Spinning a Wildfire

At least EU’s commissioner for energy got a bit of a boost Wednesday after saying that he feared a catastrophic event in Japen within hours. The financial markets went – of course – straight into free fall, and Mr. Günther Oettinger and his spin doctors probably made an unofficial speed record in official dèmentis with a contradiction statement within minutes after the first one. But spinning a wildfire is not an easy task.

“The lack of signs of improvement or even stabilisation sent stocks down sharply again and spreads were wider on the day during the afternoon.”

Gavan Nolan


It was perhaps inevitable that there would be a short covering rally at some point this week. Credit markets in Japan had widened dramatically for three days in succession; it would have been no surprise to see a pull back at some stage. And so it proved Wednesday morning when spreads opened tighter.

Japan’s sovereign CDS spreads were 11bp tighter at 105 basis points, reversing much of the widening of Tuesday.

The Nikkei was up over 5%, while the Markit iTraxx Japan index closed at 135 bp’s, 17 bp’s tighter than yesterday.

“Bid/ask spreads of 10bp were an improvement on the 15bp seen yesterday, though they were still considerably higher than the usual 1bp. Liquidity remains impaired,” credit analyst Gavan Nolan at Markit Credit Research points out in his daily summary.

A relatively bullish FOMC statement late yesterday added to the positive sentiment. he adds.

“The economy is on a “firmer footing” and the recent inflationary pressures will be ”transitory”, according to the Fed,” he writes.

But the rally soon lost momentum.

The impact of the nuclear accident in Fukushima is still uncertain, and there are now concerns over all six of the reactors at the plant.

A plan to use helicopters to cool the reactors had to be cancelled due to the high radiation levels.

“The lack of signs of improvement or even stabilisation sent stocks down sharply again and spreads were wider on the day during the afternoon,” Gavan Nolan explain.


And the incendiary comments from EU energy commissioner. Günther Oettinger, that the situation was “out of control” didn’t help- at all!

Nor did the press release a few minutes later, trying to explain that the EU commissioner only had expressed his feelings of fear, and not stating any kind of facts.

Well, looking at the chart of Tokyo Electric’s 5-years CDS it seems clear that Mr.  Oettinger’s  feelings is highly correlate with the reality of the situation.

Japan wasn’t the only factor feeding risk aversion. Bahrain has been overshadowed by events in Japan but the deteriorating public order situation there has potential ramifications for global markets. Saudi troops moved in on Monday – at the request of the Bahraini government – and the authorities declared martial law yesterday. Troops used force today to drive protesters out of Pearl Square in Manama, the heart of the anti-government movement.

“Oil crept up from $107 to $111 a barrel today, a reminder that events in the Middle East can affect global growth,” Nolan notes.

European sovereigns continued to hold up relatively well, though there was one notable laggard, according to Markit.

Portugal was downgraded to A3 from A1 and left on negative outlook by Moody’s, the agency citing the “subdued growth prospects” of the Iberian sovereign.

This didn’t come as a shock to market participants, and the downgrade only brought Moody’s into line with S&P.

The country’s auction of 12-month T-bills, however, had a far greater effect on sentiment.

The EUR1 billion debt sale was met with relatively tepid demand, the bid-to-cover ratio of 2.2 significantly less that the 3.1 achieved at the last auction held only two weeks ago.

The yield was also considerably higher at 4.331% compared to 4.057%.

“The positive effects of the EU summit are still lingering but it hasn’t quashed talk of a bailout. Investors are all too aware that the sovereign has sizeable refinancing needs over the next two months,” Nolan concludes.


  • * Markit iTraxx Europe 105bp (+1), Markit iTraxx Crossover 410bp (+4)
    * Markit iTraxx SovX Western Europe 175bp (-5)
    * Markit iTraxx Senior Financials 158bp (-2), Markit iTraxx Subordinated Financials 278bp (-1.5)
    * Sovereigns – Greece 985bp (-5), Spain 227bp (-12), Portugal 513bp (+7), Italy 160bp (-4), Ireland 588bp (-20), Belgium 150bp (-4)
    * Saudi Arabia 133bp (0), Bahrain 351bp (-6)
    * Japan 115bp (-1)
    * Markit iTraxx Japan 148bp (-5)
    * Tokyo Electric Power Co – 345bp (-21)
    * Reinsurers – Swiss Re 125bp (-1), Munich Re 76bp (-1), Hannover Re 135bp (+2)
    * Utilities – RWE 87bp (0), EON 85bp (+2), EnBW 85bp (-2), VATFAL 69bp (-1)
    * Markit Evaluated Bonds – RWE Fin BV 6.5 2021 asset swap spread 95bp (0), EON Int Fin 5.75 2020 asw 129bp (0)
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