of Markit Credit Research writes in his daily alert.

Adding: “They will remember that the first stage of QE was positive for financial markets, if not the real economy.”

Earlier in the session, sovereigns were performing their usual role as the source of volatility.

Ireland briefly hit another record wide level after S&P weighed in with their latest assessment of Anglo Irish Bank.

In a radio interview an analyst from the rating agency reiterated the cost of the bailout at EUR35 billion. But he also raised the possibility of the rescue fund exceeding this amount, and that was enough to spook the markets.

Ireland’s spreads widened beyond 500bp and Portugal’s spreads also approached their record wides of 460bp.

A downgrade rumor on Spain also didn’t help.

The Irish government on Thursday is expected to provide some clarity on the Anglo Irish bailout and its intentions regarding subordinated debt.

“This could proved to be an important catalyst for future spread direction,” Nolan points out.

In Japan Takefuji Corp filed for bankruptcy protection today.

This wasn’t a great surprise given its was heavily trailed in the media yesterday.

Indeed, a glance at its spread history over the last two years suggests that it was something of a formality.

A credit event auction – only the third in Japan – will no doubt be announced in the coming weeks.

“Recovery locks are currently indicating a recovery of 18-20,” Gavan Nolan writes.

  • Markit iTraxx Europe 114.5bp (+1.25), Markit iTraxx Crossover 520.5bp (+4.5)
  • Markit iTraxx SovX Western Europe 162.5bp (+4)
  • Markit iTraxx Senior Financials 148.5bp (+4.5)
  • Sovereigns – Greece 800bp (+3), Spain 233bp (+6), Portugal 445bp (+20), Italy 202bp (+6), Ireland 485bp (+13), Belgium 136bp (+1)
  • Anglo Irish Bank 965bp (+17)
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